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.

Good afternoon, everyone, and thank you for joining Applied's third quarter of fiscal 2024 earnings call. Joining me are Gary Dickerson, our President and CEO, and Brice Hill, 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-Q filing with the SEC. Today's call also includes non-GAAP financial measures. Reconciliations to GAAP measures are found in today's earnings press release and in our quarterly earnings materials, which are available on our website at ir.appliedmaterials.com. And with that introduction, I'd like to turn the call over to Gary Dickerson.

Thanks, Mike. With record revenues in our third quarter, and earnings towards the high end of our guided range, Applied Materials continues to deliver strong results in 2024. Secular trends are growing our available market, and our unique and connected portfolio of capabilities, products, and services positions us to outperform the industry over the longer term. At our recent investor event at SEMICON West, leaders from our semiconductor business shared their perspective on the powerful, multi-decade technology trends driving the industry forward, and explained the role Applied is playing to enable the next generations of semiconductor technology. In today's call, I will summarize some of the key themes we talked about at that event including: how advancing energy-efficient computing performance is critical to deploying AI at scale, why the energy-efficient computing roadmap is increasingly enabled by materials engineering and Applied Materials, and how we are working in new ways to accelerate this complex roadmap and create new growth opportunities for Applied. Semiconductors provide the foundation for tectonic shifts in technology that will reshape the global economy over the next several decades, including AI, IoT, robotics, electric and autonomous vehicles, and clean energy. These multi-trillion-dollar global inflections are increasing demand for chips and driving the need for significant advances in semiconductor technology. The biggest tectonic shift of all is AI, and the race for AI leadership will, in large part, be determined by which companies in the semiconductor industry are first to deliver substantial improvements in energy-efficient compute performance. In our discussions with leading AI companies, they are telling us that reducing power-per-operation is now more important than increasing operations-per-second. They are also talking about the need to drive a 10,000 times improvement in performance-per-watt over the next 15 years. Evolutionary innovation is insufficient to deliver improvements of this magnitude, and we are seeing the emergence of a new industry playbook made up of major device architecture inflections in logic, memory, and advanced packaging. These device architecture inflections are increasingly enabled by materials science and materials engineering where Applied is the clear market and technology leader. For AI, the advanced chips in the datacenter, used for training AI models, are built upon four critical categories of semiconductor technology: leading-edge logic, high-performance DRAM, high-bandwidth memory enabled by die-stacking technology, and advanced packaging to connect the logic and memory chips together in a single integrated package. In leading-edge logic, key device inflections, in both transistor and interconnect, are currently moving from chipmakers' R&D pilot lines to high-volume production. The transition from FinFET to gate-all-around transistors grows Applied's available market for the transistor module from around $6 billion to approximately $7 billion for every 100,000 wafer-starts-per-month of capacity. We also expect to gain share through the gate-all-around transition and we're on track to capture more than 50% of the process equipment spending for the transistor fabrication steps. For the interconnect module, our available market is also about $6 billion for every 100,000 wafer-starts-per-month. We forecast this will also grow by about $1 billion with the implementation of Backside Power Delivery, and we expect to win more than 50% of the applications we address in interconnect when Backside Power ramps in volume manufacturing. In DRAM, we have also established clear leadership in process equipment, and are in a great position for future growth. Over the past decade, we have grown our market share in DRAM by around 10 points. As DRAM plays a critical role in energy-efficient computing performance, there is a huge focus on advancing the roadmap. The next major DRAM inflection, from 6F-squared to 4F-squared, or vertical transistor architectures, is materials-enabled, and we expect our market opportunity to grow by approximately 10% to around $6.5 billion for each 100,000 wafer-starts-per-month of capacity. We also expect to increase our share based on our position to enable the 4F-squared inflection. In addition, we believe the subsequent transition to 