Applied Materials, Inc. is a global leader in materials engineering solutions, providing manufacturing equipment, services, and software to the semiconductor, display, and related industries . The company operates through a direct sales force, with operations and manufacturing activities in the United States, Europe, Israel, and Asia . Applied Materials' offerings are highly technical, catering to the needs of semiconductor systems, global services, and display markets .
- Semiconductor Systems - Focuses on manufacturing equipment for foundry-logic, implant, packaging, metal deposition, and chemical vapor deposition (CVD), significantly contributing to the company's revenue .
- Applied Global Services - Provides long-term subscription service agreements, accounting for a substantial portion of parts and service revenues .
- Display and Adjacent Markets - Offers solutions for the display industry, maintaining profitability even during industry down cycles .
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What went well
- Strong Growth in Leading-Edge Foundry Logic: Applied Materials anticipates "significant growth in leading-edge foundry-logic" driven by AI and energy-efficient computing. The company is "well positioned to gain share" in new architectures like gate-all-around transistors and backside power distribution.
- Improved Gross Margins Through Value-Based Pricing: The implementation of value-based pricing and operational improvements have enhanced gross margins. The underlying gross margin rate has improved to about 48.0%, with further gains expected from shipping "more valuable products."
- Increasing Demand in DRAM and High-Bandwidth Memory (HBM): DRAM customers are adding capacity, particularly for HBM, where demand is growing at about 30%. Approximately 10% of DRAM wafers are allocated to HBM production, and Applied Materials sees "capacity increases in the DRAM customers."
What went wrong
- Operating margins in the services business have declined due to structural changes, including increased allocation of corporate expenses, potentially impacting profitability in this segment.
- Reliance on value-based pricing to maintain gross margins, necessitated by supply chain cost increases, may face customer resistance and challenges in implementation, as the company is only in the "third inning" of this process.
- Significant revenue exposure to China, with approximately 30% of revenues coming from China, which may be subject to geopolitical risks and export controls, potentially affecting future growth.
Q&A Summary
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Gross Margin Outlook
Q: What's driving gross margin improvement to 48%?
A: The underlying gross margin rate has improved to about 48.0% due to business improvements across logistics, inventory management, cost controls, and the implementation of value pricing. For Q1, they are guiding to 48.4%, benefiting from a strong product mix. They view 48% as the right level longer term and will continue working to improve it. -
China Sales
Q: Is China revenue expected to remain at 30%?
A: China revenue was 30% of total revenue in Q4, down from mid-40s previously when fulfilling specific DRAM demand. The Q1 outlook is also approximately 30%, which they consider a normalized rate. Future levels depend largely on the health of the ICAPS market in China. -
Leading-Edge Foundry Growth
Q: How do you view leading-edge foundry demand?
A: They anticipate significant growth in leading-edge foundry-logic driven by AI and the need for energy-efficient computing. Architecture changes like gate-all-around and backside power distribution improve power efficiency by 20% to 30%, providing a tailwind for Applied Materials. They are well positioned to gain share as customers adopt these new nodes. -
DRAM Capacity and HBM Demand
Q: Are DRAM customers adding capacity for conventional DRAM?
A: Customers are adding overall DRAM capacity, with about 10% of DRAM wafers allocated to high-bandwidth memory (HBM) production. HBM demand is growing at about a 30% rate, leading to more capacity allocated each quarter. They see the DRAM market continuing to be fairly strong. -
WFE Spending Intensity
Q: What's the outlook for WFE spending intensity?
A: WFE intensity increased to around 17% in 2023 due to China's capacity ramp but is expected to decrease slightly over time. They are comfortable with it staying in the mid-teens to support the projected $1 trillion semiconductor market by 2030. -
Value-Based Pricing
Q: How is value-based pricing impacting margins?
A: Value-based pricing is contributing to gross margin improvements. They are in the "third inning" of this initiative, enhancing evaluation of the value provided for each application and strengthening customer communications. Integrated platforms, crucial for technology inflections, make up about 30% of revenue and bolster their value pricing capability. -
ICAPS Market Outlook
Q: Despite slow end markets, how is ICAPS performing?
