Applied Materials Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 16, 2022

There are 16 speakers on the call.

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.

Speaker 1

Good afternoon, everyone, and thank you for joining Applied's Q1 of fiscal 2022 earnings call. Joining me are Gary Dickerson, our President and CEO and Bob Halliday, our Chief Financial Officer. Before we begin, I'd like to remind you that today's call contains forward looking statements, which are subject to risks And uncertainties that could cause our actual results to differ. Information concerning the risks and uncertainties is contained in Applied's most recent Form 10 ks and 8 ks filings with the SEC. Today's call also includes non GAAP financial measures.

Speaker 1

Reconciliations to GAAP measures are found in today's earnings press release and in our quarterly earnings materials, which are available on the IR page of our website at appliedmaterials.com. Before we begin, I have a calendar announcement. Applied will hold its next master class on Thursday, April 21 at 9 o'clock Pacific Time. We'll cover patterning technologies for the chip making industry, including 2 d scaling with EUV lithography, materials enabled patterning of gate all around transistors and 3 d patterning control using e beam technology And AIX. We hope you'll join our technology experts for presentations and Q and A.

Speaker 1

And now, I'd like to turn the call over to Gary

Speaker 2

Thank you, Mike. This is an unprecedented period for Applied Materials in the semiconductor industry. Demand for semiconductors has never been stronger or broader and the supply chain's ability to fulfill this growing demand is constrained in the near term. While the supply environment remains challenging, we landed our 1st fiscal quarter of 2022 towards the high end of our guidance range and delivered our highest ever quarterly revenues. These results are a testament to the capabilities and commitment of our global team who are executing well and focused on doing everything possible to deliver for our customers.

Speaker 2

The industry clearly has a long way to go before supply catches up with demand. Applied's orders for the quarter were an all time high, beating our previous record by $500,000,000 To ensure our own manufacturing capacity is not a limiting factor, we've made and continue to make strategic investments in our global infrastructure. This includes our state of the art logistics service center in Austin, Texas that we're bringing online this month. Like many in the industry, the biggest challenge we face today is the availability of certain silicon components that go into subsystems within our products. We are working closely with our suppliers to find solutions and eliminate bottlenecks.

Speaker 2

I would like to thank them for their partnership as we collaborate in new ways to overcome near term headwinds and build a stronger supply chain that better supports the future needs of the industry. In today's call, I'll talk about our demand outlook, which is very strong and strengthening. I'll provide our longer term perspective on the secular trends, reshaping the semiconductor industry, and I'll give you some updates on the progress we're making against our in our financial outlook. Let me start with market demand. It's clear that wafer fab equipment spending in 2021 was limited by supply with some unmet demand pushing into 2022.

Speaker 2

If we look at our semiconductor systems revenues From the Q2 of 2021 to the end of Q1 2022 and compared to the prior 12 month period, they were up 43% year on year. We think this is a good approximation for industry growth in calendar 2021, which would put WFE in the mid-eighty $1,000,000,000 range. Demand is very strong and continues to grow. We believe wafer fab equipment spending could reach We also have a positive growth outlook for 2023. Within WFE, foundrylogic Spending grew faster than memory in 2021 and we see it growing faster than memory again in 2022.

Speaker 2

We believe foundrylogic made up more than 60% of total WFE investments last year and will remain at these levels or increase as a percentage of the mix over the next several years. Innovation at the edge and in the cloud means that foundrylogic demand is broad based and split relatively evenly between the most advanced nodes and iCAPS customers who serve the IoT, communications, automotive, power electronics and sensors markets. It's also important to put this near term demand outlook in the context of the secular trends driving longer term growth and structural changes in the industry. While digital transformation is already reshaping the global economy today, it will take decades to fully play out around the world And at the foundation of this multi $1,000,000,000,000 inflection is advanced silicon. Today, 9 of the top 10 Most valuable companies in the world either design or build chips.

Speaker 2

8 of the 9 are now designing their own customized silicon in house and the other one manufactures a large percentage of the world's chips by value. I think this is a great example of The fundamental role silicon plays in driving the system level power, performance and cost improvements that will unlock the full potential of digital transformation and the metaverse. Back in 2018, we introduced our framework for describing the semiconductor New chip architectures like workload specific ASICs, new 3 d structures like gate all around backside power distribution, next generation 3 d NAND and 3 d DRAM, new materials in gate, contact and interconnect, New ways to shrink from EUV lithography to advanced patterning and advanced packaging from 2.5D silicon interposers There's 2 3 d chiplets and hybrid bonding. As the major technology inflections that make up the PPAC T playbook take shape, It's clear this future roadmap is more multifaceted and complex than anything the industry has done before. This increasing complexity has positive implications for Applied Materials.

Speaker 2

First, we expect capital intensity to remain at the levels we have seen over recent years. And second, Applied's broad capabilities are more valuable because they allow us to address higher order problems for customers and provide them with more complete solutions. On top of the opportunities created by the PPAC T playbook, Major supply chain inflections are underway that are also positive for industry economics. This starts with a shift from just in time to a just in case philosophy. The most visible example of this is the automotive industry where the major Car makers are quantifying the cost of lost business in 2021 and rapidly changing the way they work with suppliers of their most critical components.

