Applied Materials, Inc. (NASDAQ:AMAT) Wells Fargo 8th Annual TMT Summit Conference December 4, 2024 11:45 AM ET

Company Participants

Brice Hill - CFO

Conference Call Participants

Joe Quatrochi - Wells Fargo

Joe Quatrochi

So let's go ahead and get started. I'm Joe Quatrochi, the semi-cap and semis analyst here at Wells Fargo. Excited to have Applied Materials' Brice Hill, CFO join us this morning. Thanks for joining us.

Brice Hill

Thanks for hosting, Joe, great venue. Happy to be here and thanks for inviting us.

Question-and-Answer Session

Q - Joe Quatrochi

Awesome. So maybe to start, right, there's a little bit of news this week China export restrictions. Anything you guys put out a short kind of release earlier this week, just kind of addressing this up, but can you maybe just opine on the takeaways and just kind of how to think about the impact there?

Brice Hill

Well, certainly -- yes. Certainly not unexpected. There were rumors that new rules were being considered so the timing was unknown. But I think from our perspective, the first thing on our press release, we said that we're not changing our range for the quarter. And the nuance there for investors is the midpoint is -- will be a little bit different because there will be some impact from those rules. There's 200 pages plus Joe to go through. And I think from our perspective, there were pros and cons. There were some tools that we thought there would be controls on that were "demoted" that there won't be and vice-versa.

And so there's a lot to go through. But for Applied Materials, most of our business in China is already in the more mature nodes, what we call the ICAPS nodes, IoT, communications, auto, power sensors, those types of products. So I think you know besides companies that might be put on the entity list, most of those nodes, we were already impacted by previous rules. So anyway, back to the -- not changing. So what we decided, we didn't need to change the range for the quarter.

Joe Quatrochi

Okay. And I guess we didn't wait until February when you guys report to us, we think about like just the impact in calendar '25.

Brice Hill

Yes. I think no guidance or I think you know our practice. We haven't guided calendar '25, so there's a lot of puts and takes. And as I mentioned in the rules, there's some positives, some things that we think move in a positive direction, and some that don't. And so we'll have to evaluate that will take some time.

Joe Quatrochi

Okay. Okay, fair enough. Maybe just kind of as we move on from that and just kind of as we look into next year and you guys just recently reported earnings, but just to kind of frame the discussion, I guess, like as you look into 2025 and you think about WFE, like is there anything you can kind of help us just kind of shape at least like how it looks into next year and just kind of just to form the discussion?

Brice Hill

We definitely try to. As you know, we don't guide the year, but we definitely try to give as much information as we can about the pace of the market and what's happening. All of last year, leading edge was at a low level, but it's been accelerating through the course of our '24 and into '25.

And that's certainly where we see the strongest market dynamics. If you think about high-bandwidth memory, DRAM, advanced packaging in general, and then leading logic, when you look at leading logic, where is the best utilization across the ecosystem? The best utilization is at the very advanced node where you're making GPUs, CPUs, accelerator chips, et cetera. So we think that's where there's the most energy in the ecosystem.

Last year, because leading was lower, ICAPS was very strong. DRAM was very strong. And obviously, there's a growth year for Applied -- five years in a row of growth for Applied. As we look into '25, if there is any maturity in the spending of ICAPS, then the question is, will leading -- will that demand on leading be strong enough to grow the business? We don't guide that, but that's certainly what we've been seeing in Q4 and Q1. It's still growth quarters for the Company. Our Q4 was a growth year-over-year. Our Q1 is a growth year-over-year in our guide. So we think it's that dynamic that's the strongest pull in the market right now.

Joe Quatrochi

Okay. I guess as you maybe ask it a different way, like when you look at '25 and you think about, right, the pull for leading-edge technology is strong and accelerating next year, what's the biggest -- maybe put China aside for a second, but like or at least the export restrictions, what's the biggest unknown or like thing that you're just kind of like yes, we kind of need to see how things play out like as you try to think about '25.

Brice Hill

Well, I think the biggest unknown is that ICAPS investment in China. So sorry, I didn't put China aside, but.

Joe Quatrochi

Yes. Well, export restrictions, straight-up demand, right?

Brice Hill

Yes. I think for us, we see the acceleration in leading edge. The reason it was lower last year was because companies are on the cusp of moving Gate-All-Around process technologies from pilot to high-volume manufacturing. And so everybody is expecting this investment cycle. Hopefully, we'll build out a large node on the Gate-All-Around node.