3D DRAM will grow our addressable market by an incremental 15%, further compounding Applied's opportunity. In the die-stacking technologies that enable high-bandwidth memory, we also have strong leadership positions, both in micro-bump and through-silicon via. We have seen demand for high-bandwidth memory accelerating in 2024 and expect to generate more than $600 million of HBM packaging revenue this year, which is approximately six times 2023. Overall, including HBM, we expect revenue from our advanced packaging product portfolio to grow to approximately $1.7 billion in 2024. We believe this business can double in size over the next several years, as heterogeneous integration is more widely adopted and we introduce new solutions that grow our addressable market. Advanced logic, high-performance DRAM, high-bandwidth memory, and advanced packaging are all great examples of how future device architecture inflections are increasingly enabled by materials engineering. As a result, we expect materials engineering, as a percentage of total wafer fab equipment, to grow in both logic and memory through the coming node transitions. At the same time, thanks to our inflection-focused approach to R&D, and the strong positions we've established at these future device architecture inflections, we expect to capture more of the expanded opportunities we serve. The value of bringing next-generation semiconductor technology to market faster has never been greater. At Applied, our strategy and investments are focused on accelerating the industry's roadmap to support the highest growth-rate global inflections spanning: AI datacenters, edge-AI and IoT, robotics, electric vehicles, and clean energy. This strategy is enabled by three pillars: First, we have built a broad, unique and connected portfolio of highly enabling technologies. As well as providing traditional, best-in-class unit processes, we can co-optimize, combine, and integrate our technologies to deliver more comprehensive solutions that address higher-value challenges for our customers. These integrated ‘fab-in-a-fab’ solutions have grown from approximately 20% of our semiconductor products revenue in 2019 to around 30% today. We expect demand for our integrated products to continue growing, both at the leading-edge and from our ICAPS customers who are serving specialty markets. Second, we are changing the way we work inside and outside the company. Over the past five years, we have built new capabilities and dedicated teams focused on module integration, device design and simulation, data analytics and AI, advanced packaging, and ICAPS. At the same time, we are driving earlier, deeper and more extensive collaboration with our customers and partners to win the device architecture inflection races, accelerate mutual success rates, and increase investment efficiencies. To further support these collaborative partnerships, we will build out our global EPIC platform over the next several years, which is specifically designed for high-velocity innovation and commercialization of next-generation technologies. And third, we are helping customers transfer new technology into high-volume manufacturing faster and then optimize performance, yield, output, and cost in their factory operations. This is supporting double-digit growth in services, with a high percentage of our service revenue coming from subscriptions in the form of long-term agreements. Overall, AGS delivered another record quarter, which is their 20th consecutive quarter of year-on-year growth. Before I hand over to Brice, I will quickly summarize. Applied Materials is delivering record results in 2024, and we are in a great position to benefit from secular growth trends over the long-term. Semiconductors are the foundation for tectonic shifts in technology which will reshape the global economy over the next several decades. This is driving increasing demand for chips as well as the need for significant advances in semiconductor innovation. The race for AI leadership depends on delivering significant improvements in energy-efficient compute performance in the range of 10,000 times over the next 15 years. The need for more energy-efficient compute is driving major device architecture inflections within the semiconductor roadmap that are enabled by materials engineering and Applied Materials' innovations. This expands our served market and is accretive to our share, and the increasingly complex industry roadmap creates new collaboration and growth opportunities for Applied, enabled by our broad, unique and connected portfolio of capabilities, products and services. Finally, as you may be aware, Mike Sullivan will be retiring at the end of this calendar year and handing the reins to Liz Morali, who recently joined Applied as our new Head of Investor Relations. I would like to say a huge thank you to Mike for his many contributions to the success of our company and congratulate him on an outstanding career. Now, over to Brice.

