Applied Materials, Inc. (NASDAQ:AMAT) Goldman Sachs Communacopia and Technology Conference Call September 11, 2024 5:25 PM ET

Company Participants

Gary Dickerson - President and Chief Executive Officer

Conference Call Participants

Toshiya Hari - Goldman Sachs

Toshiya Hari

All right. Great. Good afternoon, everyone. Thank you so much for coming. My name is Toshiya Hari, I cover the semiconductor and semi-cap equipment space at Goldman Sachs. Very honored, very excited to have Gary Dickerson, President and CEO from Applied Materials with us this afternoon. I'm sure everyone knows Gary, but I'll go through a very brief intro.

Gary is one of the longest tenured CEOs in the semiconductor industry. Having started his career over 35 years ago. His career has given him deep exposure to all the key chip making technologies.

He was a Lithography Section Manager at AT&T back in the day. He also spent 18 years at KLA, where he and his teams developed process control technologies that helped increase KLA's revenue from $80 million to $2 billion a year.

He became President and COO of KLA and then he served as the CEO of Varian Semiconductor from 2004 through 2011, during which he helped the company's market cap grow by about seven times. Gary has served in the CEO seat at Applied Materials since 2013, and has helped the company grow its revenue by more than 3.5 times.

Gary, thank you so much for coming.

Gary Dickerson

Thank you, Toshiya. I'm really happy to be here.

Question-and-Answer Session

Q - Toshiya Hari

It's great to see you. I know you spent a lot of time thinking about technology inflections with your R&D team, you were very early in identifying PPACt, which is performance, power, area, cost and time-to-market. I always kind of have to remind myself. As an area of focus for your customers in the broader industry, based on recent conversations with CEOs and R&D leaders, is that still the focus today on the part of your customers. And more importantly, based on their roadmaps, how are you and your team spending your time and your R&D resources?

Gary Dickerson

Yeah. So, I actually just met two of our top customer CEOs and their Heads of R&D and Chief Technology Officers in the last week. So, I would say, the whole industry is focused on energy efficient computing. So we have the biggest global inflections ever driving the semiconductor growth, AI, EDGE, IoT -- AI, IoT, Industrial Automation, Robotics, EVs, Autonomous Vehicles, Renewable Energy, just really big multi-trillion dollar inflections. And datacenter will pass PCs and smartphones in wafer starts over the next few years. And just everyone is focused on the race for energy efficient computing. I tell people, I love the semiconductor industry because it moves at a pace of no other industry on the planet. People are talking about a 10,000 times improvement in energy efficient computing over the next 15 years, in one of the CEO meetings I had, he said, he was talking with one of his biggest customers and then asking them, why are they so focused on the leading technology nodes when the wafer costs are so much higher and the answer was that every percent of energy efficient computing improvement is worth a lot. So we have these just powerful drivers in the digital transformation of every industry and energy efficiency is really the prime focus for every company. So if we look at AI, the four technologies that are really important for AI, high performance logic, DRAM, high bandwidth memory and advanced packaging. And Applied is leading in all of those roadmaps for energy efficient computing in every one of those technologies. And it's really a race. It is a race and whoever gets there first wins big and everybody else is left behind. So in high performance logic, the near term race is for Gate-All-Around. So why is that important. It's important because you gain 30% improvement in energy efficient computing with that new transistor architecture. So for Applied, this year, our revenue is increasing or Gate-All-Around generates about $2.5 billion in revenue. We said, next year will be double or more for Gate-All-Around revenue and we're positioned to capture over 50% of that inflection share. And then the next big race that everybody is running is Backside Power, where you move the power lines from the front side of the wafer to the backside of the wafer, you can get up to 30% area savings, but you can get over 20% improvement in energy efficient computing. So these are really important inflections architecture inflections that everyone is driving. And in wiring Applied also has a strong leadership position and we're positioned to gain more than 50% of that inflection as that one happens too. So just sizing those markets, Gate-All-Around is about $7 billion per 100,000 wafer starts up from FinFET, which is $6 billion. And then Backside Power is $7 billion per 100,000 wafer starts versus $6 billion for the current generation of wiring. And then in DRAM, the really big inflection that's coming, Applied has gained 10 points of DRAM share overall spending in DRAM over the last 10 years. And the next big inflection is called 4F-Squared or vertical channel transistor. And so there you're going more vertical in that new compute memory technology in DRAM and Applied again is positioned to capture more than 50% of that inflection. And when I was meeting these customers over the last week that really cut across our whole portfolio, one of the R&D leaders for the whole company said that Applied is the most important company for their energy efficient roadmap going forward. So a lot of this is really based on materials innovations and these new architectures. So within Applied, over five years ago, we built capability in Applied, where we have the most unique and connected portfolio for these materials innovations. 30% of our revenue today comes from platforms where we connect multiple technologies on a single platform under vacuum. So 30% about $6 billion. If you go back to 2019 that was about 20% of our revenue. And so then you say, well jeez, why do you do that. So when you're building these chips, it's over 2,000 steps, some of the materials are two atoms thick. So when those materials go to air they oxidize and damage the electrical properties. So again Applied is by far the leader in all of these different materials. We're very unique in having this unique and connected portfolio of technologies. And the other thing that we did is we formed an integration innovation team. So we have innovators that can co-innovate with our customers on multiple device architectures into the future. We work with all of our customers a decade, 10 years out in the future, and it's really this high velocity co-innovation that is crucial, whether it's Gate-All-Around or Backside Power or the next transistor or 4F-Squared or 3D DRAM, again, where our TAM goes up, our share goes up. So those are the things that we've been focused on. Now ICAPS is another market, IoT, communication, auto, power, sensors and over five years ago we formed our ICAPS group because we knew those markets would be also a high compound annual growth rate. So since then we've delivered more than 20 major new ICAPS focused products. We have an ICAPS architecture innovation team that's specifically focused on things like power electronics for EVs and renewable energy. That's very unique in the industry having all of those different kinds of capabilities. And then the -- and we've gained five points of overall share in ICAPS over the last five years and well positioned for the future. And then the last one is in Advanced Packaging. So Advanced Packaging, if you go back to 2020, it's about a $500 million business. Today, for us, it's $1.7 billion. And if you think about energy efficient computing innovations, packaging is enormously important and even will be more important if you think about what those AI server architectures look like three or four years from now. There will be tremendous innovation there and Applied again, $1.7 billion. High bandwidth memory grew for us six times in revenue this year, it's growing six times this year. Applied has leadership. We have a broad portfolio of connected materials innovation technologies in Advanced Packaging. We have new technologies that will be incredibly important for the future like hybrid bonding, where you can improve the energy efficiency 30 times with some of those technologies. So I would say that for me that's a long answer. I would say that for me, I've never had more fun. And where we've never been more deeply connected to our customers innovation. And really it is about co-innovation, which is very different than the way things worked, I would say, five years ago.