It's certainly got great performance characteristics. So if it meets its schedule and ramp requirements, it should be a good landing spot for lots of designs and be a large node. And so where is the more uncertainty in the market relative to that, it would be we've had a significant ramp in China over the past three years in terms of ICAPS capacity.

Joe Quatrochi

Yes.

Brice Hill

Now when we look at that, we have a number of ways of triangulating to say, is it too high? We think the country has a goal of being self-sufficient from a capacity perspective. We don't think it's reached that level yet. The utilizations in China are at a good level. And so it will just be a question of whether that continues at the same pace or not.

Joe Quatrochi

Yes. I guess like on the domestic China piece, right, like you've seen there's a lot of new customers there, right? And as we move into next year and maybe there's some digestion a little bit just because they've spent a lot, right, trying to kind of ramp-up their technology, are you seeing like where there's consolidation of that ecosystem yet, or is that still maybe something that is in front of us?

Brice Hill

No evidence of consolidation, at least from my perspective. We see a growing customer list and a lot of these customers to your point are smaller. It's just a long tail of customers. Some are large, but there's a long tail of smaller customers. And so the positive from that perspective is you've got over 30 factory projects that we see. We've got even a longer list of customers that are adding capacity in facilities that already exist.

It does make sense to me that over time -- I have a mental model where I say, okay, maybe there's eight companies that are starting an image sensor business. It does make sense over time that they won't all be successful and there'll be some consolidation. I don't think we're seeing that at this point.

Joe Quatrochi

Okay. Okay. That's helpful. I mean, you talked about -- maybe let's say we're trying to a little bit longer. You talked about kind of the normalized rate of 30% ish of revenue. I mean, that's still, I guess, the right way to think about it. I mean it can ebb and flow. And then how do you break down the services versus systems versus there's also the display business, right, that maybe is a little bit different than your peers that I think historically has been a little bit more driven by China than other regions.

Brice Hill

Right. It is. So first of all, since there had been a few quarters where we had a very high percentage of our business in China, that was largely driven by the DRAM shipments that we could do to once a DRAM node was confirmed that we can ship within the rules to that. That lasted for about three quarters. I think our prior Q4, our Q1 and Q2. And then we've sort of normalized and that was as expected. And we call 30% normal because we sort of looked at our historical average -- longer historical average and we think 30% is a good number.

We also have a perspective that China consumes about 25% to 30% of semiconductors globally. And so it makes sense to us from that perspective if they're working to put that capacity in place. And I think with respect to the mix of the business, I don't think we really would call out significant changes in intensity between our services business and our equipment business. So I think 30% is a decent number to think of. It is true that our display business is more intensive in China, so that the number for the other two is probably just a little bit lower, but I wouldn't call that out.

Joe Quatrochi

Okay. Okay. Maybe one of the things that with the rules that came out Monday, right, and some of the things that have been happening in China is like they've also been trying to develop their own equipment just ecosystem. And it feels like maybe the rules on Monday that came out could pretty hamper that pretty significantly. Do you feel like that, that's an opportunity for you guys to maybe like kind of gain back some share that you've kind of like ceded away to some of those players? Or how should we think about that?

Brice Hill

It's definitely, a positive from that perspective that the rules may also have some impact there. And so I think what we're describing is if the local China vendors don't have access to some of the supply chain because of the trade rules, then maybe they're impacted.

Joe, one thing you'd have to think through in that thesis is, assuming those vendors have expected it, they've probably also taken steps to stock up on inventory and work on their supply chain. So it's unclear what the impact will be. But then backing up just to an Applied share thinking perspective. The local China vendors have grown share over time, while at the same time, Applied has been growing share.

Joe Quatrochi

Yes.

Brice Hill

And so we understand that companies in China will try some of their applications with lower-cost hardware vendors. We understand that's part of the model. For us, we have two -- our strategy to address that, first of all, is to just grow the TAM, grow the addressable market of our business faster than anyone can duplicate a hardware offering that we have somewhere else in the roadmap.

And that's what you see happening the leading-edge nodes, leading-edge logic, DRAM, the applications grow so quickly. And because Applied has integrated equipment and unit equipment that can address those demands, those applications are growing more quickly than any share we would lose on something that could be duplicated from a hardware perspective.

