Earnings Call Transcript - AMAT Q3 2023

Operator, 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.

Michael Sullivan, Corporate Vice President

Good afternoon, everyone, and thank you for joining Applied's third quarter of fiscal 2023 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 the IR page of our website at appliedmaterials.com. And with that introduction, I'd like to turn the call over to Gary Dickerson.

Gary Dickerson, President and CEO

Thank you, Mike. In our third fiscal quarter, Applied Materials delivered results at the high end of our guidance range. Across the business, our teams are executing well. We are making incremental improvements in our operations as we productively scale the company, and we're driving our technology roadmap, introducing and enabling new products and solutions for our customers. In my prepared remarks today, I will start with our big picture view of the IoT-AI era and how this is driving growth and innovation across the industry. I'll then summarize Applied's strategy and how this is enabling us to outgrow the industry this year while also positioning us for sustained outperformance over the longer term. And finally, I'll cover our near-term performance and outlook, including some recent business highlights. In the summer of 2018, at our AI Design Forum, Applied laid out a thesis explaining how we expected IoT and AI to drive a new wave of semiconductor growth and innovation. Five years later, IoT and AI inflections are having a profound impact across many sectors of the economy, as well as within the semiconductor industry. We view IoT and AI computing as two sides of the same coin. At the edge, consumer devices, vehicles, buildings, factories, and infrastructure are all getting smarter and more capable. Our customers that serve these IoT, Communications, Auto, Power, and Sensors markets, or ICAPS, are growing and represent the largest portion of wafer fab equipment sales in 2023. Increasingly intelligent edge devices are fueling an explosion of data generation that can then be transmitted and combined to create very large datasets for training AI models. High-performance AI computing is primarily enabled by hardware innovations. As a result, AI is becoming the key driver of the leading-edge logic and DRAM roadmaps, as well as heterogeneous integration, which creates exciting new innovation opportunities for device designers. In summary, the first part of our thesis is that the combination of IoT and AI drives demand for significantly more chips as well as next-generation silicon technologies. The second part of our thesis relates to how those chips and new technology innovations will be supplied. In terms of technology, as the benefits of traditional Moore's Law 2D scaling slow down, the industry is moving to a new playbook to drive improvements in Power, Performance, Area-Cost, and time-to-market. The PPACt playbook has five key elements: new system and device architectures, new 3D structures, new materials, new ways to shrink, and heterogeneous integration. The transition to the new playbook is positive for Applied in two key ways: First, as the roadmap evolves, it is increasingly enabled by advances in materials engineering where Applied has differentiated capabilities. Key examples of this include the move to Gate-All-Around transistors and Backside Power Distribution in advanced logic. Second, the PPACt playbook is inherently more complex, and we can help customers manage this complexity by providing more comprehensive solutions, which include integrated products and advanced services to accelerate R&D, technology transfer, ramping, as well as yield and cost in volume production. In parallel to the new PPACt playbook being implemented, we are also seeing regionalization of semiconductor supply chains, as countries seek to build resilient local capacity to support industry verticals that are essential to their economies. As a result, hundreds of billions of dollars of government incentives will be deployed globally over the next five years. At Applied, we recognized these trends early and made important changes to our strategy, organization, and investment profile. In the past five years, we created a dedicated organization to focus on the ICAPS market and released more than 20 new products for ICAPS applications. We also formed a team focused on co-optimized and integrated products to accelerate solutions for leading-edge logic and memory. This has resulted in much deeper strategic relationships with our customers, new highly differentiated products, and increasing market share. We developed a very strong portfolio of products to enable multiple generations of DRAM technology that are fueling share gains in this market segment and contributing to our outperformance. And we established a clear leadership position in heterogeneous integration and advanced packaging. In fact, we just announced five new heterogeneous integration products at SEMICON West in July. This strategy and increased focus on IoT