Toshiya Hari

Okay. That's great. That's really helpful, Gary, definitely want to go back to many of the inflections that you spoke to, but taking a step back, one of the more common questions I get is on the market, the WFE market. I realize that you've moved away from giving specific numbers around the market, but curious what you're seeing by device type and into next year, what are some of your preliminary thoughts if you will?

Gary Dickerson

Yeah. I would say, you're right that we don't guide future specific numbers for wafer fab equipment. But what I would say is that, you look at the overall market. So I think many people have talked about a $1 trillion wafer fab equipment market in the future. And I think all of these things I mentioned, what do you have to do to deliver energy efficient computing improvements that are incredibly valuable. It's really hard. The application processor in your smartphone, one example, I give people, tiny chip, 15 billion transistors, 60 miles of wiring and 2,000 steps. So how do you move data through a 60 mile wire with no resistance. It's like magic. What we do is like magic. So capital intensity with this complexity to enable energy efficiency, I think, it's still going to be healthy. So if you think trillion dollar market mid-teens or higher capital intensity, I think, the compound annual growth rate overall is going to be pretty robust. And I think Applied with our positions for the inflections, we have a great opportunity to outgrow that overall market. Then our services, I think, can grow as faster even faster. We can talk about that later. I think inside that the markets were most positive relative to the compound annual growth rates, high performance logic, again data center wafer starts will pass PC and smartphone in the future. And so and you have these big technology inflections that are more capital intensive, Gate-All-Around, Backside Power and then future inflections. DRAM, we're very positive on compute memory. If you look at the foundry logic and DRAM content and an AI server versus an industry standard server, it's about eight times more. And then DRAM, one of our customers was talking about this recently to produce the equivalent number of bits with high bandwidth memory, you need to start three times more wafers. So there are very strong demand drivers. And then you've got this 4F-Squared technology inflection that will happen in a few years that will drive additional demand in DRAM and in compute memory. And then at Advanced Packaging, that's another one as I talked about, we went from $500 million to $1.7 billion. I believe we can double again over the next few years. And I think this is going to be an enormously important inflection for the entire industry. I would say the one, if I looked at, again high performance logic, DRAM, high bandwidth memory packaging, we're probably most bullish on those. Storage memory, I think, will grow. Of course, it's way lower than it was in the past, but we think the compound annual growth rate there compared to some of these other markets may not be as robust.