Then the other piece of the strategy sort of head on is when Applied sales in China or anywhere else in the world, you're bringing a top-to-bottom. You're not just selling a hardware capability. You're bringing an experienced supply-chain, high-quality supply-chain. You're bringing a services business that can service the equipment and make recommendations how to keep it at high yield and how to get it to high yield in the first place.

You're bringing the installation capabilities that we have for the Company and a roadmap of how to improve those tools over time. And so there's a lot that comes with that. And so we understand that customers might try an application with a local vendor for lots of reasons, including being incentivized, but we have ways to address that competitively.

Joe Quatrochi

Okay. That's helpful. Maybe we'll move on from China for a bit. Let's stick with ICAPS though. I think outside of China, right, like analog, semi-demand relatively still kind of bounces along the bottom. A lot of -- the customers that have spent a lot on tools over the last couple of years to add capacity now they kind of don't need to maybe outside of one that's kind of building some strategic capacity. So like how do we think about, I guess, then returning to normalized utilization rates, and what's the right way to think about the long-term kind of growth algorithm for that part of the business? And then also, I guess, like where are you seeing the areas that can still grow from just kind of secular trends?

Brice Hill

Yes. I think, first of all, I would back up and say, all right, the process technologies we're talking about for ICAPS, our definition is greater than 7 nanometer or more mature than 7 nanometer. So anything that's EUV or newer -- EUV starts at 7, anything that's EUV or newer, we'll put in leading logic, and then the ICAPS process technologies will be the ones that are larger than that or older than that.

If you look at those, they're larger as an ecosystem. The actual factory footprint and wafer starts of capacity there in place are larger than all of the other markets that we're talking about put together plus a factor. NAND plus DRAM plus leading logic. ICAPS is much bigger than all that. All of the third-party forecasts call for those devices, every single device, microcontrollers, analog devices, image sensors, power devices, et cetera, all of the third-party forecasts say that those will grow at mid-to-high single-digits over time as especially these EV, renewable energy, all these end-markets continue to grow. And we agree with those forecasts. So if you look at that large footprint, our view is, as you step back, that footprint will grow at that speed over time.

Now the question is today, where are you on that curve. You're right, the end markets have been slower. The utilization is probably somewhere in the 70s and the rest of the world. And so they can take -- there's a little bit less pressure to add capacity right now. So I think it's just a question of when does that normalize and then they get back on the path of adding 5% to 7% capacity every year.

And as you know, when I think about the trends, we like to think -- we look at GDP. GDP is typically 2% to 3% from a global perspective. Every bunch -- every once in a while, it doesn't meet that like 2009, you have a year off from that or something like that, but it's a pretty steady drumbeat. If you look at semiconductors, they're usually a few points higher than that, two to three -- 2 points, 3 points, 4 points higher than that from a growth perspective, but it's more volatile, right? And then if you look at equipment, it's a couple of more points on top of that, but it's also more volatile. It amplifies that line.

So it's difficult to forecast one year, but we're confident in the secular trends that the industry is going to grow to a trillion, all those device types will grow to a trillion, and that large capacity profile of those more mature nodes, the ICAPS nodes will continue to grow.

Joe Quatrochi

Okay. Maybe I guess like you mentioned it, right, everyone has kind of said, look, a trillion dollars by pick your time-frame, 2028, 2030, whatever, right? But I think like what is -- and that hasn't changed for years -- a few years, right? But I think what has changed is the mix of that, right? GPU is taking a much bigger share of that. So I guess, how do you like kind of handicap that in the growth expectations?

Brice Hill

Yes. It's a great question because I think when people ask the question about the GPUs, they're thinking about price.

Joe Quatrochi

Yes.

Brice Hill

Right? Because if you get to a trillion dollars by selling one GPU for a trillion dollars, that doesn't help the equipment business very much. But a lot of people ask us this in the sense of intensity, what's the equipment intensity? If you take the equipment spending for a year and you divide it by the semiconductors, we have an intensity rate that we think about.

It's been elevated and it's been increasing over the past number of years for various reasons. One, because intensity increases. The second is because of the build out in China that we just discussed. So we've sort of expected it to come down a little bit from an intensity perspective. And one of the unknowns in that equation is, you know, what is the price movement of semiconductors relative to volume? I guess what we would say is the range actually has widened. People say a trillion. Now we're starting to see estimates that are as high as $1.3 trillion. Some are lower and certainly, the mix toward leading edge is improving.