Thank you, Gary. And I'd like to thank our teams for their strong execution this quarter which enabled us to deliver record revenue, improved operational performance, and healthy gross margin. Today, I'll summarize the market environment, discuss our Q3 performance, and share our Q4 outlook. As Gary mentioned, Mike Sullivan plans to retire from Applied at the end of this calendar year. Liz Morali has joined Applied as our new Vice President of Investor Relations. Mike and Liz are working on a smooth handoff of the IR function beginning with our November earnings call. I hope you'll join Gary and me in congratulating Mike on his extraordinary career and leadership, and welcoming Liz to Applied Materials. Beginning with the business environment, our revenue in Q3 as well as our outlook for Q4 reflect the industry's focus on the major inflections Gary highlighted earlier. We are seeing particularly strong pull related to AI and data center computing. Specifically, our DRAM system shipments remained strong even as DRAM sales in China decline as anticipated. Adoption of high-bandwidth memory and other forms of advanced packaging continues to grow. And in foundry-logic, leading-edge investment is growing each quarter and becoming a larger percentage of our mix while ICAPS demand remains strong overall. Turning to our Q3 performance, we delivered record revenue of $6.78 billion, which was up 5% year-over-year, with growth in all three segments. Operationally, we saw improvements in a number of key metrics such as manufacturing cycle times, linearity, and on-time delivery. These improvements give me confidence that we are preparing the company to more efficiently support the growth we are forecasting in the years ahead. The strong operational performance helped us deliver non-GAAP gross margin of 47.4%, which was up 100 basis points year-over-year. Non-GAAP operating expenses of $1.26 billion were up 8% year-over-year, and over 70% of the increase was driven by R&D programs aimed at the technology inflections Gary described. Non-GAAP EPS of $2.12 was up 12% year-over-year and $0.01 below our highest EPS quarter ever. Turning to cash flows and profit distributions in Q3, we generated nearly $2.4 billion in operating cash flow and over $2 billion in free cash flow. We distributed nearly $1.2 billion to shareholders including the first $0.40 per-share dividend and $861 million in stock buybacks. Turning to the segments, Semiconductor Systems sales were $4.92 billion in Q3, up 5% year-over-year. Segment non-GAAP operating margin was 35%, up 130 basis points year-over-year. From a device perspective, our DRAM sales grew nearly 50% year-over-year to $1.16 billion. Our DRAM sales in China declined sequentially as we anticipated, and this contributed to our company revenue in China declining by 11 percentage points sequentially to 32%, which is in line with our longer-term average inclusive of Semi Systems, AGS, and Display. Our NAND memory sales grew 10% year-over-year to $203 million. Our foundry-logic sales were down 4% year-over-year to $3.56 billion. Leading-edge foundry-logic demand was lower year-over-year but continued to strengthen on a sequential basis. We continue to expect to generate more than $2.5 billion in system revenue from gate-all-around nodes this calendar year, with the potential to more than double next year. Our ICAPS business remained strong overall, with pockets of weakness in the auto and industrial end markets. Longer term, we expect the ICAPS market to remain around half the foundry-logic market as major inflections in IoT, autonomous and electric vehicles, and the global energy transformation are expected to drive mid- to high-single-digit, through-cycle growth in ICAPS semiconductors well into the future. We are investing in new products to compete in more areas of the ICAPS semiconductor and packaging ecosystem. We are also working with our customers to enable new power and sensor device architecture inflections using our co-optimized and integrated materials systems. Next, Applied Global Services delivered record revenue of $1.58 billion in Q3, which was up 8% year-over-year. AGS recurring parts, services, and software revenue grew more than twice as fast as overall segment revenue during the quarter. AGS non-GAAP operating margin of 29.6% was up 230 basis points year-over-year, and non-GAAP operating profit was a record $467 million. From a business perspective, customer factory utilization continued to strengthen during the quarter across memory, foundry-logic, and advanced packaging. Our leading indicators of future AGS growth remain positive. Our installed base of systems and chambers increased 7% year-over-year, and our average revenue-per-unit increased even more. Our average subscription agreement length increased to 2.8 years, and the renewal rate was above 90%. We continue to expect AGS to grow at a low double-digit rate over the long term. As a reminder, the consistency of our profitable growth in services gives us confidence in our ability to continue to increase our dividend per share. In fact, over the past 10 years, we have increased the dividend per share at a compound annual growth rate of approximately 15%. Moving to Display, Q3 revenue of $251 million was up 7% year-over-year, and segment non-GAAP operating margin was 6.4%. While LCD equipment spending remains low, we are becoming more confident that the OLED technology found in smartphones will be adopted in notebook PCs and tablets whose larger screen sizes will require a significant increase in capital investments. Applied has built a leadership position in deposition and e-Beam metrology technologies for the display industry and we are well positioned to enable our customers to convert the notebook PC and tablet markets to OLED technology over the coming years. Now, I'll share our guidance for Q4. We expect company revenue of $6.93 billion, plus or minus $400 million, and non-GAAP EPS of $2.18, plus or minus $0.18, both up 3% year-over-year at the midpoint. Within this outlook, we expect Semi Systems revenue of around $5.1 billion, which is up 4% year-over-year, AGS revenue of about $1.61 billion, which is up 9% year-over-year, and Display revenue of around $200 million. We expect non-GAAP gross margin to be approximately 47.4%, and non-GAAP operating expenses to be around $1.275 billion. Finally, we are modeling a tax rate of 12.5%. Thank you, and now Mike, let's begin the Q&A.