Toshiya Hari

Okay. That's great. Maybe sticking to sort of market related questions. Long-term WFE intensity, I think, if you look at the past 15 years or so, the numbers north of 10%, 11%, 12%. On a five year look back, I think, it's closer to 13%, 14%. You're obviously, very excited about all these inflections. Things are getting very complex.

Gary Dickerson

Yeah.

Toshiya Hari

60 miles of wiring is just nutty.

Gary Dickerson

Hard to imagine. It's like magic.

Toshiya Hari

It's like magic. So I would think the trend is at least flat, if not up, but curious how you're thinking about.

Gary Dickerson

Yeah, no, I think, again, it's just that same comment, every percent of energy efficiency is worth a lot of money. And I see, again, we're working because we have these integration teams, we're working with customers for technology nodes a decade out into the future. So we can see all of these big inflections that are going to happen over the next decade and they are more capital intensive. So I think we're comfortable with kind of a mid-teen or maybe a little bit higher capital intensity.

Toshiya Hari

Okay.

Gary Dickerson

Based on what we see.

Toshiya Hari

Got it. Maybe one last one on the markets. Just your view on China. It's been an important market like other regions. Applied is very strong there. Low-to-mid 40s of total revenue, a couple of quarters ago, declined to 32% in the most recent quarter. You're in the region. What are you hearing from customers? What's the outlook from your perspective?

Gary Dickerson

Yeah. So if you look at China for Applied, if you go back a few years, China was about 30% of Applied's revenue. That's including service and display, which normally is around 10%. So 30% including service and display. Then there was a five quarter period of time when we had COVID supply chain challenges where China was all the way down to 17%, including equipment, service and display. And then you had a period of time where there were three quarters where China was more than 40%, but you were really catching up to that period of time where five quarters in a row, we were under shipping kind of what the run rate had been previously. Now we're back down to 32%, again, including AGS and display. So when we look at China, China really is mostly an ICAPS driven market. Again, the IoT, communication, auto, power, sensors. We believe that market will be growing at a mid-to-high single-digit compound annual growth rate. If you look at EDGE, AI, Industrial Automation, Robotics, EV, 7,000 chips in an advanced electric vehicle. There's thousands of dollars of chips for every megawatt in renewable energy. So we think those are going to be good demand drivers for that ICAPS market. There are also innovations happening in ICAPS. Certainly in Power Electronics, there are going to be some pretty significant architecture inflections that will happen there too. And Applied is really well positioned for those architecture inflections. But again I think the that kind of run rate where we were at before, including our service and display is probably about the right zip code. We also look at, in China specifically, the domestic demand versus supply by device segment. And so when we look at that, again, with mid-to-high single-digit compound annual growth rate, we think that will be a healthy market over time.

Toshiya Hari

Okay. Got it. Thank you. At the leading edge foundry and logic space, you talked about Gate-All-Around, you talked about Backside Power. You gave us all the stats, which are really impressive. The leading foundry is going full throttle. There's one fairly sizable logic supplier that's going through quite a bit these days. The often the question that I often get is from investors is, is it a zero sum whereby if one is losing, the other is gaining. So net-net, as an equipment supplier, you're fine or is it incremental negative should something, should CapEx go down?

Gary Dickerson

Yeah. I mean we're, I mentioned before, data center will pass PC and smartphone on wafer starts. And when we look at that trillion dollar market or we see the growth of AI servers with those massive GPU chips and that's what's going to drive those wafer starts for the future. I think we're really focused on in any of these markets, what's driving the end market, what do we think the end market compound annual growth rate is. And then who builds the chips, that's kind of a separate topic. Of course, we're deeply engaged, as I mentioned, with all of those companies many technology nodes out into the future. But I think for us the most important thing we focus on is compound annual growth rate for the market, which we think is going to be very healthy for that particular segment. And then positioning Applied to outperform, which I think we're also in good position there.

Toshiya Hari

Okay. Shifting gears maybe on the DRAM side, again, to your point earlier, you've gained significant share over the past five, six, seven years.

Gary Dickerson

Yeah.

Toshiya Hari

You talked about 4F-Squared, you've got 3D DRAM out in the horizon as well. From an overall market growth perspective, from a share gain perspective, what are your thoughts on the DRAM space?