and AI-driven inflections have enabled us to deliver more value to customers and strong performance in 2023, even during a period of very low investment by memory makers. It also positions us for ongoing outperformance in 2024 and beyond. Let me highlight a few key areas. In DRAM, our revenues in the first half of 2023 were higher than our two closest process equipment peers combined. Our strength in DRAM is underpinned by multiple factors. We have gained significant share in DRAM patterning, both for EUV-based and multi-patterning. We have developed unique, co-optimized hardmasked solutions, which are a key enabler for capacitor scaling. We have successfully ported key technologies developed for logic to DRAM, where they are used in the peripheral circuitry to significantly increase I/O speed. And we are the largest supplier of advanced packaging solutions with leadership positions in micro-bump and through-silicon via that enable multiple generations of high-bandwidth memory. As DRAM investments increase, we feel very positive about our opportunities, especially in high-performance DRAM for the datacenter. High-bandwidth memory is less than 5% of DRAM capacity today, but it is expected to grow at a 30% compound annual growth rate over the coming years. If you look at a HBM2 die compared to DDR5, it’s about 25% larger because of additional I/O routing and the area needed for the TSVs. On top of this, the extra processing steps needed for die-stacking further increase our total available market by approximately 5%. Another key growth driver is our ICAPS business. We see ICAPS demand as sustainable as these customers are delivering enabling technology for large, global inflections that will play out over the next decade. These include industrial automation, electric vehicles, and vehicles with advanced driver assistance systems, solar and wind energy, where each megawatt generated requires $3,000 to $4,000 of power chips, and the smart grid, which could drive $50 billion of annual silicon demand by the end of the decade. ICAPS investments are also expected to be underpinned by government support around the world, and we expect these markets to be a significant beneficiary of regional incentives. The increasing complexity needed to enable the PPACt playbook combined with a broadening of the industry's geographic footprint are both key growth drivers for our service business. AGS delivered record revenue this quarter and is on track to grow in 2023, even with this year's low fab utilization rates and after absorbing the impact of new U.S. trade rules. This year, more than 60% of our service revenue is generated from subscriptions in the form of long-term agreements. These agreements are growing at a faster rate than the installed base and have a high renewal rate of more than 90%. With strong customer pull for our services and a robust pipeline of new capabilities, we believe we're on track to achieve low double-digit AGS growth in the coming years. While I am excited about the opportunities ahead, it is important to recognize that to deliver this future, the industry must also overcome significant challenges relating to complexity, cost and our combined carbon footprint. At Applied, we believe the way to do this is through closer collaboration and higher velocity innovation and commercialization of next-generation technology for energy-efficient computing. In the past quarter, we announced two major initiatives: our EPIC platform in the United States and a Collaborative Engineering Center in India. These investments will support even faster and better relationships with customers, universities, suppliers and government partners to accelerate time-to-innovation and time-to-commercialization while increasing our combined R&D productivity. In addition, we are also driving a collaborative approach to reduce carbon emissions as the industry grows. In July, we rolled out our collaborative Net Zero playbook and we announced two major new products that help customers with carbon reductions: our Vistara platform, which lowers platform energy consumption by up to 35% and increases throughput density by as much as 30%, and EcoTwin, which enables customers to monitor, model and optimize chemical and energy consumption by tool and by recipe. Before I hand over to Brice, I’ll quickly summarize. Advanced chips are at the foundation of major global inflections and, as the IoT-AI era takes shape, it is driving a new wave of growth and innovation for the semiconductor industry. At Applied, we have focused our strategy and investments to deliver high-value technologies that enable key IoT and AI-driven inflections. We have strong leadership positions in ICAPS, leading-edge foundry-logic, DRAM, and heterogeneous integration using advanced packaging. This strategy is enabling us to consistently deliver strong results in 2023, despite lower overall wafer fab equipment spending, and positions us for sustainable outperformance over the coming years. Now, Brice, it's over to you.