Speaker 2

We're also working differently with our customers. They are providing us with longer term visibility and we are collaborating more closely In addition, the strategic and economic importance of semiconductors is being recognized at a national level. In the coming years, government support and incentives in the U. S, Europe and Japan will translate into regionalization of supply. As I've highlighted before, these regional supply chains will be more resilient, but also less capital efficient, which is an additional tailwind for us.

Speaker 2

Overall, our outlook for the next decade is very positive. We expect Semiconductor and wafer fab equipment to grow significantly faster than the economy with outsized opportunities for Applied Materials. To be ready for this exciting future, we've aligned our organization and investments around 3 strategic pillars. First, to be the PPAC T enablement company and provide the foundation for customers' roadmaps for power performance, area, cost and time to market. Second, to shift more of our business to subscriptions and third, to generate incremental free cash and advanced packaging.

Speaker 2

All of these inflections are primarily enabled by materials engineering Applied's core strength and To enable these inflections, we are also in a great position to capture more of that growing TAM. For example, in the transition from FinFET To 1st generation gate all around, our transistor TAM grows by more than $1,000,000,000 And based on our tool of record positions, we expect to capture the majority of the inflection. We will provide more details about these inflections and how we expect them to play out in our 2022 MasterClasses. While our current supply constraints mean that we can't fully realize the strength in our business, we are executing very well against our product roadmap and there are clear leading indicators of our future growth potential. I'll highlight a few recent examples.

Speaker 2

In etch, we've recently won multiple tool of record at advanced nodes and foundrylogic across all three leading edge customers. This is significant because these wins are in areas we haven't served in the past and demonstrate how our next generation of etch solutions address customers' most challenging applications. In inspection and metrology, where we have fewer Our trailing 12 month revenues were up 68% year on year and our e beam Revenues nearly doubled in that period. We expect to outperform the market again in 2022 with especially strong growth in optical wafer inspection combined with further extension of our EV leadership. Beyond unit process excellence, Applied is able to combine the industry's broadest technology portfolio and unique ways to create co optimized and fully integrated solutions.

Speaker 2

For example, co of hard mask deposition and etch is an enabling solution for high aspect ratio structures. Adoption of our co optimized Draco solution is accelerating and on track to generate an incremental $600,000,000 of revenue this year. And we recently secured our first wins with a new carbon hard mask deposition and etch solution at a leading Memory manufacturer. Another key component of our technology portfolio is our digital tools that accelerate R and D, Technology transfer and ramp and optimize productivity and high volume manufacturing. We are engaged with a broad range Customers, in this quarter, we secured a new strategic penetration for R and D acceleration using our AIX actionable Insight Accelerator platform at a leading customer.

Speaker 2

As part of this engagement, we will use our unique sensor technology and proprietary machine learning algorithms for rapid process window tuning and process variability reduction. We're also making progress on our multi year journey to increase subscription revenues. Within AGS, more than 60% of our parts and service revenue as generated from subscriptions in the form of long term service agreements. The average tenure of these agreements is now 3 years, up from 1.9 years 12 months ago and the renewal rate is over 90%. In addition, when we look at our combined software business in AGS and Semi Systems, which are also subscription based, we expect them to generate more than $300,000,000 of revenue this year.

Speaker 2

Before I hand the call over to Bob, I'll quickly summarize. Applied and our global Demand for semiconductors and wafer fab equipment remains strong and continues to grow. There's still a long way to go before supply catches up with demand. Our outlook for 2022 and beyond is very positive as long term secular trends drive our markets structurally higher. In addition, the major technology inflections that make up the industry's PPAC T roadmap expand Applied's addressable market opportunities in our broad and differentiated technology portfolio puts us in a great position to capture a larger portion of our served markets in years to come.

Speaker 2

With that, Bob, it's over to you. Thanks, Gary. I'd like to begin by thanking our teams and our partners for doing everything they could in a challenging supply chain environment. We still have a lot

Speaker 3

of work to do to satisfy our customers' needs and this is job 1 for all of us. I have 3 main messages for you today. 1, demand for Applied products is very strong and continues to grow. 2, we remain supply chain limited and we forecast gradual improvement over the course of the year. 3, we expect to grow our revenue and earnings each quarter through the end of the calendar year, And we believe it is increasingly likely that 2023 will be another growth year.

Speaker 3

Next, I'll summarize our Q1 results. Then I'll provide details about the demand environment for Applied Materials. And finally, I'll share our guidance for fiscal Q2 and the rate of growth we expect to see throughout the year. In Q1, we delivered Strong year over year revenue and earnings growth and exceeded the midpoint of our guidance. The supply chain environment was challenging.

Speaker 3

Our teams collaborate broadly with partners upstream and downstream of Applied to maximize the supply of components to our manufacturing sites and service locations. This work enabled us to deliver record semiconductor systems revenue, which we grew by 29% year over year. We grew fastest in Foundry logic to outgrow WFE in 2022 with strength in both leading edge and iCAPS. From a product perspective in Q1, we generated record quarterly revenue in process control, CVD and CMP, And we achieved our highest ever DRAM revenue. We also grew non GAAP operating margin in semi by 2 80 basis points year over year.

