Applied Materials' third quarter of fiscal 2023 earnings call was led by Michael Sullivan, Corporate Vice President, and joined by Gary Dickerson, President and CEO, and Brice Hill, Chief Financial Officer. Sullivan reminded listeners that the call contained forward-looking statements and non-GAAP financial measures. Dickerson discussed how Applied Materials is outgrowing the industry due to its execution of its strategy, which is enabling the company to introduce new products and solutions for its customers.

Applied laid out a thesis in 2018 that IoT and AI would drive a new wave of semiconductor growth and innovation, and that has proven to be true. The thesis consists of two parts: first, that the combination of IoT and AI drives demand for more chips and new silicon technologies; and second, that the industry is moving to a PPACt playbook which includes new system and device architectures, 3D structures, materials, shrinking methods, and heterogeneous integration to improve power, performance, area-cost, and time-to-market.

Applied is transitioning to the PPACt playbook which is enabled by advances in materials engineering. This transition is beneficial for Applied as it allows them to provide more comprehensive solutions and integrated products to their customers. In the past five years, Applied has developed a dedicated organization to focus on ICAPS applications, released more than 20 new products, developed a strong portfolio of products for DRAM technology, and established a leadership position in heterogenous integration and advanced packaging.

In 2023, the company was able to deliver more value to customers and strong performance during a period of low investment by memory makers. This was due to its strategy and focus on IoT and AI-driven inflections, as well as its share in DRAM patterning, unique co-optimized hardmasked solutions, porting of key technologies from logic to DRAM, and leadership in advanced packaging solutions with micro-bump and through-silicon via. Additionally, the company expects high-bandwidth memory to grow at a 30% CAGR and ICAPS demand to be sustainable due to enabling technology for large, global inflections.

Applied has announced two major initiatives, the EPIC platform in the U.S. and a Collaborative Engineering Center in India, to help the industry overcome challenges such as complexity, cost and carbon footprint. ICAPS investments are expected to be supported by government incentives and AGS delivered record revenue this quarter with 60% of its service revenue coming from long-term agreements. The increasing complexity needed to enable the PPACt playbook and the broadening of the industry's geographic footprint are both key growth drivers for the service business, and Applied believes it is on track to achieve low double-digit AGS growth in the coming years.

Applied is investing in high-value technologies such as ICAPS, foundry-logic, DRAM, and heterogenous integration to enable key IoT and AI-driven inflections, and is positioned for sustainable outperformance over the coming years. They are also driving a collaborative approach to reduce carbon emissions, and have rolled out the Net Zero playbook and two new products to help customers with carbon reductions. Applied believes that the semiconductor industry is on track to reach $1 trillion in sales by 2030.

Applied Materials had a strong Q3 business environment, with ICAPS demand being broad-based and generating record revenue in 200mm systems and Europe. The company exceeded revenue guidance across Semiconductor Systems, Services and Display, and improved delivery performance and reduced inventory. Company revenue was nearly $6.43 billion, down 1% year-over-year and in the upper end of the guidance range. Non-GAAP gross margin was slightly above the guidance, and operating expenses were slightly below. Non-GAAP EPS was $1.90, down 2% year-over-year, and near the high end of guidance.

Applied Global Services had a record quarter, with revenue of $1.46 billion and non-GAAP operating margin of 29.3%. 200 millimeter system sales, tools under service agreements, and tools under comprehensive service agreements all saw increases. In Display, revenue grew sequentially to $235 million. Operating cash flow was $2.58 billion, free cash flow was $2.3 billion and shareholders received $707 million in dividends and share buybacks. For Q4, Applied expects revenue of $6.51 billion, non-GAAP EPS of $2.00, Semi Systems revenue of $4.75 billion, DRAM revenue up $500 million, AGS revenue of $1.42 billion, Display revenue of $290 million, non-GAAP gross margin of 47%, non-GAAP operating expenses of $1.17 billion and a tax rate of 12.3%.

Applied Materials had a strong quarter in DRAM, and is expecting more growth in the next quarter. This growth is largely due to trailing-edge technology. The company also plans to make a multibillion-dollar investment in R&D infrastructure over the next several years to expand its capacity to collaborate with customers, and is expecting the EPIC Center to come online in fiscal 2026. They are also committed to increasing shareholder returns.

Applied Materials has seen a 10% increase in DRAM wafer fab equipment share in the last 10 years due to its strength in high-bandwidth memory, capacitor scaling, advanced packaging, and patterning share gains. In Q4, they will see growth in DRAM related to confirming technologies they can ship to customers in China. DRAM has been a strong market for them this year from an equipment perspective.

Brice Hill answered a two-part question from C.J. Muse of Evercore ISI about the sustainability of Micron's outperformance in the coming years. He explained that any pent-up demand from 2022 that was served in the first half of 2023 will not affect their performance in 2024. He also assured that the outperformance of their WFE business is not due to any previously booked business from China.

In this paragraph, Gary Dickerson and Brice discussed how Applied Materials is expecting growth in their Gate-All-Around, Services, Display, and ICAPS businesses in 2024. They also discussed their strength in DRAM and Packaging, which is currently a $1 billion business and they expect to double that over the next few years. Additionally, they highlighted that their focus on materials engineering is expected to lead to more nodal spending, and that their Services business is still on track for low-double digit growth in a weak memory market.