Gary Dickerson

Yeah, I think, we're really well positioned. As you said, we gained 10 points of share over the last 10 years in overall DRAM spending. And again there, we're enabling capacitor scaling in the DRAM or in the periphery -- peripheral circuitry where you have to have high speed IO onto the chip that give, we have great technology, and logic that we applied into DRAM into memory. Conductor Etch, we're in very strong position there. So we've been gaining share. We're larger than our two next closest process equipment peers combined. So we've had a very strong position there. And I'd say especially for 4F-Squared, we're deeply engaged with all of those companies. That's going to be the biggest architecture change in a decade. It's more materials intensive versus lithography intensive. That's a very big inflection. There are certain key technologies that are the tipping point for adoption of that new architecture and we're deeply engaged and well positioned with all of those companies. So I think 4F-Squared is something like $6.5 billion in revenue per 100,000 wafer starts. And then the next inflection after that is 3D DRAM where the TAM for Applied grows another 15% after that, but very, very strong position in DRAM compute memory. I mentioned high bandwidth memory also, where you have to start three times the number of wafers to get the same number of bits. That's grown 6x for us this year in '24. We have very strong positions on the key technologies through silicon via and micro bumps that enable high bandwidth memory. And then going forward technologies like hybrid bonding where it enables tremendously better energy efficiency. Again those are also technology innovations where Applied is leading.

Toshiya Hari

Got it. I think Applied is unique in the sense that you've got a really broad and deep portfolio. You talked about integrated solutions accounting for 30% of revenue up from 20%. Again I think no other company has the breadth that you guys have.

Gary Dickerson

Yeah.

Toshiya Hari

Does that continue to be a big source of competitive advantage and does that drive share gains going forward?

Gary Dickerson

I think it's incredibly important. So again we've grown from 20% to 30% of these integrated solutions. And as I mentioned some of these materials are two atoms thick, two atoms. So you go to air, you oxidize those materials, you damage the electrical properties. So more and more this ability to connect all of these different technologies under high vacuum is a very unique capability. So that 60 miles of wiring that is an amazing innovation. We have selective ALD, PVD, CVD, copper reflow, the surface interface engineering, many technologies, all combined under vacuum on one single platform to enable moving data 60 miles in a super thin wire with almost no resistance. And even just that innovation enabled a 50% improvement in resistivity. So I think going forward for whether it's in high performance logic or DRAM or any of these different technologies that ability to have this unique connected portfolio is going to be more important for our customers. And again that puts Applied also in a unique position that combined with unique integration innovators so that we're co-innovating with companies on many technology nodes a decade out in the future. So again that kind of a deep strategic relationship with our customers is unique. And again we'll see that continue to grow.

Toshiya Hari

All right. So given that relationship you're pulled into these projects, if you will, early and you've got visibility. So there's a bit of a flywheel effect?

Gary Dickerson

Every week.

Toshiya Hari

Right.

Gary Dickerson

Every week. Our Head of R&D is meeting. Head of R&D of these companies in some cases every week.

Toshiya Hari

A lot of miles?

Gary Dickerson

Yes.

Toshiya Hari

Maybe a question on your services business, another very strong business. It accounts for, I think, a little bit over 20% of revenue.

Gary Dickerson

It's about a $6 billion run rate right now.

Toshiya Hari

Right now. It's delivered year-over-year growth every single quarter since the back half of 2019.

Gary Dickerson

20 consecutive quarters.

Toshiya Hari

20 consecutive quarters, thank you. Apart from your installed base growing pretty much every year, what's sort of driven that success in your service?

Gary Dickerson

Yeah, I think, this complexity that we're talking about, think about that. You have a platform that has seven technologies under vacuum. And so for our customers, they need to ramp those technologies quickly and high yield with very high yield and they want to keep optimizing the output and the cost. So we've been really innovating in our service technologies. Today, we have around 7,000 tools that are remotely connected. We're driving tremendous service innovations into the roadmap and working with customers that are dealing with all of this complexity, sensor innovations with those companies. We're increasing the frequency of tools or the amount of tools that are remotely connected, so we can have instantaneous access with experts to optimize all of those different kinds of processes. So, yeah, that we've been driving since I joined Applied, before I joined Applied, we were low single-digit growth. And then after double-digit growth since I've been there and again we see double-digit growth going forward. But that complexity and your ability to ramp yield quickly, when you're developing these incredibly complicated processes, you make one chamber golden, then you have to make them all golden as fast as possible. So that ability to ramp fast and then optimize yield output and cost with our service innovations, huge opportunity for growth. I think we can actually accelerate growth from where we've been.