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

Certainly. Our first question comes from CJ Muse from Cantor Fitzgerald. Your question, please.

Yeah, good afternoon. Thank you for taking the question. I guess, for my question, I was hoping you could speak to how your outlook for WFE in the second half of the year and for all of 2025 has evolved over the last three months. Obviously, tremendous strength, anything AI related, but elsewhere kind of seasonal at best. So I guess, first part of the question is, can you share with us how you're thinking about your silicon business in the second half of calendar '24 versus the first half? And then, the early signs that you see today and how that informs kind of your view both positive and negative into 2025? Thanks so much.

Okay, CJ, thanks for being on the call. Looking at our Q3 performance and the outlook for Q4, there's significant energy surrounding the AI developments that Gary mentioned. The leading-edge technology is advancing rapidly, as we noted in our prepared remarks. Our forecast for $2.5 billion in gate-all-around related equipment for this fiscal year remains unchanged. Additionally, the growth in DRAM and HBM memory aligns with the momentum we're witnessing in AI investments. Our ICAPS business also shows solid performance in both Q3 and Q4, which we believe is strong. We can explore that in more detail during the call. Over the past month, our outlook has remained positive for the ICAPS business, and it seems like each quarter we end up raising our expectations for it. The energy around leading-edge technology is substantial, ICAPS is performing well, and we anticipate a strong year for DRAM and HBM. Those are our main themes. For 2025, while we’re not providing specific guidance, we are optimistic about gate-all-around and the leading-edge technologies we’ve discussed.

Thank you. And our next question comes from the line of Stacy Rasgon from Bernstein Research. Your question, please.

Hi, guys. Thanks for taking my question. I wanted to dig into the China revenues a little bit. So, 32% of revenue this quarter. It sounds like a lot of that was DRAM. I guess, was it all DRAM? And then, in the guidance for next quarter and I guess your expectations going forward from there, do you expect the China mix to be staying around these levels in the low 30% or does it go higher or lower? Is there anything else going on with China that we need to be aware of?

Great. Thanks for joining, Stacy. So, yeah, on the 32%, I'll shift your perspective on that just a little bit. So, the 32% is almost no DRAM to China. So, you've got it right. Our business mix to China declined to 32%. And if I think back in time, just to remind everybody, if we go just over a year back, it was like 17% mix to China. We were having supply chain issues. So, it was very low at that point. In the last three quarters, we bounced up to the mid-40%s while we served the DRAM that we could ship and that's the prior three quarters. And we feel this quarter 32% is probably normal for us or in the normal range for us, that's across our entire business for shipments to China. And what it really represents is ICAPS. And the ICAPS market in total has been very robust. We think it will be a record year in our fiscal year for ICAPS.

So, is it fair to say that you still see the mix in the low-30%s next quarter to China?

Yeah, we expect that mix approximately normal, which we call 30% for the next quarter, yes.

Got it. That's helpful. Thank you, guys.

Thank you.

Thank you. And our next question comes from the line of Srini Pajjuri from Raymond James. Your question, please.

Thank you. Brice, following up on the previous question about China DRAM, you mentioned that it's near zero levels. Can you share your outlook on when, if at all, we might see some improvement? Do you anticipate a recovery for DRAM in China at any point? Additionally, you noted that demand for ICAPS is quite strong in China. Could you provide some insights into the trends for ICAPS outside of China? Thank you.

Yes. Thanks, Srini. Thanks for joining. So, yeah, the China DRAM in Q3 and Q4 will be at nominal levels. We have speculated you may see new investments in DRAM there. I don't have any comments to make on that specifically for the roadmap, but I would say that DRAM globally is very strong, should be a very, very strong year for DRAM. Of course, that includes some of that China volume, but we think that goes along with the mix to HBM and utilizations in DRAM have improved and there's a lot of energy around the high-bandwidth memory for the leading-edge systems. And then, on the ICAPS side, we anticipate the edge technologies referred to as ICAPS to increase in the mid- to high-single digits over time. This growth is driven by trends in clean energy, renewable power, electrification, and AI edge sensors, among other applications. Our long-term outlook remains in the mid- to high-single digits. Regarding China for Q3 and Q4 and the overall ICAPS business, I mentioned earlier that it is likely to set a record for us in our fiscal year. Additionally, not only in China, but other regions have also experienced growth during this quarter.

Got it. Thanks, Brice.

Thank you. And our next question comes from the line of Vivek Arya from Bank of America Securities. Your question, please.

Thanks for taking my question. I'm curious if we should bake in the impact of any CapEx cuts that were announced recently at Intel. What does that imply for just the overall WFE market for the remainder of the year and into next year? From your comments, it doesn't seem like it's having a big impact. Is the assumption that whatever CapEx has been cut there is being increased somewhere else, or just what are the puts and takes? Because it is a fairly sizable CapEx cut, which we are saying is more WFE in terms of the mix.

Yes, thank you for joining, Vivek. Our outlook remains unchanged, still indicating $2.5 billion for leading-edge gate-all-around this fiscal year. Looking ahead to next year, we've seen acceleration in every quarter this year in the leading-edge segment, which we believe is largely driven by excitement surrounding AI and AI datacenters. We receive regular updates from our customers, and our outlook for Q4 reflects the most current information from them. We view the market from a macro perspective; while customers keep us informed, there hasn’t been a significant change to our view on the leading-edge moving forward.

Thank you, Brice.