Brice Hill, Chief Financial Officer

Thank you, Gary. On today's call, I'll discuss the business environment, summarize our Q3 results, provide our guidance for Q4, and frame the investments we're making in our R&D infrastructure. Before covering the near term, I'll remind you of our longer-term thesis. First, we believe the semiconductor industry is on track to grow faster than the overall economy over time and reach $1 trillion in sales by 2030. Second, Applied's leadership in materials engineering is increasingly critical to our customers' roadmaps. Third, Applied's broad portfolio of differentiated products, balanced market exposure, and growing services business make us less volatile today than in the past and more likely to grow faster than our markets. And fourth, our efficient business model generates strong profitability and free cash flow, which enables us to both invest in profitable growth and deliver attractive shareholder returns. Moving now to the Q3 business environment, we continued to see strength in ICAPS which largely offset weakness in leading-edge foundry-logic and NAND. ICAPS demand was broad-based, generating record revenue in 200mm systems and record revenue in Europe. In fact, the United States, Japan and Europe are the fastest growing ICAPS regions this year. Around the world, customers and governments are making long-term investments to ensure future supply of a wide range of semiconductors needed to support growing demand in key industries such as automotive, medical equipment, and renewable energy, to name a few. Turning to our operational performance in Q3, our teams delivered strong results. We exceeded our revenue guidance across Semiconductor Systems, Services, and Display. We improved our delivery performance in systems and services and made further progress reducing inventory. Cash from operations and free cash flow were both the second highest in our history. Now, I'll summarize our Q3 financial results. Company revenue was nearly $6.43 billion, down 1% year-over-year and in the upper end of the guidance range. Non-GAAP gross margin was slightly above our guidance, and operating expenses were slightly below. Non-GAAP EPS was $1.90, down 2% year-over-year, and near the high end of guidance. Turning to the segments. Semi Systems revenue of $4.68 billion was down 1% year-over-year. Segment non-GAAP operating margin was 34.8%. Applied Global Services generated record revenue of over $1.46 billion and non-GAAP operating margin of 29.3%. This was AGS's 16th consecutive quarter of year-over-year revenue growth. While 200 millimeter system sales contributed to the growth, the team also made strong progress driving the leading indicators of our subscription business. For example, tools under service agreements are up 5% year-over-year to over 16,000 systems, and tools under comprehensive service agreement, which have the highest revenue per tool, are up 7% year-over-year, reaching 12,000 systems. In Display, revenue grew sequentially to $235 million, and segment non-GAAP operating margin was 15.7%. Turning to cash flows, we generated $2.58 billion in operating cash flow during the quarter, which was 40% of revenue. We produced over $2.3 billion in free cash flow, which was 36% of revenue. We distributed $707 million to shareholders through quarterly dividends and share buybacks. We paid $268 million in dividends and the dividend per share was $0.32, reflecting the 23% increase announced in March. We used $439 million to repurchase nearly 3.4 million shares at an average price below $130. Now, I'll share our guidance for Q4. We expect Q4 company revenue to be $6.51 billion, plus or minus $400 million. We expect non-GAAP EPS of $2.00, plus or minus $0.18. Within the guidance, we expect Semi Systems revenue to be around $4.75 billion. We expect DRAM revenue to be up by around $500 million quarter-over-quarter, primarily driven by trailing-edge shipments. We expect AGS revenue to be about $1.42 billion and Display revenue should be around $290 million. We expect Applied's non-GAAP gross margin to be about 47% and we expect non-GAAP operating expenses to be around $1.17 billion. We continue to model a tax rate of 12.3%. Finally, as we said last quarter, we plan to make a multibillion-dollar investment in new R&D infrastructure over the next several years to significantly expand our capacity to collaborate more closely and productively with our customers as we develop next-generation materials, process technologies, and equipment. The scale of the investment will depend on our ability to secure government support. The EPIC Center is expected to come online in fiscal 2026. And while we expect our capital expenditures to be higher over the next several years, there is no change to our strong commitment to shareholder returns. In summary, Applied Materials continues to execute well. We are making good progress against our internal goals and outperforming our markets. While wafer fab equipment spending is lower in calendar '23, our Semi Systems revenue in the first three calendar quarters is trending slightly up year-over-year and our Services business remains on track for year-over-year growth. We've aligned our business with the fastest-growing end markets and are winning key decisions across leading-edge foundry-logic, DRAM, ICAPS and advanced packaging. We are in a great position to invest for technology leadership and growth, generate strong free cash flow, and increase shareholder returns. Now, Mike, let's begin the Q&A.

Michael Sullivan, Corporate Vice President

Thanks, Brice. Our goal is to help as many of our analysts as possible. With that in mind, 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 this session. Operator, let's please begin.

Operator, Operator

Our first question comes from Stacy Rasgon from Bernstein.

Stacy Rasgon, Analyst

Hi, guys. Thanks for taking my question. I wanted to ask about the DRAM in the quarter and in the guide. So, DRAM in the quarter was strong, and you've got a lot of growth in the next quarter. You said it was mostly from trailing-edge. Am I right in reading that is primarily the Chinese customer driving that? And maybe you could sort of talk a little bit about your strength in China that is from DRAM versus foundry. It almost sounds like the DRAM piece is stronger than the ICAPS piece in China right now.

Brice Hill, Chief Financial Officer

Thanks, Stacy. Thanks for your question. This is Brice. Yeah. So, we highlighted in Q4 that we'll see sequential growth in DRAM. It is related to confirming technologies that we can ship to customers in China. We've gotten lots of customer questions about that during the quarter. So, we wanted to make sure that people got that answer. So you'll see that growth in Q4. It probably won't be the only quarter where we'll have shipments along those lines, but we wanted to make that clear on the trend quarter-over-quarter. And one more thing that I'd add, we think that's probably something that's not well understood by the investors that while the memory market has been weak for our customers, the DRAM market actually has been fairly strong this year from an equipment perspective, and this is just a continuation of that profile for us. So, we've got a good position in DRAM, and that is manifesting in Q4.

Gary Dickerson, President and CEO

Stacy, it's Gary. I'd add...