Speaker 3

In AGS, we grew revenue by 14% year over year and increased non GAAP Our AGS service revenues grew sequentially and year over year. We increased our tools under comprehensive service agreement by 13% year over year and our subscription renewal rate Our parts business met our expectations, but could have been even higher. AGS includes our legacy 200 millimeter equipment revenue, which was below our expectations in Q1 due to supply chain constraints that prevented us from shipping to demand within the quarter. For the fiscal year, we continue to expect AGS to grow in the low with potential upside depending on the supply chain recovery. In display, We exceeded our revenue goal in Q1 and increased non GAAP operating margin by 2 80 basis points year over year.

Speaker 3

Summarizing Applied's Q1 results on a year over year basis, we increased revenue by 21%, non GAAP gross margin by 140 basis Non GAAP operating profit by 2 70 basis points and non GAAP EPS by 36%. In addition, we generated record free cash flow and distributed over $2,000,000,000 to shareholders with $1,800,000,000 in repurchases and $214,000,000 in dividends. Next, I'll address the impact of the supply environment on our business in the near term. Underlying demand for Applied's technology is very strong and growing. And we believe that as we work through the supply chain constraints, we will demonstrate the progress we're making toward our market share and gross margin Although we don't usually report backlog on a quarterly basis, I'm going to give some further color on today's call to help you understand our In Q1, our semi systems backlog increased by more than $1,300,000,000 to a record $8,000,000,000 Moreover, the backlog includes a rich mix of products that are highly enabling to our customers' roadmaps.

Speaker 3

What this tells us is that in an unconstrained environment, we would have produced substantially higher revenue and demonstrated a healthy share gain in calendar 2021. Also, absent the supply chain issues, Our gross margin in fiscal 2022 will be very close to the targets in our 2024 financial model. We are laser focused on improving the supply chain, which will enable us to support our customers and demonstrate the strength of our business. As Gary outlined, we expect the WFE market to grow by over 15% in 2022 to $100,000,000,000 or more. Even with the constraints, we expect I'll grow the market in our semi business and carry sizable backlog into 2023.

Speaker 3

Now I'll share our guidance for Q2. We expect to increase revenue to $6,350,000,000 plus or minus $300,000,000 which is up almost 14% year over year. We expect non GAAP EPS in Q2 to be around $1.90 plus or minus $0.15 which is up around 17% year over year. Within this outlook, We expect semi systems revenue of around $4,600,000,000 up 16% year over year, AGS revenue of around $1,350,000,000 up 12% year over year and display revenue of around $380,000,000 Applied's non GAAP gross margin Should decline to around 47% in Q2 as we absorb near term cost pressures, primarily related to expediting shipments to our customers. After Q2, we expect to gradually increase the gross margin by mitigating cost pressures and shipping a richer mix of high margin products.

Speaker 3

Non GAAP OpEx should be around 1,000,000,000 dollars 15,000,000 in Q2. And our non GAAP tax rate should be around 12%. Looking ahead, We expect we can grow revenues by increasing mid single digit percentages each quarter through the end of the calendar year. And based on customer conversations about semiconductor demand and technology inflections, we're increasingly optimistic 2023 will be another growth year for the industry and especially for Applied. Now, Mike, let's begin the Q and A.

Speaker 1

Thanks, Bob. To help us reach as many people as we can, please ask just one question on today's call. If you have a second question, please re queue and we'll do our best to come back to you later in the session. Operator, let's please begin.

Operator

Our first question comes from the line of C. J. Muse of Evercore. Your line is open.

Speaker 4

Yes, good afternoon. Thank you for taking the question. I guess a question on gross margins, particularly in the current challenging supply environment. You guided at 47% and expectations for that to grow through the year. Can you speak to What it will take to build out greater scale upstream for your key suppliers?

Speaker 4

What Impact that might have on input costs for you and then your ability to pass those down to your customers and what gives you the confidence that You can get to that 48.5% as part of the target model. And I guess as part of that, if you could frame What your expectations are, when you might be able to hit that type of number? Thanks so much.

Speaker 3

Well, let me take those six Questions, CJ. So first, what's going on with gross margins? What's the outlook and what can we do? So what's going on with gross margins? As you know, in Q4 of 2021, we did 48,200,000,000.

Speaker 3

The long term model at 2024, I guess it is, It is $48,500,000,000 $88,800,000,000 We were down 47. 3 this quarter, we guided around 47. We go up half a point the other year. There are 2 things that are hitting us. One is cost increases from logistics, Inefficient factory operations like overhead and burn absorption.

Speaker 3

And thirdly, some material cost issues. I'd price those in at 1% to 1.5% on gross margin impact, probably about 1.2% is the middle point. I would say that most of those are transitory, factor absorption, logistics and a bunch of the material cost stuff should get better. So I'd say over 2 thirds of that is kind of transitory. The second one is mix.

Speaker 3

We have a couple of initiatives. We have very, very strong Orders and backlog, particularly in semi. So if we had a higher mix of semi versus non semi, it would help our gross margins. Secondly, if you had a better if you look, we priced out the mix of our semi backlog, so our mix in the semi backlog is very attractive. So if you look at those 2 mix things and you normalize by past backlog levels what we could ship, you pick again another 1 to 1.5 points of gross margins.

Speaker 3

And again, the sweet spot is kind of 1.2. So if you're at 80%, 47% next quarter, if you could get 1.2, 1.2, you're pretty much on model. You might be above it a little bit actually. So that's the scale of what we're looking at. So we're pretty confident we're on the model trajectory of 48.5@8748.8@100,000,000,000 WFE.