Thank you. And our next question comes from the line of Chris Caso from Wolfe Research. Your question, please.

Thank you. Good evening. I have a question about foundry-logic. Could you provide some insight on the growth you're anticipating for 2025, particularly with the new process nodes like gate-all-around, in relation to capacity? We've noticed that foundry capacity additions have slowed down. Are there any indications of improvement as we move through the second half of 2024 into 2025?

Yes. Thanks, Chris, and thanks for joining. When we think about leading-logic, actually I'll make a comment for utilizations. We've seen utilizations improve in every single end market this quarter and our expectation is for that to continue next quarter. So, DRAM, NAND, ICAPS and leading-edge. And no change to our expectation on absolute leading-edge investment, gate-all-around technologies, not changing our number for this fiscal year. And we do think it's a harbinger for acceleration next year as we look forward. We're not giving a guide for '25, but we think there's a lot of energy around the AI markets and we see that in HBM, we see that in DRAM, we see that in leading-edge acceleration. So, we'll hope that those trends continue.

Thank you. And our next question comes from the line of Krish Sankar from TD Cowen. Your question, please.

Hi, thanks for taking my question. Gary or Brice, I'm curious about the outlook for next year. I know you don't want to provide specific comments, but there seems to be optimism regarding the growth in DRAM and NAND WFE. If we exclude HBM, it looks like there's increasing demand for memory pricing, though it's moderate for DDR and NAND compared to the first half of this year. I'm interested in how to assess DRAM and NAND WFE for next year compared to this year and which end markets are expected to drive spending increases next year.

Okay, Chris. You're correct; we won't provide specific guidance for 2025. However, we believe there will be new capacity added in DRAM, independent of HBM, and we expect investment in DRAM to continue. There have been increases in wafer start capacity for DRAM, and more of that capacity is being allocated to HBM, as you mentioned. Therefore, the investment level in DRAM is currently higher than in NAND. Looking ahead to NAND, its levels are still relatively low, but we have observed improvements in utilization, which I would categorize as being in a normal range for both DRAM and NAND. Prices are also improving, and vendor inventory positions have strengthened. We foresee a more favorable environment for both memory technologies in the upcoming quarters compared to what we've seen in the past.

Thanks, Brice.

Thank you. And our next question comes from the line of Joseph Moore from Morgan Stanley. Your question, please.

Great. Thank you. It looks like you had some good solid growth from the services business again. Are you benefiting there from the utilization increases in memory that you just talked about? Are you seeing offsetting utilization declines on the ICAPS services side? And then, any indication of customers worry about export controls, stockpiling on spares, anything like that? Just any puts and takes around that service growth? Thank you.

Hi, Joe. Thank you. Our services business is very exciting for us. We grew 8% year-over-year in Q3, and we expect 9% growth for Q4. Just a reminder, we anticipate low double-digit growth in the future. We are expanding our services with customers, particularly in information and AI-related services that assist them in scaling up. We initially expected more growth in Q3, aiming for double-digit growth this year, but we fell short of that expectation. The utilization grew, but at a slower pace than anticipated. However, there is positive news as utilizations are improving throughout the system, with 8% year-over-year growth for us, and we expect that to increase as we move into Q3 and beyond. And just one other comment just for the rest of the investors. The other thing with this business since it's mostly recurring revenue for us about 85%, that gives us a very stable operating profit and growing. And so, we think about our dividend as being enabled by the profits from the services business and that gives us confidence we'll be able to raise our dividend looking forward.

Hi, Joe. Just maybe a little bit more color. If you look at what really all of our customers are focused on, there is a race for these new device architectures and the complexity is going up significantly. And in the prepared remarks, I talked about, about 30% of our tools are these integrated platforms that have a high degree of complexity. So, as these customers are racing to bring these new devices, complex devices to market, and also we're shipping more and more of these integrated platforms with multiple technologies, that also gives us a really good tailwind.

Thank you.

Thank you. And our next question comes from the line of Joe Quatrochi from Wells Fargo. Your question, please.

Yeah, thanks for taking the question. Wanted to ask about the advanced packaging. I think based on the revenue expectations you have for HBM and advanced packaging, it implied basically that the non-memory advanced packaging relatively unchanged year-over-year. Is that the right way to think about it? And if so, why wouldn't that grow this year?