Stacy Rasgon, Analyst

Go ahead. I'm sorry.

Gary Dickerson, President and CEO

Yes, maybe just let me add some color and then you can ask the follow-on question. So DRAM, we've added about 10 points of overall DRAM wafer fab equipment share in the last 10 years. So, if you look at the big inflections in DRAM, the periphery moving to high-speed I/O for high-bandwidth memory, we're taking logic technologies into DRAM. That's a really big driver for our share gains. Capacitor scaling is an area where we have strength, patterning share gains, advanced packaging, especially high-bandwidth memory. So, all of those areas are really big drivers for Applied and have contributed to this 10% overall WFE share gain in DRAM over the last 10 years. And then, you have another question, Stacy?

Brice Hill, Chief Financial Officer

Yes, I think I got it.

Stacy Rasgon, Analyst

I just wanted to follow up on whether the strong performance in DRAM during Q3 was driven by the same factors.

Brice Hill, Chief Financial Officer

In Q3, there was a small amount of shipments to Chinese customers, so relatively small. Q4 would be larger.

Stacy Rasgon, Analyst

Got it. Thank you so much.

Michael Sullivan, Corporate Vice President

Thanks, Stacy.

Operator, Operator

Thank you. Our next question comes from the line of C.J. Muse of Evercore ISI.

C.J. Muse, Analyst

Yeah, good afternoon. Thanks for taking the question. I wanted to focus, I guess, on sustainability. You're talking about significant outperformance versus WFE here in calendar '23. And so, a two-part question. So, if you look out to the January quarter, representing the calendar year, are you suggesting that you guys should be kind of in that flat to down 4% kind of year? And then, as you look to calendar '24, can you speak to, I guess, what kind of pent-up demand in terms of deferred revenues is helping this year that won't be replicated next year versus gains where you see leverage to the right end markets and/or new technologies that can drive relative outperformance? Thanks so much.

Brice Hill, Chief Financial Officer

Okay. Thanks, C.J. Maybe I'll start with the 2024, because I think you were embedding a question there on, in '23, how much did we benefit from unserved orders in '22? We think that's about $0.5 billion to $1 billion. All of that was served in the first half of the year. So, what you're seeing from us in '23 besides that $0.5 billion to $1 billion is largely tracking with the business that we see, the WFE business that we see during the year. So, there shouldn't be an overhang. There shouldn't be a benefit from any previously booked business that we see now or going forward. And, as far as sustainability, that's one question we get regularly. The second question that we get regularly is just about ICAPS and the sustainability from China. And well, that's the largest country in ICAPS for China. It's not the fastest growing. That's sort of a global trend and a global demand function. We see that as very sustainable. We think Gate-All-Around will start shipping in earnest in '24. We think our Services business will grow in '24. We think that the Display business will be a little bit better in '24. So those are kind of the bits that we've given for '24. Otherwise, we're not going to give a specific forecast yet for '24 or for the January quarter.

Gary Dickerson, President and CEO

C.J., this is Gary. Maybe I'll add a little bit more color. On the leading-edge foundry logic, what we see is more of that spending moving to materials-enabled technologies, which is the sweet spot for Applied. So, if you look at, again, the nodal spending more is shifting to materials engineering. Gate-All-Around, we've talked about, that's a $1 billion opportunity for us. Backside Power, when that comes in, that really leverages all of our strength in interconnect. And that's probably the same zip code in terms of size of opportunity for Applied. ICAPS, we've talked a lot about, formed the organization four years ago. We've introduced 20 major new products since we formed the organization. And we still have room to grow in ICAPS share. DRAM, I talked about. I think people really maybe don't understand the strength we have there. I talked about those big inflections in gaining 10 points of overall DRAM WFE share over the last 10 years. Packaging, that's a $1 billion business for us now, and we see an opportunity to double that over the next few years. And as Brice said, Services, we're going to be up in Services in a relatively weak memory market in terms of utilization, and we're still on track for low-double digit growth. So, again, those are some of the things that really will help us outperform over the longer term.

Michael Sullivan, Corporate Vice President

Yeah. Thanks, C.J.

Operator, Operator

Thank you. Our next question comes from the line of Vivek Arya of Bank of America Merrill Lynch.

Vivek Arya, Analyst

Thanks for taking my question. I wanted to understand what measures do you have in place to ensure that there isn't a pull forward of your mature technology shipments because of geopolitical reasons or because of take or pay arrangements? Do you have ways to measure the utilization of what you are shipping? And if I kind of just ask that same thing in a different way, do you think Applied will grow in line, above, or below whatever WFE does in 2024?