Speaker 3

Secondly, the cost increases, can we do anything to mitigate that and pass it along? With customers, our 3 primary Issues are, 1, we have to do better on deliveries. Job 1 for us is to ship more tools, get them out the door on time to customers, and that's our commitment to customers. Secondly, for a long time, we have created really valuable tools and shared that value with our customers and ourselves. And I think we've done a good job on both sides.

Speaker 3

Now that we have these unusual cost pressures, I think it's fair to have that discussion with customers. But job 1 and job 2 is to get our products shipping in volume on time And also to create value for customers. But I think we can have that type of conversation.

Speaker 1

Great. Thanks, C. J.

Operator

Thank you. Our next question comes from Stacy Rasgon of Bernstein Research. Your line is open.

Speaker 5

Hi, guys. Thanks for taking my question. Bob, I just wanted to clarify and be crystal clear. So you said you thought through the year you could grow By increasing mid single digits, do I read that as the actual percentage of sequential growth as we go through the year goes up every quarter? So the sequential growth is actually accelerating itself through the year?

Speaker 3

Yes. It's kind of it's roughly 5%, 7%. And then in the Fiscal Q1, we think around 9%. That's semi and AGS and display are similar type of numbers. So the overall number is pretty close.

Speaker 5

Got it. That's helpful.

Speaker 3

Yes, I think that's a fair estimate. We still got to work through issues, but I think it's a good estimate.

Speaker 5

Got it. And I guess along those lines, like what gives you confidence? Is that just your visibility on how the supply constraints themselves are easing? Like are you shipping, Like partially done tools where you just have to supply like a final module or something to make it work like what gives you the confidence that the supply constraints will actually ease along that trajectory?

Speaker 3

Well, if you look at total material receipts for us in Q1, they were up a good amount, but we didn't get exactly the match Parts, we they were up kind of mid to high single digits. And if you look at that type of increase in Q2, we think that's similar, I think we'll have a better match of the parts. Remember what we said last quarter was, there's a lot of stuff we're tracking, but the hotspot is kind of some semi Device type things that are supplied through the distribution channel to our customers. So we think it's a fair Our estimate of what we could do, it's not internal capacity constraints, it's more some parts of the supply chain, but I think it's a reasonable estimate.

Speaker 5

Got it. That's helpful. Thank you so much. You're welcome.

Speaker 1

Yes. Thanks, Stacy. And then those numbers are right for semi We would say that AGS year over year, AGS tends to grow a little bit slower than semi systems. So it's probably just up low double digits. And then display, you already have our View that it's probably up a little bit year over year, also depending on the supply chain.

Speaker 1

But that will help you with the 5.79 for semi

Operator

Our next question comes from John Pitzer of Credit Suisse.

Speaker 6

Congratulations on the solid results. I guess, Gary, Bob, The bookings number and the backlog number in the Jan quarter were extremely impressive. But the cynic in me would argue that when your customers Can't get what they want. They always order more than they need. And so from your perspective, how do you safe Guard against the fact that you and all of your peers are having supply constraints right now.

Speaker 6

And if I'm your customer, I at the very least better get in line Or I might not get what I need to kind of grow supply. How do you kind of safeguard against the dreaded double ordering?

Speaker 3

Well, I'll give you my perspective and Gary talks to customers a lot. He'll give you his. So I think, 1, if you look at the Magnitude of the orders and how much they're going, it's pretty big number. So we're not going to be overbuilding inventory or anything. The second thing is if you look at the mix, I think that's So if you look at memory, so I'll give you some data, John.

Speaker 3

So if you go look at the history of the industry last 15 years, 20 years, Some of the leading indicators of when you overbuild is particularly strong memory years. There's 3 years that are strong memory years, 'seventeen and 'eighteen, We're all over 50% memory. So if you look at it right now, memory was 40% of WFE in 2021 And going down several points in 'twenty two. So we look at memory as moderate growth and we don't see double bookings there. Second thing is a leading indicator of whether they're overbooking in the short term.

Speaker 3

We look at wafer starts and we look at fab utilization. So I said last Quarter fab utilization was at a record at our fiscal Q4. In fact, in Q1, fab utilization is slightly higher, so very high. Thirdly, if you look at wafer stats over the last several years, wafer stats from 2016 to 2021 in memory, D. Ram and Nav were both 19%.

Speaker 3

That's not a compound rate of growth. That's a total growth from 16% to 21%. If you look at 200 millimeter, it's 70%. If you look at where the growth was, it was kind of 300 millimeter stuff, 100% from 16% to 21% in logic and foundry, right, logicfoundry. So now you though, well, so gee, let's look at logicfoundry.

Speaker 3

So if you look at TSMC has put long term spending out forecast of $100,000,000,000 kind of CapEx, dollars 40,000,000,000 $42,000,000,000 in CapEx next this year. And we've talked closely to them. I mean, they're pretty committed And if you look at Intel, pretty committed to spending, I mean, announce new fabs. We're tracking fabs. Last quarter, we stayed at a number 59 shells with $300,000,000,000 of $335,000,000,000 to $335,000,000,000 that number is up to $68,000,000,000 to $385,000,000,000 So if you look at shell counts, you look at growth in starch, you look at fab utilization and you look at what the Foundry logic guys are committing to who are a little more predictable and you look at memory mix, it's pretty good.