I think so, Joe. In our forecast, we highlighted that advanced packaging was $1.1 billion last year, should grow to $1.7 billion this year, and we highlighted that $600 million of the growth would come from HBM-related equipment. So, I think you're thinking about it right. It was probably stable this year with HBM, high-bandwidth memory, driving the growth in that area. And again, we would point back to the energy around high-performance systems and sort of the race Gary talks about to develop systems optimized for the AI workload. So, there's a lot of energy there at this point. And then just the last thing is we have highlighted that, that total packaging business sort of, to your point, $1.7 billion, we think it has the opportunity to double over several years looking forward given the energy around advanced packaging technologies. So, we'll keep investing there.

Thank you. And our next question comes from the line of Toshiya Hari from Goldman Sachs. Your question, please.

Hi. Thank you so much for taking the question. I was hoping you could speak to gross margins and how you're thinking about profitability going forward, the puts and takes price, Brice. And Gary, you talked about complexity growing and how things like IMS contributed toward 30% of your business and that number growing over time. I would think your ability to price would improve going forward. What am I missing in terms of again the puts and takes as it pertains to gross margins? Thank you.

Okay. Thank you, Toshiya. I'll start on that. So, 47.4% gross margin for us in the quarter. We're actually very pleased with our performance in cost and pricing this quarter. And I'll just highlight as our mix to China, which are generally smaller customers declined during the quarter to 32%, that gave us some headwinds on the gross margin side. We were able to get some pricing performance and also some cost improvements and improvements in managing our inventory that helped us offset that mix decline and deliver 47.4% in the quarter. Since the China mix is 32%, we call that normal. I want to emphasize that 47.4% should be our baseline level moving forward. Our goal is to reach 48% or higher next year, and we believe we can achieve this through ongoing improvements. While there are some challenges if our services or display segments grow faster than our core business, we remain committed to this goal and anticipate continued advancements in cost and pricing.

Yeah, Toshiya, again, our focus is really to enable our customers to accelerate their innovations for these new architectures especially around AI datacenters. That datacenter will pass smartphones and PCs relative to wafer starts. Everybody is focused on energy-efficient computing. So, these inflections are incredibly important for the entire ecosystem. Whoever gets there first wins big and everybody else is left behind. So, we're driving tremendous innovations in foundry-logic, leading-edge, high-bandwidth memory, DRAM, there's new architecture inflections, I talked about 4F-squared, advanced packaging. So, our positions in all of those inflections are very strong. We're on track to capture more than 50% of the inflection spending as those new devices ramp. And our goal is to move the needle for our customers and for Applied, and that includes how we drive value for them and how we drive our margins higher.

Thank you.

Thank you. And our next question comes from the line of Harlan Sur from JPMorgan. Your question, please.

Good afternoon. Thank you for taking my question. Companies pushing the boundaries of advanced manufacturing technologies like 2-nanometer and 3-nanometer are also advancing packaging technologies. These companies are designing AI and compute accelerators. We're hearing that most of today's designs for these next-generation chips are targeting the second half of 2025 and beyond, specifically around new 3D SoIC architectures. This includes using hybrid bonding and chip-stacking approaches with 3-nanometer on 3-nanometer die and 2-nanometer die on 3-nanometer die. The manufacturability challenges are significant, but similar to front-end integrated solutions, the team has been working on an integrated hybrid bonding system with some partners. What is the timeline for introducing these integrated solutions, and will you aim to capture the next-generation 3D SoIC solutions coming to market around 2026?

Hi, Harlan. Thanks for the question. So, heterogeneous integration is one of the biggest areas of focus for Applied and for the entire industry. At our AI event, along with AMD at SEMICON, there was a discussion around driving 100x improvement in energy-efficient computing. So again, this is the big race that everybody is focused on, and certainly packaging is a key part of that. So, we're in deep engagements, really multiple technology nodes, five, 10 years out into the future, and there's going to be tremendous innovations. If you look even at new DRAM technologies like 4F-squared or high-bandwidth memory, you're going to see adoption of hybrid bonding technologies that are going to be really important for those parts of this ecosystem. And you mentioned what's happening from a logic standpoint. So, I think the great thing for Applied is we have this broad portfolio in packaging. We have, as you mentioned, the hybrid bonding, digital lithography. We have other new technologies in the pipeline that even expand our portfolio further. We have an advanced full flow packaging lab in Singapore, where we're driving co-innovation with our customers to accelerate those architecture inflections. So, I think this is going to be one of the most exciting segments of the market going forward. We're at about $1.7 billion today. We've talked about doubling the packaging revenue over the next few years. And I think it's going to keep going from there. Again, this is a really key part of the industry drive for energy-efficient computing.

Thank you, Gary.

Thank you. And our next question comes from the line of Charles Shi from Needham & Company. Your question, please.