Brice Hill, Chief Financial Officer

Hi, Vivek. Thanks for the question. I'll start with the second part. We believe Applied will grow at a faster rate than the market's WFE. It's a good way to frame it, as we are focused on long-term growth and expect to exceed market rates. Regarding the issue of pulling forward in China, we have various methods to evaluate that situation. One approach is to compare local capacity with local consumption. We see strategic intentions in the country to invest sufficiently to meet local demand. These factors seem to align and justify their initiatives. We also examine the overall capacity being acquired against the semiconductor market. We conduct thorough checks to ensure this aligns with our expectations. Additionally, we monitor the installation of our equipment in China to confirm it is being utilized, and we track its use at a broader market level. All indications suggest that the equipment is being successfully installed and operated. Therefore, we do not observe any signs of unnecessary or idle equipment, and we believe the purchasing decisions are sound at this time.

Vivek Arya, Analyst

Okay. Thank you.

Michael Sullivan, Corporate Vice President

Thanks, Vivek.

Operator, Operator

Thank you. Our next question comes from the line of Krish Sankar of Cowen.

Krish Sankar, Analyst

Yeah. Hi. Thanks for taking my question. I kind of have a two-part technology question for Gary. You spoke about high-bandwidth memory and how it's benefiting advanced packaging, which makes a ton of sense given the exposure to TSV, et cetera, but on the other side, it seems like hybrid bonding is slowing down, and some of your hybrid bonding customers are looking at things like thermal compression bonders. Can you give any color on that? And along the same path, Gary, you've spoken about Gate-All-Around being like a $1 billion for every 100,000 wafer starts per month incremental opportunity and 5 point share gains for Applied. You're there in most of those core technologies like epi, vertical epi, ALD, selective epi, et cetera. Are customers in Gate-All-Around making bundling decisions, or are they still going with best-of-breed solution? Thank you.

Gary Dickerson, President and CEO

Thank you for the questions. I'll begin with high-bandwidth memory packaging. This involves two essential packaging technologies, Through Silicon Via and micro-bumping, which facilitate stacked DRAM. For Applied, we have the most extensive portfolio to support various types of packaging, including CMP, PVD, CVD, etching, and plating. This presents a significant opportunity for us, as the total addressable market for HBM increases overall packaging by about 5%. We are the leading provider in packaging; this business is currently valued at $1 billion, and we aim to double that in the next three to five years. Regarding hybrid bonding, we view it as a promising opportunity in the long term. It may not produce substantial revenue in the short term, but chiplets are a focus for every company in the industry. We still project the growth rates we've discussed. For Gate-All-Around, which you inquired about, we estimate it to be a $1 billion opportunity for 100,000 wafer starts per month. In FinFET, we hold nearly 50% of the total market share. With the complete adoption of Gate-All-Around, we expect a 5% increase in our share. Our extensive engagement with companies and their integration teams, supported by various critical enabling technologies, enhances our position. Everything we discussed around the $1 billion opportunity remains on track, with expectations to ramp Gate-All-Around by the end of 2024. Additionally, in the IMS unit processes, we are innovating by combining different technologies under vacuum, a unique offering from Applied that significantly improves electrical performance. Overall, we maintain strong collaborations with all integration teams, and the progress on Gate-All-Around aligns with our previous discussions.

Michael Sullivan, Corporate Vice President

Thanks, Krish.

Krish Sankar, Analyst

Great. Thank you, Gary. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Toshiya Hari of Goldman Sachs.

Toshiya Hari, Analyst

Hi. Good afternoon, and thank you so much for taking the question. I had a follow-up on your ICAPS business, maybe for Brice. So, how big was ICAPS as a percentage of your business in the July quarter? Where do you see that going in the second half of the calendar year? And maybe more importantly, yourself and Gary talked about sustainability in the business. I think the rationale for China makes a ton of sense. How are you thinking about the U.S., Europe, and Japan, where your customers, yes, they're strategic, but they also care about near-term profitability and returns. With some of the end markets slowing, is there fear that the non-China business within ICAPS could slow going forward? Thank you.

Brice Hill, Chief Financial Officer

Thank you, Toshiya. Good afternoon. Regarding ICAPS, we haven't specified the exact size, but we noted that this year it is our largest market. It experienced significant growth last year and continues to grow strongly this year. Over time, we expect the business to be roughly divided into a third for ICAPS, a third for leading logic, and a third for memory. This gives you a rough idea. As we've mentioned throughout the year, the growth in our ICAPS business has been sufficient to compensate for the downturns in NAND and leading logic. This should give you a general understanding. On regionalization, we believe it may lead to increased global spending for ICAPS. However, we're also assessing whether this trend is sustainable from our viewpoint. We analyze the underlying businesses and the growth rates of all device types being invested in, whether in China or other global markets. We find that the investments align with the growth rates of those underlying devices and markets, which see compound annual growth rates ranging from 6% to 9% across various segments like computer vision, analog, and power chips.