Applied Materials expects to grow faster than the WFE market in 2024. To ensure that there is no pull forward of mature technology shipments due to geopolitical reasons or take or pay arrangements, Applied Materials looks at the amount of local capacity relative to local consumption, the overall capacity being purchased relative to the semiconductor market, and the installation and utilization of their equipment.

Applied Materials is the leader in packaging and has a broad portfolio to enable different types of packaging, such as CMP, PVD, CVD, etch and plating. Through Silicon Via and micro-bumping are critical technologies for high-bandwidth memory packaging which increases the TAM by 5%. Applied is on track to double their packaging business over the next three to five years. Hybrid bonding is not a short-term revenue generator but is a great opportunity for the future as every company is focused on chiplets.

In the July quarter, ICAPS made up a percentage of Applied Materials' business. Looking ahead to the second half of the calendar year, Applied Materials believes that ICAPS has the potential to be a sustainable business in China, due to their deep engagements with integration teams and the ability to combine different technologies together under vacuum which has a big impact on electrical performance.

Brice Hill and Gary Dickerson of Applied Materials discussed the regionalization of their ICAPS business, which is their largest market and is growing strongly this year. They believe that regionalization leads to more spending globally and that the investment in different device types is consistent with the growth rates of those markets. They view regionalization as important due to the large vertical markets in different regions.

Brice Hill and Toshiya Hari discuss the importance of secure supply chains and the opportunities for service businesses as companies move to new locations. They also explain that customers are making long-term investments in equipment due to their two to four-year planning horizons. Finally, they update on the success of process control systems, which make up 10-12% of their systems business and grew at a rate of 55-60% faster than their overall systems business.

Gary Dickerson discussed the growth of the PDC business, which has grown two times between 2020 and 2022, and the synergy between PDC and other process equipment. He mentioned eBeam, which has a 50% overall share, and new products coming to market with cold field emission with the highest resolution and fastest imaging. He also mentioned the capacitor formation of DRAM and the importance of eBeam imaging in accelerating inflections.

Brice Hill answers a question about the $1.7 billion in China revenue for July, which is largely made up of domestic Chinese chip makers. He also comments on the potential of a DRAMs pull in, saying that it is not likely as it is an existing technology that was not restricted in China. Hill also states that the equipment being installed in China is not necessarily incremental, as it would have been shipped elsewhere if it were not allowed in China.

Applied Materials is focused on innovating and creating deeper strategic relationships with leading customers in all device segments. They have gained market share and formed a group four years ago to focus on ICAPS technology. They have launched 20 major new ICAPS products and have a strong pipeline of new innovations to continue to strengthen their position. They have the strongest strategic position and broadest portfolio, but still have room to grow in certain segments like etch and PDC.

Brice Hill and Gary Dickerson discuss the success of the Services business despite headwinds from the memory market. They attribute the success to the 200-millimeter equipment and the transactional activities associated with utilization. They also note that the indicators of price, inventory, and utilization are still trending in the negative direction or flat, indicating that the memory market has not yet seen a turn.

Brice Hill discussed the potential for AI-driven wafer start expansion in the future, noting that it currently accounts for 5% of the overall market and has the potential to grow at a rate of 30-50%. He believes that it is an important workload that will continue to grow in the future.

Brice Hill and Brian Chin are discussing the rate of growth in wafer starts and WFE associated with the Internet of Things. Hill mentions that there is a lot of movement in the macro numbers, and that they have seen delays in installation of tools and pushouts with leading foundry customers. Hill also highlights the strengths in ICAPS and DRAM. Schulze-Melander then inquires about the longer-term R&D intensity, considering the mix of the business.

Brice Hill explains that Applied is currently spending 18.1% of revenue on R&D, two-thirds of which is going towards their roadmap. He believes that the semiconductor industry will grow 6-9% over the next few years, and Applied will gain share due to their engineering and materials expertise. Hill also notes that Applied has held their spending flat for the past three quarters and there will be a normal pay rate cycle in the first quarter of the next fiscal year.

Brice Hill provided an outlook for the company's business in 2024, stating that the ICAPS business is expected to be stable, the Display business to grow modestly, and the Services business to grow at a low double digit rate. He added that they will have to wait until closer to the year to provide a forecast for memory and leading logic. Gary Dickerson also mentioned that the company is in a great position for the long-term.

Gary Dickerson and Michael Sullivan discussed the potential of Applied's Gate-All-Around technology and its revenue contribution to the company in 2024. While they did not give a specific dollar amount, they did note that the inflection of this technology would start to ramp up in the latter part of 2024 and would be a significant driver going forward. Brice Hill also added a note on gross margin, stating that a normal mix would be around 46.6-46.7%, although their guide for Q4 was higher due to a rich mix.

Applied Materials is making progress towards their goal of 48% to 48.5% in '25 and is outperforming their markets. Their Semi Systems and Services businesses are both on track for year-over-year growth, and they are investing for technology leadership and growth. They are also generating strong free cash flow and increasing shareholder returns. A replay of the call will be available later today, and they invite everyone to join them at the Jefferies Conference in Chicago and the Goldman Sachs Conference in San Francisco.

This summary was generated with AI and may contain some inaccuracies.