Hi, good afternoon. I want to follow-up on the China question. Looks like your China revenue has well past the peak around almost the $3 billion per quarter level. Now it's down to like in the low $2 billion. And based on the commentary, it sounds like you are still expecting roughly 40%-ish of the China revenue growth year-on-year. But I mean, should the current dollar revenue level sustain into this year? I'm just hoping if you can give us any color because that would imply the China revenue probably is going down year-on-year, roughly 15%, 20% next year. I know you're not guiding, but that will be the conclusion I draw up on all the commentary you provided. Plus, I do want to get a little bit more insights. If I compare the China revenue performance of Applied Materials with some of your process control peers like KLA, they were expecting China to be flat into the second half, but you're obviously seeing a half of the half decline.

Okay, Charles. Thanks for joining. I think I would separate between ICAPS, the edge technology markets, and the DRAM market for China. We had three quarters with elevated shipments that we described where we caught up on what was allowed from a DRAM perspective. If you separate that out, we're currently not expecting that to repeat at least nothing near that magnitude for next year. So that leaves us with the ICAPS market. And what we expect in the ICAPS market, our Q3 and Q4 and all of this year has been very strong in ICAPS. When we look at China in particular, utilizations are improving. We're adding customers. We've got a large number of factory projects that are building out. So, if you strip out your estimate for those extraordinary DRAM shipments the last three quarters, our expectation over time is that the ICAPS market will grow. We say mid- to high-single-digits. We will make a call for next year, but we would expect growth over time.

Thank you. And our next question comes from the line of Brian Chin from Stifel. Your question, please.

Hi there. Good afternoon. Thanks for letting us ask a question. So, if I look at the past three years, past three 10-Ks, TSMC was your largest customer. But they weren't 10% in either the April or January quarters. Taiwan, as a geography, was a little higher this quarter. Did TSMC cross the 10% threshold in fiscal 3Q? And then, even bigger picture, this overall pattern would seem to suggest a pretty favorable year-over-year compare moving into 2025 when you think about the type of spending gate-all-around and expansions being discussed. And so just kind of wanted to get maybe your view on that.

Yes. TSMC was a 10% customer in Q3 and we think obviously they're a large part of that leading-edge investment when we think about the gate-all-around technologies and a lot of the energy being driven there as we look forward.

Okay. Thank you.

Thank you. And our next question comes from the line of Blayne Curtis from Jefferies. Your question, please.

Thank you for allowing me to ask a question. I was a bit confused about the ICAPS history and its current strength. I recall you mentioned last quarter that segment being somewhat down. You just mentioned mid- to high-single digits, so I might have misunderstood the reference point. It would also be helpful if you could discuss the 15% sequential growth you saw in July for foundry-logic and how that relates to leading-edge in ICAPS. The feedback on leading-edge seems very positive, but your comments imply that ICAPS is also performing well. However, I'm trying to reconcile this with your statement about it being 50% of the mix, as I thought that business was doing much better. A summary of the complete history and how things unfolded in July would be appreciated.

Yes. Thanks, Blayne. So, in the quarter, we did see strength in both end markets, leading-logic and ICAPS. Leading-logic is accelerating every quarter this year and we said ICAPS is very strong and continues to be strong throughout the year. This will probably be a record year for us in ICAPS for our fiscal year anyway. And so, leading-logic is accelerating based on the gate-all-around investments and the AI trends that we're talking about. And then, ICAPS, the mid- to high-single-digits was a longer-term forecast. We've had utilizations improving. And when we think about that market, we don't give a guide for next year, but we think there will be continued growth in the mid- to high-single-digits as all those different end markets like AI sensors, electrification, autonomous vehicles, renewable energy, all those end markets continue to build out and grow faster than GDP.

Thanks for that.

Thank you. And our next question comes from the line of Jed Dorsheimer from William Blair. Your question, please.

Thank you for taking my question. I have a two-part inquiry about ICAPS, Gary. First, I visited some of your fabs and customers in Malaysia last week, and it appears that capacity expansion outside of China has resumed as some of the EV pressures have transitioned to opportunities in power density within datacenters. Could you comment on that? Secondly, regarding services for ICAPS, do they align with leading-edge services, or are there specific differences in terms of quantity and timing? Thanks.