Gary Dickerson, President and CEO

Yes, regarding the regionalization of supply, it is crucial to note that some of the ICAPS segments are linked to significant vertical markets in various regions. Ensuring a secure supply chain is a major priority for each country, with substantial incentives available to support these different ICAPS markets. Additionally, as companies expand into new locations, it presents a great opportunity for our Service business, as there is often no service infrastructure in place for these companies entering new regions. This trend is expected to contribute positively to our low-double-digit growth in the Service business, which is supported by the regionalization efforts.

Brice Hill, Chief Financial Officer

Good. And Toshiya, I overlooked the final part of your question about the current state of the business and whether customers are reducing their starts or altering their plans. That does occur in the current environment, and we've observed it. However, it's important to note that equipment investments tend to follow a planning horizon of two to four years. Customers are essentially making investments based on their anticipated demand over that timeframe, which contributes to a more stable purchasing approach compared to the fluctuations in current demand.

Toshiya Hari, Analyst

Thank you for all the color.

Brice Hill, Chief Financial Officer

Yeah.

Operator, Operator

Thank you. Our next question comes from the line of Harlan Sur of JPMorgan.

Harlan Sur, Analyst

Good afternoon. Thanks for taking my question. Team has been doing very well in process control. It's about 10% to 12% of your systems business. I think it grew above 55%, 60% faster than your overall systems business last year. Gary, you talked about strong technology inflections and benefits across the wafer equipment portfolio, but I'm assuming this is also pulling strong requirements for more and better process controls. So with that, I mean, can you just give us an update on the process control portfolio? And how is that segment performing relative to your overall systems business this year?

Gary Dickerson, President and CEO

Hi, Harlan. Yeah, thanks for the question. So, PDC for us, there are really two major areas of focus. One is, as you've talked about, growth within PDC, but the other thing that is increasingly important is the synergy with PDC and our process equipment, both for unit equipment and integrated material solutions, accelerating R&D for some of these major inflections. So, on the PDC growth, the business grew about two times between 2020 and 2022. eBeam is one of the fastest growing segments there. And we've maintained our leadership with around 50% overall share in eBeam. We have new products coming to market. We've talked about in our Master Class, the cold field emission with the highest resolution and fastest imaging. So that's helping that business growth. And then on the synergy, we had discussed the capacitor formation of DRAM where we're bringing new materials, new etching solutions together with eBeam technology, again, to accelerate those inflections, nanosheets, and Gate-All-Around. These technologies are incredibly complex. And you can't fix what you can't see. In our eBeam, imaging is world-class, ahead of anyone else. And so that synergy value is increasing. That will also help our growth in our market share overall in our semiconductor product group, but in PDC. So again, we're really in a great position, strong pipeline of products coming in PDC and great synergies with overall Applied.

Harlan Sur, Analyst

Great insights. Thank you.

Operator, Operator

Thank you. Standby for our next question. And our next question comes from the line of Timothy Arcuri of UBS Securities.

Timothy Arcuri, Analyst

Thanks a lot. I had a two-part question. First of all, Brice, can you give us a sense of, of the $1.7 billion that's in July for China revenue, can you tell us how much of that is domestic China chip makers versus other multis that might have fabs in China, but they're not domestic Chinese chip makers? And then the part two of the question is, how do you handicap the potential that this China DRAM pull-in? I mean, we have Micron that's been banned in China. We have a China memory maker now taking $500 million more worth of your tools in October versus July; that's $2 billion to $2.5 billion worth of extra WFE that's just in that one quarter. So, how do you handicap sort of how you run production factory? Do you count on that being sustained? Do you think that it's possible that it could be a pull-in? If you can just comment on that? Thanks.

Brice Hill, Chief Financial Officer

Sure. Thanks for the questions, Tim. Regarding the $1.7 billion for China, which represents about 27% of our revenue, it's primarily from domestic Chinese customers, with very little coming from multinationals at this time. Additionally, this figure includes some of our Services and Display business. Concerning the potential for a pull-in related to traditional or legacy DRAM, I don’t believe that's the case. This technology has not been subject to restrictions for China, and I expect they will implement that equipment as quickly as they can. Generally speaking, when we look at the equipment being installed in China, we consider that it's not an incremental situation; if it couldn't be shipped there, it would be directed to other locations for production. So, we see this as a matter of location rather than an increase in overall demand.