So I'll just say it's a range, but if we back up, it's good news. We don't want to turn a good news story into bad news. The good news is leading-edge logic, high-performance compute systems, the search for power efficiency, and the ability to put more and more compute in data centers and serve these models. I mean, there is a lot of energy there today, and sure, it might change the intensity and it might change the ratio of semi-revenues versus equipment. But we're not actually -- it doesn't cause us to not sleep at night.

For us, it just means boy, we need rapid innovation on power efficiency on leading-edge process technologies. We need to support our customers building out these factories and we need to have plans. If you think of the net zero stuff and ESG, very important that we drive the energy efficiency and we have to work with our customer base on how are we all going to improve the grid and be able to serve the AI demands successfully.

Joe Quatrochi

Okay, that's helpful. Maybe moving to leading edge more broadly. I mean you guys have been pretty vocal about your opportunity to gain share as the industry moves to Gate-All-Around 2 nanometer. Can you talk about just kind of double-clicking on those opportunities to gain share where -- what steps are becoming more important with Gate-All-Around and your position there?

Brice Hill

Yes. So Gate-All-Around is a new transistor. So we were on FinFET for a number of years in leading logic. We're moving to a new transistor. The reason that's done is because that transistor is more reliable and more power-efficient than the FinFET transistor. The difficulty, of course, is it's a more complex architecture built at even smaller geometries, which offers Applied since we bring these connected tool solutions.

Someone described to me, Joe, if you look at a Gate-All-Around transistor, there's like three nanosheets if you've seen a diagram of this. And in between those nanosheets, there's just literally a few atoms thick or angstroms thick of operation space. And in between, I think we're putting three or four or five different types of materials in between those sheets.

And so the tools required and the environment required to combine the techniques, to put those films, put those layers, put them with precision at high yield, it's very complex and that's that sort of -- that is the bread-and-butter of Applied Materials is knowing the roadmap for many years forward with customers and then working collaboratively with them to develop the tool techniques that will build those architectures at that small level.

So Gate-All-Around it actually increases a broad variety of tool types needed to do that. I think the steps for the process. We've added or the industry has added over 200 steps in terms of the number of passes to get a Gate-All-Around type of processor versus a FinFET type of processor. So that's a lot of different passes and different tool types. For us, what that's done is grown the addressable market by about 15%.

So we said for the transistor itself, for 100,000 wafer starts of capacity, it was a $6 billion addressable market for FinFET. It's now $7 billion for Gate-All-Around and it's actually the same math if you add the wiring for backside power delivery. If that's being employed, it also grows from $6 billion to $7 billion of addressable market. And we feel we're well-positioned.

We do feel we'll gain a share in that transition. And part of what drives that is those integrated solutions because of the complexity of what we just described, having tools that can work in a vacuum environment that are connected together where you never let the device, sea, air and the oxidation that comes with that, there's advantages Applied brings to that equation to deliver those solutions.

Joe Quatrochi

And on the integrated solutions, I mean, can you remind us what percentage of revenue that is today and like where do you realistically see that going?

Brice Hill

It's approximately 30% of our business. That means tools that are integrated and co-optimized. And we do have -- it is accretive from a margin perspective for the Company. So it's better for the customers and it's also better for Applied to build those environments. And we've seen it grow over time. So I don't think we have a number that we've shared in terms of the pace, but we expect it to gradually grow as a portion of our business over time.

Joe Quatrochi

Okay. Okay. Maybe just kind of back on 2 nanometers, I mean outside of the architectural changes, I think there's some excitement in terms of potentially kind of the size of the node relative to prior nodes. Is there any kind of help you can provide there and thinking about that?

Brice Hill

Well, I can just -- sure. I can just give you my intuition. I mean, what I've heard from designers is it should be a big node. I mean, if you think of nodes, 10, 7, 5; 10 was a small node, 7 was a large node, and I think 3 is a fairly large node. I guess my expectation is that 2 nanometer will be a good landing spot. Power, shrink, the reliability of the transistor type itself. If they stay on schedule with demand and yield, then we think it will be a large landing spot.

Joe Quatrochi

I mean, has that changed at all over the last several months just given that I think there's been some movements in some of the customers in terms of just planning and things like that?

Brice Hill

From our perspective, the size of the node -- and I think thank you for starting that way because it's a great way to think about it. The size of the node is going to be driven by the end markets, PCs, smartphones, data center, how much product and how many wafer starts are needed. Now whether it's -- the mix of foundries that serve that market, we think from a macro perspective, it doesn't affect our planning very much. So let's just say that we expected this to be a 400,000 wafer start per month node. And I don't have that expectation. I'm just picking that as a number. Then we would expect that to be put in place regardless of what the mix is between foundries.