Toshiya Hari

Okay. That's great.

Gary Dickerson

And again it's a $6 billion run rate. So that's meaningful top line growth. And the margins are pretty much in the same zip code, the operating profit as overall company margins.

Toshiya Hari

Okay. Got it. And probably a good segue into my margin question if that's okay. You've done a really good job in improving gross margins over time since joining the company. I think your expectation is to hit 48% in fiscal '25. Again you've improved that number. When I think about your market position, the growth and complexity that we've talked about, the innovation that you're delivering and some of your customers are very profitable in terms of margins. Why not hire for Applied?

Gary Dickerson

That's a good question. So I think what I focus a lot on is the value creation. And so I think really we are in a good position, where we're in, we will enable energy efficient computing innovations that are incredibly important for all of our customers' roadmaps. So I think over-time, we did have a headwind through COVID. We had a lot of supply chain challenges. And there the biggest focus for us was number one customer trust, whatever it took to provide the supply to our customers in that time frame. So I think we made progress on margins. We took some steps back as we were dealing with all of those supply chain challenges. I always think about never waste a crisis. So we've been driving a lot of changes inside the company that I think will really pay-off for us in our operations and in our supply chain. But again the other part of it is as we're delivering these incredibly valuable innovations, there's an opportunity for us to capture more value and drive margins higher over time.

Toshiya Hari

We've talked quite a bit about AI and AI is a big topic these days and certainly at this conference at Applied Materials whether it be how you design your tools, the day-to-day operation, do you leverage AI? And what kind of benefits have you been able to identify or benefit from?

Gary Dickerson

So AI has been a huge focus inside Applied. We use AI in R&D, product development. We're using AI in operations and supply chain, in our field operations. I mentioned, you have so much complexity, so much data you're dealing with in terms of optimizing these processes, we're innovating with new sensor technologies inside our systems. And so AI, improving the productivity for our teams that are in the field, our service engineers, our process engineers, tremendous opportunity. And then we're also using AI inside our infrastructure. So we have productivity goals in Applied, revenue per headcount and we have a great opportunity to double the size of Applied over the next few years. But in some of these areas, when we look at the top headcount growth as we go forward, we have programs in every one of those areas where we're drive re-engineering how we work through technology. I mentioned remote connectivity. That's an area that we're growing very quickly. But AI, we're using in every part of our operations. We have a leadership team. We're prioritizing ROIs on all of those different innovations we're driving, but I think it's a game changer. I think really that's a big, big focus for us in re-engineering, how we work and driving significant gains in productivity.

Toshiya Hari

Great. In the last couple of minutes, Gary, I wanted to give you the opportunity to speak to anything that we may have missed. I know you spend most of your time with customers and R&D leaders, but as a collective unit investor/analysts, anything about Applied Materials specifically or the markets you play in that you feel like we miss or underappreciate?

Gary Dickerson

Yeah. I think that, as I mentioned earlier, the biggest focus for us at Applied is on energy efficient computing. So I have to say for me, as you mentioned, I've been in the industry for quite some time. I've never had more fun. I tell people this industry is not for everybody, because the race you're running, this is the fastest pace of any industry on the planet. So the speed of innovation, and there's so many things, our vision as a company is to make possible a better future. So there are so many cases where we're enabling innovations that are nearly impossible. Some cases we even thought they were impossible. But over, and over, and over again, we've been able to make those kinds of things happen. So and I would say with Applied, we've really built these unique and connected capabilities over the last five years, whether it's in ICAPS or high performance logic or DRAM or Advanced Packaging where we are part of shaping the future. And this whole focus on high velocity co-innovation, I really think is a great opportunity for Applied Materials. Applied is very uniquely positioned in all of these different major markets and major inflections. So again I feel lucky personally to be in this kind of position. It's just so much fun what we're doing. So again I look forward to, we've driven market cap and applied up pretty significant amount since I've been here and I'm really optimistic about the future.

Toshiya Hari

More market cap to come?

Gary Dickerson

Absolutely.

Toshiya Hari

Great. Thank you so much.

Gary Dickerson

But more important, I think, it's just really enabling all of these magical innovations. That's the value that we create. That's what's going to drive the company higher in the future.

Toshiya Hari

Great. Thank you so much, Gary.

Gary Dickerson

All right. Thank you.

Toshiya Hari

Appreciate it. Thank you, everyone.

Gary Dickerson

Thank you, everybody.