Hi, Jed. We are very optimistic about ICAPS in the long term. Brice mentioned that we expect mid- to high-single-digit growth rates for ICAPS over time, with growth driven by various segments including IoT, industrial automation, robotics, and particularly edge computing for AI. We believe this will be a strong business moving forward. Many on the call know that we established our ICAPS group over five years ago, on April 12, 2019, specifically to focus on the IoT, communication, automotive power, and sensors markets. Since forming that group, we have gained market share in that area. We've introduced more than 20 major new ICAPS products. And this group is just completely focused on innovation in those device segments. And there are races that are happening there. Your comment on what's happening on the different device segments, if you look at power electronics, there will be some major architecture inflections that will happen there that are important for electric vehicles and renewable energy. We have an ICAPS architecture innovation group collaborating with our customers on new ICAPS architectures. This is part of the strategy we have developed over the last five years. We have new products in the pipeline that will cater to large ICAPS' new segments and competitive cost applications. It has been a significant focus for us over several years, and we have built strong capabilities. From a service perspective, ICAPS is also a promising market for us, contributing to our overall growth opportunity, especially in systems where we have gained substantial market share. I am very optimistic about our positioning. The actions that we've taken, I think really position us going forward in ICAPS. Brice, I don't know if you want to add anything else.

No, I would just say that two of our regions grew during this Q3. So, if the question is, is there investment in other areas of the world? Absolutely. And we expect that to continue. Thanks for the question, Jed.

And operator, we have time for two more questions, please.

Certainly. And our next question comes from the line of Mehdi Hosseini from Susquehanna. Your question, please.

Yes. Thanks for taking my question. Just a very quick follow-up for Brice. If you could give us an update with the progression towards that 48%, 49% gross margin target, I assume that's for fiscal year '25? And how the funding for the EPIC R&D center, which I think is a $4 billion project is going to impact those targets? Thank you.

Thank you, Mehdi. Regarding the update, our gross margin is at 47.4% and we anticipate gradual improvements as we move toward that 48% target, which remains my expectation. The change from last quarter to this quarter was modest, as we worked through challenges related to our mix. Concerning the EPIC initiative, we received notice that we will not be receiving the grants, but EPIC remains a crucial platform for us. It focuses on Equipment, Process Innovation, and Commercialization, and it will help us speed up co-innovation with our customers. We are continuing with that investment. It will elevate our CapEx as we look forward. And we are benefiting from the investment tax credit that's related to those types of projects. So, we still do have some help from the government from that perspective. As we look ahead, our capital expenditures for the EPIC center and in general will be at a higher run rate than in the past. For your future modeling, I wanted to point out that the first quarter will see our usual increase in pay-related expenses, and you can refer to past trends to understand what this increase typically looks like. Additionally, our tax rate is expected to be 14% next year, compared to 12.5% this year, as a larger portion of our global operations will be related to the US. This shift will affect our overall tax mix. Thank you for allowing me to share these insights.

Yeah, Mehdi, this is Gary. I wanted to provide a bit more insight on EPIC. As we've mentioned, the entire industry is competing to be the first to introduce innovations in energy-efficient computing. In our conversations with our partners and customers, we strongly believe that EPIC can enhance our innovative capabilities, allowing us to innovate simultaneously, which will speed up the process for both our customers and partners, as well as for Applied, in bringing energy-efficient innovations to market. So, the concept we're getting tremendous traction and pull with our customers and partners. And we also think of EPIC as a global platform. So, where we make investments is going to be based on incentives, talents, proximity to innovation ecosystem. So, we are moving forward for sure with this EPIC concept. Very good traction with customers. And again, over the last several years, we've built out this innovation engine inside Applied Materials. We have architecture innovation teams that are working on ICAPS. They're working on foundry-logic and DRAM and packaging. We have this unique and connected portfolio of materials innovations that are crucial for all of those major inflections. So, EPIC is a way for us to innovate the way we innovate to move all of that in parallel to accelerate all of these major inflections that are crucial for AI, datacenter and all those major tectonic shifts in technology that we talked about earlier.

Great. Thanks, Mehdi, for your question. I think we're approaching the end of the hour. So, Brice, I'm going to go ahead and ask if you have any closing thoughts for us.

Okay. Thanks, Mike. From my perspective, I'm pleased that the investments we've been making in the technology roadmap inflections and also in our operational capabilities are showing up in our financial results this quarter on both the revenue and gross margin lines. I believe we put the company in a great position to grow along with megatrends like datacenter AI as a whole host of new technologies come to market across leading-edge, foundry-logic, DRAM, advanced packaging, and ICAPS specialty chips. We have the fuel we need to keep driving the materials engineering roadmap with our customers, while also distributing profits to our shareholders through dividends and buybacks. Gary will be at the Goldman Sachs Conference in San Francisco on September 11, and I hope to see many of you at the Citi Conference in New York on September 4. Mike, thank you, and please close the call.

Okay. Thanks, Brice. And we'd like to thank everybody for joining us today. A replay of today's call is going to be available on the IR page of our website by 5 o'clock Pacific Time. Thank you for your continued interest in Applied Materials.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.