Speaker 3

Then you look at ICAPS mix versus Trailing edge, right, because iCAPS historically wasn't too big. Now iCAPS, we just define as 10 nanometer above, right. So if you look at that, it used to be pretty moderate because the business model for customers was to roll over tools From leading edge to the trailing edge and now is enough tools to do trailing edge. But if you look at trailing edge demand, it's through the roof. If you look at the WFE by application base from 'twenty one forward to 'twenty six, some of the biggest growth areas If you look at data center, the accelerators, but it's also automobile, IoT, comms and some stuff in phones, particularly sensors.

Speaker 3

So there's big demand on this iCap sensor stuff. So if you look at it, the demand is there and Funding of that through tools is not there because you don't have enough rolling over from the leading edge because the demand is going up on the trailing edge, Right. So then you look at it and say, well, what is actual demand? So we said 53% in 'twenty one and 'twenty two for iCAPS. Well, if you drill into 20 nanometer and above, so I ignore 10, 14, 16, look at some of the oldest stuff, particularly 28, It's gone up as a percentage of WFE from 31% in 2020 to 43% in 2021 and 44% in 2022.

Speaker 3

So because of 2 factors, demand going up and less tools to roll over 2 of those. So, somebody might say, well, gee whiz, that's overheated. Well, if you look at the rate of increase, Right. It went 31, 43, 44. So it's strong, but the rate of increase is declining.

Speaker 3

So the very long answer, but I gave you data, is I don't think we're overheated right now. We have lots of orders. The mix is the type of mix that's not crazy mix that you can drill into ICAPS in China a little bit. But

Operator

Our next question comes from Vivek Arya of Bank of America. Your question please.

Speaker 7

Thanks for taking my question. I just wanted to go back. So in Q4, I think you mentioned you were short by about $300,000,000 or so that you were not able to fulfill. I'm wondering what that impact was in Q1 because when Bob I applied this 5% sequential growth to Q3, it only captures I think $300,000,000 So of sequential growth, shouldn't you be growing more than that going into Q3 given The shortfalls you had in Q4 or Q1 or is this still kind of very supply constrained number?

Speaker 3

Well, it's completely supply constrained. We have more orders than we can ship. If you look at our backlog build was $1,300,000,000 in the quarter and our backlog growth is pretty substantial next couple of quarters. So we are totally supply constrained as everyone is in the industry. I think $300,000,000 was a starting number for what it was in Q4 and I think Q1 could have been more if we weren't supply constrained.

Speaker 3

And the mix is really good for us in the backlog. It's Products like MDP and Epi and products like that.

Speaker 8

Thank you.

Speaker 3

You're welcome.

Speaker 1

Thanks Vivek.

Operator

Thank you. Our next question comes from Krish Sankar of Cowen and Company. Your line is open.

Speaker 9

Hi. Thanks for taking the question. Bob, I just wanted to touch base again on the supply constraints. The semi industry has been constrained for a while, But you and your equipment peers have been experiencing it for a few quarters now. And it seems like now you're talking not just to your suppliers, but their suppliers and also a few levels below that and some of whom might end up being your direct customers as well.

Speaker 9

So I'm kind of curious, has that level of depth In your supply chain, given you better insight into when these issues could abate and is that what is informing your Mid single digit sequential growth for the next few quarters in Chinese?

Speaker 3

Yes. I'll give you some more color than Yas. So we buy an average tool is about 5,000 discrete parts for us and then those parts Many subcomponents down to our level suppliers. And so some of our suppliers are on MRP, some of them run build to stock, stuff like that. So our Historical visibility into their bills of material and their supply chain was limited.

Speaker 3

We've gotten into it a lot more depth to understand our Suppliers, suppliers, suppliers, which goes back to our customers. It's kind of a circuitous route. And at many times, they get their parts from our customers through distributors, not directly from our customers. So as we've gotten visibility into this, we've gotten a much more in-depth understanding of the choke points And ways to manage this tactically and frankly long term strategically. So I think our visibility is a lot better.

Speaker 3

Our management of it is getting incrementally better every quarter. And how we think about it strategically long term, I think, is going to be a big benefit to the company. So yes, we got again better visibility. I think we're Tactically management better. We're not out of the woods yet, but I think there's going to be long term benefits to the company in terms of our depth of understanding.

Operator

Our next question comes from Toshiya Hari of Goldman Sachs, your line is open.

Speaker 8

Good afternoon. Thanks so much

Speaker 10

for taking the question. Gary, in your prepared remarks, you talked about Some wins in the etch market in areas where you historically didn't compete all that much. You talked about the advanced nodes across foundry and logic. You also talked about inspection and metrology and how you've done well there on a trailing 12 month basis and the outlook into 'twenty When you think about those wins and the momentum you have, how should we think about your overall WFE market share In 2022? I realize in the near term, you're still supply constrained.

Speaker 10

But once supply eases, should we expect you guys to outperform the market this year and perhaps into 2023.