Joe Quatrochi

Sure. Okay. Okay. Maybe, -- I guess maybe one last question there. I mean tool reuse in terms of 2 nanometer, I think maybe 3-nanometer demand has been a little bit surprisingly stronger this year than expected. So can you help us any expectations in terms of reuse?

Brice Hill

I don't think it matters early.

Joe Quatrochi

Okay.

Brice Hill

So when you're starting the ramp of a new process technology, you generally can't use the existing tools that you have to start that ramp because as you're describing, if it's 3-nanometer in that example, 3-nanometer is being used so you can't use those tools. Generally, the first part of your build-out of a new node is all greenfield or all new equipment. And then at some point, you're taking demand from that old node as designs move over, and then you can reuse some of that equipment. And we just think that's a positive. That's always been part of the leading-edge math. There is a planned amount of reuse and I don't really see any difference in the dynamic there.

Joe Quatrochi

Okay. Maybe shift gears a little bit to DRAM. You guys have been gaining a lot of share there. I mean, what's been the key driver of those share gains over the last several years?

Brice Hill

I think there's a couple of things. One, some of the integrated tool offerings factor into that space. At a high level, we think the architectures in DRAM are starting to employ many of the techniques we've used in leading logic. And so for us, bringing that to bear in the DRAM space has offered the Company the opportunity to gain applications and gain share. And as we look at the DRAM roadmap, it becomes more and more vertical architectures going forward.

So the Company has talked about a 4F squared architecture that we're working on the roadmap that will offer Applied an opportunity to provide even more value from a materials engineering perspective and then much further out on the roadmap is the 3D DRAM. So just the complexity of those architectures, the more 3D nature of those architectures offers -- similar to the logic it offers many more passes and many more steps of materials engineering type applications.

Joe Quatrochi

Okay. You know, HBM obviously, has been a big area of focus for investors and a nice area of growth. I mean, how do you think about like the setup into '25 after a really, really strong '24?

Brice Hill

Yes. High-bandwidth memory, another indication of this leading logic pull and the pull of high-performance compute because those high-bandwidth memory stacks are being put in the highest-performance systems right now. So first, sizing that, we think about 10% of DRAM wafer starts today are allocated towards high-bandwidth memory, and we think that's growing at a 30% rate so fast. And that's helped increase the utilization on DRAM in general. And last year, the Company -- we had started with $100 million of revenue, but last year, the Company delivered $700 million of revenue in the HBM area. So obviously, it grew a lot during the course of the year.

Joe Quatrochi

Packaging only, right?

Brice Hill

That's right. It's -- when we quote our advanced packaging number of $1.7 billion, it includes that $700 million of revenue. So when we think of '25, they're going to continue to add capacity. We don't think it will be at that same rate because there's an initial build-out and then you just start adding capacity. So there's sort of that first jump-off in '24, we'll see it just continue to grow in '25.

Joe QuatrochiQ -Joe Quatrochi

Okay. That's helpful. Maybe on the flip side, right, like a lot of conversion of conventional DRAM capacity to HBM to -- basically, it's also helped improve utilization rates. I mean, in the discussions with your customers like how are they thinking about conventional DRAM capacity looking into next year? Is that an area they're starting to maybe do some planning in terms of adding capacity?

Brice Hill

I think so. I think we've tried to call out that the DRAM market has just continued to be strong. Even after those quarters that we shipped that China demand, it continues to be strong and I think it is from the pull that you're describing. And you know the DRAM market continues to add capacity footprint overall. It's a little bit different from NAND. It's approximately the same wafer start capacity footprint, mostly advances by upgrades. DRAM also advances by upgrades, but is also continuing to add to its wafer start footprint. And that's what we see in the forecast. And we called out in our Q4 and our Q1 even after those China shipments that it's still strong from a DRAM market perspective.

Joe Quatrochi

Right. Anything to worry about in terms of like fab readiness footprint like clean room space…

Brice Hill

Well, it's a good question. So I'm not very close to those to the NAND -- sorry, the DRAM footprint so I -- no, I don't -- I'm not aware of a roadblock.