Timothy Arcuri, Analyst

Okay, Brice. Thank you so much.

Brice Hill, Chief Financial Officer

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Joe Quatrochi of Wells Fargo.

Joe Quatrochi, Analyst

Yeah, thanks for taking the question. When we look at your ICAPS portfolio, how do we think about your technology leadership over some of the emerging competitors, and specifically in China, just given some of the comments around their efforts to localize their supply chain? I guess what other certain markets where you have broader leadership or more competitive advantage? I guess how do we think about that competition?

Gary Dickerson, President and CEO

Thank you for the question, Joe. We are always mindful of competition, even in non-critical areas. Our main goal at Applied is to continually innovate across our portfolio and establish stronger strategic partnerships with leaders in all device segments. In ICAPS, which we established four years ago, we have seen benefits from gaining market share and fostering deep relationships with top customers. These strategic partnerships are crucial, starting with the integration teams, because technology evolves rapidly and staying ahead is essential. Since the formation of ICAPS, we have launched 20 major new products, and we have a robust pipeline of innovations that will enhance our market position. Additionally, we maintain a strong strategic position and a wide portfolio, collaborating with integration teams on next-generation technologies. However, there is still potential for growth in segments like etch and PDC, where we have momentum that will help us gain more market share in the coming years.

Operator, Operator

Thank you. Our next question, please standby. Our next question comes from the line of Joseph Moore of Morgan Stanley.

Joseph Moore, Analyst

Thank you. I was surprised to see Services at a record level considering the utilization issues in memory. Can you discuss that? Are you experiencing incremental headwinds from the memory side that you are offsetting with strength in other areas? What does this indicate about the potential for that business to grow when utilizations improve?

Brice Hill, Chief Financial Officer

Okay. Thanks, Joe. This is Brice. So yes, the Services business, 16 consecutive quarters of year-over-year growth. It was a record this quarter. And yes, the puts and takes there are that the transactional spares and the transactional activities that sort of are associated with utilization are significantly lower in the quarter. And then what we see that's higher in the quarter that drove that growth was really the 200-millimeter equipment. So, we talk about ICAPS growth and the strength of those markets. And the 200-millimeter equipment is really what's driving the significant upside in the Services business for the quarter. And then, on the second part of the question, incremental headwinds for memory. When we think about the memory market, there's been discussion of when will it be turning around and when will we see upside. The indicators that we follow, price, inventory, and utilization, we still see trending in the negative direction or flat. So, we haven't seen a turn at this point. But we wanted to be careful to point out that in the DRAM market, we have seen strength this year. And it's sort of a normal year from an equipment perspective on the DRAM side, even though the memory market itself has been weak.

Gary Dickerson, President and CEO

Yeah, Joe, this is Gary. I think the other thing to add is that part of our business is based on service agreements, and that also helps us have a higher level of stability. We're over 60% on the service agreements. And again, that's keeping that part of the business much more stable, even though the memory utilization is down. And the other thing I would say is that there is a significant amount of complexity. If you think about all the inflections, whether it's in memory with DRAM or ICAPS or leading-edge foundry logic, about a third of our revenue are these integrated material solutions with multiple technologies combined in a single platform under vacuum, those are increasing, those steps are increasing, and the service opportunity for us is also increasing. So, we've talked about the low double-digit growth in Service. Once you come back to more normal levels of utilization, and we have high confidence we're going to be able to achieve that.

Joseph Moore, Analyst

Okay. Thank you very much.

Operator, Operator

Thank you. Please standby for our next question. Our next question comes from the line of Brian Chin of Stifel.

Brian Chin, Analyst

Hi there. Good afternoon. Thanks for letting us ask a few questions. Maybe firstly, it seems difficult to imagine AI not driving incremental foundry capital spending in the next upcycle. So, have you thought about how much incremental WFE spend in future years could result from AI-driven wafer start expansion?

Brice Hill, Chief Financial Officer

Hi, Brian, thanks for the question. We certainly have. When we think about the WFE share of the different end markets, data centers have approximately 20%, and we estimate that AI-related WFE is about 5% of our overall market. You've heard various peers mention a high growth rate ranging between 30% and 50% for that workload and the corresponding capacity. So, while 5% may seem like a small amount, we believe it's growing rapidly and will be a significant workload moving forward. That's our sizing for now. As a comparison, we would place that alongside 10% to 15% of wafers related to IoT, and we also expect those IoT wafer starts and WFE to grow at an accelerated rate.

Brian Chin, Analyst

Yeah. Got it. That's helpful. And heterogeneous integration is sort of supplemental to that as well, right?