Speaker 2

Yes. Thanks for the question, Toshiya. No question Chen, that the areas that you mentioned, etch, PDC, are Significant opportunities for us both now and going forward. I'd say the biggest thing for us is Capturing the inflections, we talked

Speaker 8

about gate all

Speaker 2

around, wiring, we mentioned a few months ago, Bringing a new tool to market, 7 different technologies and an integrated platform to lower wiring resistance by 50%. And that one Platform combined platform is worth 1,000,000,000 of dollars. So, you've got the transistor to process the data, wiring to connect the data, all All of the technologies associated with those inflections, we gave some examples around capacitor scaling in DRAM, the CMOS logic also Inflection and memory, all of those inflections are really, really great opportunities for Applied. Really the unique thing for us, When you look at whether it's the leading logic, iCAPS, memory, packaging is another one where we Over 50% share of our served markets, we have very deep visibility into all of those inflections and it's really about creating materials to enable the electrical performance, shaping those structures, modifying the materials, Analyzing to really drive the tea and the PPAC tea for our customers, we're in really we've never been In a better position in any of those different areas. In the specific products you mentioned in etch, Certainly, that's been a really great growth platform for us.

Speaker 2

The SIM III Etcher materials on our chamber walls, so we can provide better defects and better yield. And again, really, as I mentioned in the prepared remarks, Not only are we doing really well in memory there, but we're gaining significant share, double digit share at all the leading foundrylogic customers. PDC, that was another one that you mentioned, really tremendous growth in PDC, 68% In terms of the overall revenue growth, a really significant position in e beam or e beam overall, the review, inspection, measurement, Action and measurement, where we doubled in 2021. We have significant leadership there. In 'twenty two, we will have significant growth, not only in e beam, but even faster growth in optical wafer inspection.

Speaker 2

So I would say on the unit processes, we We're in a really great position and really what I'm most excited about is our ability to capture these big inflections that I talked about in the prepared remarks. Relative to what you see in the revenue growth, and Bob mentioned that earlier, You just can't see it because we can't ship it. And also what Bob talked about earlier was that our backlog we're Booking into 2023, especially in some of our leadership areas. Bob mentioned Our metals for wiring and again, big inflections in wiring where Applied has tremendous leadership. Epi implant, that's another one that will grow significantly for us in 2022.

Speaker 2

So, yes, I Really, we've never been in a better position, Toshiya, than where we are right now. The biggest challenge for us right now is really to close that demand supply gap.

Speaker 8

Thank you so much. Thanks, Toshiya.

Operator

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

Speaker 11

Good afternoon. Thanks for taking my question. I assume that the team is placing orders for both subsystems, parts and ships Basically through the entirety of this year, just given the extended lead times with your suppliers. And I assume that you guys have good visibility as So, what those suppliers can ship against your orders. So, if you put all of that together, can the team meet its forward backlog and forecasted Customer shipment requirements for this year?

Speaker 11

Or do you think that there's a likelihood that you exit this calendar year with your shipments Below your customers' demand requirements. In other words, is the 2022 WFE of $100,000,000,000 for you and peers Below what your customers require? And if so, like what do you think is the true 2022 equipment demand profile?

Speaker 3

Sure. Well, you got a couple of questions in there, Holland. Mechanically, what we do, 2, divisibility and 3, what do we think unconstrained demand is in 'twenty two. So if you think about how we do it, we send signals to the supply chain through MRP and they say they can meet or not meet. Frankly, they are struggling to understand And what they can make more than a quarter or 2 out because it's their suppliers, right?

Speaker 3

So I think visibility is kind of gray. So We mechanically do it, but nobody is sure, right? The second thing is but we see improvement, right? The second thing is what do we think unconstrained demand is? I think the tactical question you asked too, could we go out of the year with demand still Bought the supply?

Speaker 3

Yes, we could. We're into 'twenty three. So I think our backlog probably grows throughout our fiscal year. If you go look at Unconstrained demand, I think WFE, dollars 100,000,000,000 is defined as what we ship for the industry. And you see our competitors are constrained this year and they're booking into 'twenty three.

Speaker 3

I think unconstrained demand is several 1,000,000,000 more than 100. I think it's less than 110,000,000, but it's more than 100.

Speaker 11

I appreciate the insights. Thank you. You're welcome.

Speaker 1

Thanks, Harlan.

Operator

Thank you. Our next question comes from Joe Quatrochi of Wells Fargo. Please go ahead.

Speaker 12

Yes. Thanks for taking the question. You had mentioned that you're opening a new logistics center. I was wondering if you could help us understand, does that give you added Or does that also help on the cost efficiency side? And then are there some startup costs that we should be thinking about that are embedded in this quarter's gross margin guidance?

Speaker 3

That mostly helps efficiency of shipping, receiving, moving things around. It doesn't do much to our Cost because our volumes are up, so the cost that we absorb into the burden. And so as a percentage of cost, Doesn't have much impact. We probably, frankly, will do further expansions in the next year or 2. But I don't think it hurts our cost, helps our effective efficiency.

Speaker 1

Yes. And Bob, just a follow-up. So what do you think gross margin does between Q2 and the end of the year? And is It impacted at all by that build out.

Speaker 3

Yes, I think gross margins probably go about 0.5 point from the Q2 guide to Q4. And I think what we just mentioned doesn't have really any impact.

Operator

Our next question comes from Timothy Arcuri of UBS. Please go ahead.

Speaker 3

Thanks a lot.