A: ICAPS remains strong globally, including China. While markets like automotive, industrial, analog, and image sensors have been slower, power-related components and microcontrollers are performing well. They expect customers to continue adding capacity over time , though there may be some slowing of investment due to lower utilizations. -
Services Business Margins
Q: Why are services operating margins below targets?
A: Operating margins are about 100 basis points below prior levels due to allocating more corporate expenses to the segments. They expect to continue improving operating profit even with these increased allocations. -
NAND Market Outlook
Q: What's your outlook for NAND spending?
A: They see a slight growth in NAND in their Q1 outlook. Due to impressive shrink rates delivering needed bits, there hasn't been a need for new wafer starts in NAND, making it more of an upgrade market. -
Impact of Administration Changes
Q: How might a new administration affect restrictions?
A: It's too early to speculate on changes due to a new administration, and they can't provide insights on potential policy shifts at this time.
- With your advanced node revenue expected to double, how much of this growth is truly incremental versus replacing revenue from prior nodes, and how do you assess the sustainability of this growth moving forward?
- Considering that approximately 30% of your revenue comes from China, primarily in the ICAPS business, do you expect this level to hold given potential geopolitical risks and how might changes in trade policies impact your outlook?
- Despite the strong growth in your services business, operating margins remain below prior targets; what structural challenges are preventing margins from returning to the low 30% range, and what actions are you taking to improve profitability?
- You noted an increase in gross margins due to favorable product mix and value-based pricing; can you provide more detail on the drivers behind this improvement and discuss the sustainability of higher gross margins in the current market environment?
- As you see customers adding DRAM capacity, particularly for high-bandwidth memory, how are you managing the potential risk of overcapacity in conventional DRAM, and what strategies are in place to balance investment and demand?
Q4 2024 Earnings Call
- Issued Period: Q4 2024
- Guided Period: Q1 2025
- Guidance:
- Total Revenue: $7.15 billion, plus or minus $400 million
- Non-GAAP EPS: $2.29, plus or minus $0.18
- Semiconductor Systems Revenue: Approximately $5.3 billion
- Applied Global Services (AGS) Revenue: Approximately $1.65 billion
- Display Revenue: Approximately $175 million
- Non-GAAP Gross Margin: Approximately 48.4%
- Non-GAAP Operating Expenses: Approximately $1.33 billion
- Tax Rate: Approximately 14%
Q3 2024 Earnings Call
- Issued Period: Q3 2024
- Guided Period: Q4 2024
- Guidance:
- Total Revenue: $6.93 billion, plus or minus $400 million
- Non-GAAP EPS: $2.18, plus or minus $0.18
- Semi Systems Revenue: Approximately $5.1 billion
- Applied Global Services (AGS) Revenue: About $1.61 billion
- Display Revenue: Around $200 million
- Non-GAAP Gross Margin: Approximately 47.4%
- Non-GAAP Operating Expenses: Around $1.275 billion
- Tax Rate: Modeled at 12.5%
Q2 2024 Earnings Call
- Issued Period: Q2 2024
- Guided Period: Q3 2024
- Guidance:
- Revenue: $6.65 billion, plus or minus $400 million
- Non-GAAP EPS: $2.01, plus or minus $0.18
- Semi Systems Revenue: Approximately $4.8 billion
- Applied Global Services (AGS) Revenue: About $1.57 billion
- Display Revenue: Around $245 million
- Non-GAAP Gross Margin: Approximately 47%
- Non-GAAP Operating Expenses: Around $1.26 billion
- Tax Rate: 12.3%
Q1 2024 Earnings Call
- Issued Period: Q1 2024
- Guided Period: Q2 2024
- Guidance:
- Revenue: Expected to be $6.5 billion, plus or minus $400 million
- Non-GAAP EPS: Expected to be $1.97, plus or minus $0.18
- Non-GAAP Gross Margin: Expected to be approximately 47.3%
- Non-GAAP Operating Expenses: Expected to be around $1.235 billion
- Tax Rate: Modeling a tax rate of 12.5%
- Segment Revenue Expectations:
- Semi Systems Revenue: Around $4.8 billion
- AGS Revenue: About $1.5 billion
- Display Revenue: Around $150 million