Joe Quatrochi

Okay. Okay. That's helpful. Maybe shift gears a little bit. I thought this past quarter on the gross margin side, you guys have some really positive things to share. You're talking about a 48% kind of gross margin baseline. I don't think many people had expected that to hear you guys talk about that, at least maybe not this quickly. Can you talk about just kind of you know how you got there, what are the puts and takes of it and where can we go from here?

Brice Hill

Yes. I think it's been gradually improving. So at least from my perspective, if you go back two-plus years, the Company was operating at close to 40% or just over 40%. And so the supply-chain issues and COVID coming off the backs of COVID certainly caused a depression in that gross margin. And so what you've seen over the last couple of years is we nailed the low-hanging fruit relatively quickly.

Like when I first came to the Company two-plus years ago, a lot of things were being air freighted and expedited, and you have all these kinds of extraordinary cost to deal with the environment. That was relatively low-hanging fruit. Since then, we've been doing the harder work of continuing to reengineer components, shaking out inventory. If you look at our inventory on our balance sheet, it's at a much better days of inventory position than it has been over the prior years. Feeling really good about that. Along with that comes excess and obsolete material. We've done a great job of managing those costs down. All of those are benefiting. And then on the price side -- so a lot of cost drivers.

On the price side, it was also a factor, although less of a factor. And one thing I highlighted is that I expect our pricing -- our ability to improve pricing to mature as we go forward. We've been working on that process and that will become a more meaningful benefit in our gross margin trajectory going forward.

And lastly, just to reiterate, we had said we think our guide for Q1 is 48.4% gross margin, but I didn't want people to think we were at 48.4%. It just happens to be a rich quarter from a mixed perspective. So it's better to think of it as approximately 48% and then we're going to continue to work on improving that.

Joe Quatrochi

Yes. Okay. I mean when I look out three to five years, I mean, do we dare start to say a gross margin starts with the five?

Brice Hill

Well, we're not going to give that guide, but I'll just say that we're committed to continue what we've been doing. Yes.

Joe Quatrochi

Yes. I have to try. Maybe shift gears a little bit on the AGS side, you guys have seen nice reacceleration as utilizations have increased. Can you talk about this the confidence of low double-digit growth kind of looking into next year still is the right way to think about it?

Brice Hill

Yes. Well, again, we didn't guide the year, but when you look at our Q4 and Q1 guide, we're certainly growing at low-double-digits. And we think from a macro perspective and a through-cycle perspective, that's the right way to think about that services business. The installed base continues to grow every single year.

Our attach rate, if you will, to that installed base is growing also because there's more service intensity to the more complex tools. And because a lot of the customers, maybe because of global incentives are building in newer places and they're going to be more interested in working with Applied and getting our labor into their factories to help them ramp their factories and keep them at high-yield.

So we think there is a few tailwinds and we're providing more service capability, Joe, in terms of if you think about AI, we've got this fleet of tools. We've got the ability to see how they operate and help the customers tune them so that they're operating at the highest levels. That is sort of increasing our service offerings and capabilities as we work across the ecosystem.

So we think that's a good long-term perspective for that business, demonstrating it in Q4 and Q1. And more and more of that business has a subscription recurring revenue type flavor. So we talk about how 85% of the revenues approximately are recurring business, meaning either spares or service contracts. About two-thirds of that is under contract.

And those contracts are at a high renewal rate and actually are being renewed for on average longer-term as it helps us with our planning and it helps our customers with their planning if those are longer-term service agreements. And then from a finance perspective, that gives you a little bit more of a recurring revenue flow, a little bit more confidence in that. And so we've also sort of attached our sizing of our dividend expectations to that flow.

Joe Quatrochi

Yes. That's kind of perfect. You have like 30 seconds left, but like capital return, thinking about that dynamic, and that's exactly how it's going is services and the dividend, right, growing that dividend. And then I think maybe there's a little bit of CapEx kind of requirements over the next several quarters, but just kind of briefly talk about capital return.

Brice Hill

Yes. So no change in the overall plan, return 80% to 100% if there's little M&A in the environment. It's close to 100% being distributed to shareholders. We have been on a path to raise the dividend. We are thinking of that related to that recurring business that we just talked about. And then you mentioned CapEx. We are expanding our lab footprint so that we can do this collaboration work with our customers. That's a project primarily in Sunnyvale, where you see that and that will elevate our capital spending for '25 and '26.

Joe Quatrochi

Okay, perfect.

Brice Hill

All right.

Joe Quatrochi

Leave it there.

Brice Hill

Thanks very much. Good to see you.

Joe Quatrochi

Thank you.