Speaker 13

I have a question just on the shape of the year in terms of WFE and sort of how to think about Gary, You talk about WFE intensity and the question really is how much semiconductor revenue can this WFE Backstop. So if you take everyone's reporting and they've sort of commented on Q2 as well, it seems like we're doing about $45,000,000,000 here in the first half and Maybe 55 in the back half, something like that to get you to a 100 number. And I think in the past Gary, you talked about 14% WFE intensity. So that would have to support like $800,000,000,000 in And this year, if we're lucky, we're going to be at kind of $650,000,000 So I'm just wondering, if you agree with all that math and sort of how you

Speaker 2

Well, yes, thanks for the question, Tim. In terms of WFE or the capital intensity, the number is definitely higher than 14%. If you look at All of these big inflections that the customers are ramping, the capital intensity is probably around 18%, I would guess right now, But definitely higher than the 14% number. I'll let Bob come in here just a second. Just one example is in wiring resistance, where that really is one of the biggest Areas of focus for all of the foundrylogic customers, if you look at back end interconnect steps from 5 nanometer to 3 nanometer, They're increasing by about 2x.

Speaker 2

Now the other thing that's happening, and by the way, it's also increasing in not only foundry logic, but also in memory. So that again, that's just an example to get that 50% reduction in wiring resistance, it's pretty complex. That complexity also impacts the output of the system. So not only are you seeing steps increase, But you're also seeing a reduction in output. And then certainly for Applied, our metal deposition products where we have a very, very high share, That's an example of a really significant driver for us and one of the factors on why we're booking into 2023 for those products.

Speaker 2

And Bob, I don't know if you want to add any more color.

Speaker 3

Sure. Yes, it's a good question, Tim. I think the 14%, 15% is running a little higher. I think Sustainably, you're at a good 15. If you look at the trend lines and you split it out, WFE intensity, just WFE divided by customers' revenues, When you look at foundrylogic, DRAM and NAND, foundrylogic is the most and it's trending up for a couple of reasons, leading edge and Because of there's not enough tools for the trailing edge.

Speaker 3

So the revenue dollars take more WFE and you can sort of see customers talking about that too. And you see customers like TI who haven't spent in years having to add trailing capacity, so the CapEx as a percentage of WFE of revenue is trending up. If you do a rough cut and you think with this foundry logic mask, with more iCaps, with more greenfields and Technological inflections around 3 d and data all around, which drive a little more spending. I think 15% is kind of the new normal, frankly. If you look at electronic spending in 2025, it's about $780,000,000,000 So if you take 15% of that, you're about 100 and 17,000,000,000 WFE in 25,000,000.

Speaker 3

So I think kind of sustainable growth rate is high single digits for WFE And it's driven partly and half of that's got a capital intensity, half of it is growth in wafer starts. And if you Drive the capital intensity to 50%. I think the numbers all kind of work to high single digits sustainable cross cycle growth rate for WFE. Got it. Thank you, both.

Speaker 5

Thanks, Jim.

Operator

Thank you. Our next question comes from Joe Moore of Morgan Stanley. Please go ahead.

Speaker 8

Great. Thank you. I wonder if you could talk about the nature of the supply constraints a little bit. Last quarter, you talked about it being Mostly programmable logic has the challenges broadened out from there. And I guess how is it that There is so much visibility that this is going to continue to be constrained to the end of the year.

Speaker 8

I would think you're the highest utility user of a lot of these chips. Is it possible that you could get you could sort of get move up in the queue and get these products before the end of the

Speaker 2

Yes. Thanks, Joe. I'm living this every single day relative to Going deep into supply chain with all of the components that are constraining our output, I really think the guidance we've given, Bob talked about relative to quarter to quarter improvement is really in the zip code of where we're going to land. We definitely have Much, much deeper visibility, even than we had when we were on this call a quarter ago. As Bob talked about, From a chip perspective, in a lot of cases, these chips are buried down in components.

Speaker 2

They come from our customers Through distributors and they really don't know the end destination for those chips. As they learn That where the constraints are, they've certainly responded in helping to resolve those issues. But there are just a number of those different constraints. I wouldn't say it's only chips. There are also other areas of The industry, I mentioned again in our metal deposition products, where the really the demand has just went up so much higher than where they were.

Speaker 2

There are other components that are also constraining us, but I think that we do have much And what Bob said earlier, I think is also true. We will come out of this stronger. I think there's no question we'll have better visibility. We have very we'll have deeper relationships with our suppliers. So again, but I think from a zip code The ballpark of what Bob talked about in terms of the incremental growth quarter on quarter is about right.

Speaker 2

Again, it May not be exactly those numbers, but that's really the relative trajectory.

Operator

Our next question comes from Sidney Ho of Deutsche Bank. Your line is open.

Speaker 14

My question is on the memory side of I think you guys reiterated your view that Memory WFE will grow, but less than foundry and logic. But based on some of the comments you had earlier, You're looking at the kind of low teens growth rate for memory. Just curious, has your view changed much given the memory market seems to have improved in the past 3 months Or they are so supply constrained that you can't really service the upside. And maybe just one more. I think last quarter you talked about At the NAND side, it's up, the DRAM is down.

Speaker 14

Is there any update to that as well? Thanks.

Speaker 3

Sure. Good question, Cindy. I think that There's two reference points for our view of DRAM NAND growth, foundrylogic and the mix. And I think our view has changed a little bit since last I think last quarter, our outlook for 'twenty two, we were probably a little low on our outlook for China, and we're probably a little low on DRAM in particular. So if you look at Our reference point, we now believe that in a constrained environment, which is kind of the $100,000,000,000 number, We think that DRAM and NAND are kind of flattish from 2021, maybe down tiny bit, but kind of flattish.

Speaker 3

And if you look at foundry logic, that's the biggest Growth, and we think that increases from 60% to several points higher than that in terms of mix in a $100,000,000,000 environment. So Number 1, I think we're more positive on DRAM and NAND, DRAM particularly than we were last quarter. And we are more positive on overall WFE in 'twenty two than we were last quarter. I think we still remain positive on foundry, But DRAM probably had the biggest delta on our view from last quarter. And then in an unconstrained and I don't think they're Growing too fast, frankly.

Speaker 3

If you look at fab utilization by memory endearing, it's pretty darn good. So I think they're okay. And I think it's a little more second half weighted.

Operator

Our next question comes from Mehdi Hosseini of SIG. Your line is open.

Speaker 15

Yes. Thanks for taking my question. Actually, Couple of follow ups. Bob, you were making references, I think it was the Trail Nature ICAPS you were highlighting 43% of the WFE mix in 'twenty one and 44% in 'twenty two, was that did you mean to imply that Trading niche or entire eye caps as a percentage of WFE?

Speaker 3

What were the two choices again, Manny?

Speaker 15

You highlighted 31% mix for 2020, 43% for 2021 and 44% I'm just trying to understand what you were referring to, what are those mixes?

Speaker 3

All right. So what we did is we broke down iCAPS a little bit. We define iCAPS as everything So that's 10 nanometer and above, okay? But then I drove into it some more and I said, I want to look at 20 nanometer and above, including 200 millimeter Because if you look at the last 3 years, the sales in those have grown. Now where you've particularly had growth is 28 nanometer stuff.

Speaker 3

So the percentage of foundry and logic that was 20 nanometer and above In 2020, in the WFE numbers was 31%. And then our revenue mix for us for Final Life is pretty similar too. We had 43% for 2021 and 44% for 2022. And where you see the biggest growth year on year is 28 nanometers up, 45 nanometers up, the strongest 90 nanometer, Not too much, but we went into depth by node by year. So our The conclusion is so the other thing that's interesting, Meny, was it's gone up.

Speaker 3

The rate of acceleration has diminished somewhat. And then if you look at a curve in the out years for ICAPS, Leading Edge, DRAM and NAND and Their share and growing of WFE, you see iCAPS growing in absolute volume. So what also you have to think about is Where do the iCAPS tools come from? Not only are the number of devices coming, but where do you get the equipment for that? So they used to take that equipment and Roll it over from the leading edge.

Speaker 3

So let's make up an example. So in the leading edge, you might run it for a couple of years, 2 nodes, And you might roll 90% of the equipment forward to the next node and then 10% is for reuse or some gets left behind. But if ICAPS trailing edge isn't growing much, you have most of your equipment for the trailing edge fully depreciated to use on the trailing edge. But an incremental growth in iCAPS make believe your iCAPS grows 2x. Your capital equipment requirements for it goes up like 10x, relatively speaking, because you don't have that much Equipment rolling over from the leading edge.

Speaker 3

So the WFE spend on iCAPS is driven by not just growth in iCAPS, But the availability of tools to roll into it, they generally have to buy new. Yes.

Speaker 2

I would say, Mehdi, just one more thing. That's a dynamic over the last few years, is used to have used tools that were available for iCats. That's all gone. And more of that has moved from 200 millimeter to 300 millimeter. So all of those transitions have increased capital intensity for iCAPS.

Speaker 15

Great. If I may have just a quick follow-up, and thanks so much for all the insights, it's very helpful. If I were to think about these mixes, Bob, you referenced, I think the majority of this is actually being installed in China. And we're dealing with a situation that For the most of the OEMs, China has become domestic China has become more than a third. So I'm assuming that The investment in China for 20 nanometer and above for logic and foundry will continue, will sustain, regardless of what happens outside of China.

Speaker 15

Would that be fair?

Speaker 3

Yes, I think that's fair. The other thing you might look at, Mehdi, which is interesting Where is the growth at WFE spend by application? And you've got a pretty big growth in the out years for automobiles, IoT, some of the sensor stuff in phones. So I agree the China stuff will sustain stuff. I agree that The long term demand is pretty good.

Speaker 3

I agree that it can't keep growing forever, but I think it's already started to decelerate a little bit in the relative growth rates from 2020 to 2021, 2021 to 2022. And you have to look at that availability of tools to roll out from the leading edge when you look at WFE because it's a compounding factor. Yes, thank you, Mehdi. And operator, that's all

Speaker 1

the time that we have for questions. Bob, would you like to help us close off the call?

Speaker 3

Sure, Mike. I'll give you my 3 legged stool summary. I'll look forward to those. Number 1, demand continues to be very strong. We see our business trending up as we proceed through the year, And we believe 23 will be even stronger.

Speaker 3

Number 2, Applied's position is very strong. I'm confident that as we make progress with our supply chain, We'll be able to demonstrate that we are very much on track to our market share and our gross margin targets. And number 3, Even in this constrained environment, we're generating record revenue and operating cash flow, which is fueling strong shareholder returns. Now, Mike, let's go ahead and close the call.

Speaker 1

All right. Thanks, Bob, and 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 o'clock

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Applied Materials Q1 2022
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