Brice Hill, Chief Financial Officer

That's right.

Brian Chin, Analyst

And although it wouldn't be detectable from your results, did you see any pushouts from advanced foundry and logic customers? And also, when you think about the several domestic foundry shells that are either constructed or being constructed and ready to be filled, now until, I guess, into next year. What's kind of your current expectations for the timing and significance for some of those expansions?

Brice Hill, Chief Financial Officer

Yeah. There's still a lot of movement underneath the macro number in our results, there's still a lot of movement underneath as you're suggesting with that question. So, we have seen a delay in the installation of some of the tools, and we have seen pushouts with some of the leading foundry customers. So, that's consistent with what we're seeing. And then I would just highlight again the strengths in ICAPS and the strength in DRAM, both Q3 and Q4, our outlook is really what's offsetting that. Thank, Brian.

Operator, Operator

Thank you. Please standby for our next question. Our next question comes from the line of Timm Schulze-Melander of Redburn.

Timm Schulze-Melander, Analyst

Hi, there. Thank you very much for taking my question. I wanted to ask about longer-term R&D intensity. You mentioned about the higher CapEx for the EPIC R&D center and just thinking about the mix of the business, a third of revenues from ICAPS probably intuitively a lower R&D intensity. The other two-thirds leading-edge logic and memory, as you say, is more materials intensive and maybe higher R&D to sales intensity. Just wondering what we should expect the net of those two factors to be on a kind of multiyear view, please? Thank you.

Brice Hill, Chief Financial Officer

Thank you, Timm. Currently, our spending stands at 18.1% of revenue, which is slightly above our model, but we are quite comfortable with this level of spending. We allocate about 66% of our budget, or two-thirds, to research and development, and our focus remains on our roadmap. When we consider the business, we look at its long-term trajectory. We believe we are investing in a positive trend, with semiconductors expected to grow at a high mid-single-digit rate, around 6% to 9%. The growing complexity in semiconductor manufacturing will lead to a higher demand for equipment, contributing positively to our growth. Furthermore, we anticipate that Applied will gain market share as we align with our customers' evolving needs. Therefore, the synergy between the expanding semiconductor market, increased equipment complexity, and the intensified focus on materials engineering, coupled with Applied's involvement, should result in significant growth. Moving forward, I expect to maintain our current spending levels while we pinpoint the most promising R&D projects. Additionally, for investors refining their financial models, it's worth noting that our spending has remained flat for nearly three quarters, as we have been very deliberate about strategic hires. As we enter Q1 of our next fiscal year, we will experience our typical pay rate adjustments, leading to a natural increase in spending during that period. I wanted to emphasize this for those modeling that aspect.

Timm Schulze-Melander, Analyst

Super helpful. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Charles Shi of Needham & Company.

Charles Shi, Analyst

Hey, thanks for taking my question. I want to ask, your largest customer in Taiwan talked about CapEx leveling off on a dollar basis. Wonder what's the impact that you might be seeing in terms of your revenue coming from that particular customer in 2024 and beyond. And any preliminary thoughts on the relative outperformance of WFE maybe in '24 by segment, meaning leading-edge, foundry logic, ICAPS, DRAM and NAND? Thank you.

Brice Hill, Chief Financial Officer

Thanks, Charles. I can’t discuss specific customers, especially those at the forefront, but we are in sync with their forecasts. We have a good understanding of their future projections at an account level. As we navigate through the supply chain challenges, we are gaining clearer insights into the roadmaps across the board. In general, we haven’t provided a specific figure for WFE in 2024, but I mentioned earlier that our outlook on the long-term market growth informs our investment decisions. For next year, we anticipate that the ICAPS business will remain stable, indicating that its growth is sustainable. It has performed well over the last two years, and we expect that stability to continue. We foresee modest growth in our Display business and low double-digit growth in our Services business. That summarizes our current market outlook, excluding memory and leading logic, for which we will provide forecasts as we get closer to the time.

Gary Dickerson, President and CEO

Yes, Charles, this is Gary. Looking at the long-term perspective, we're in a strong position. A larger share of our future technology spending is directed towards materials-enabled technologies, which is a key area for Applied. Gate-All-Around and Backside Power provide both power and performance advantages, along with significant area savings. We've been enhancing our market position with each technology node, and I believe this trend will continue to improve moving forward.

Michael Sullivan, Corporate Vice President

Yes, thanks, Charles. And operator, we have time for one more question, please.

Operator, Operator

Yes, sir. Please standby. Our final question comes from the line of Sidney Ho of Deutsche Bank.

Unidentified Analyst, Analyst

Great. Thanks for including me, everyone. This is Sidney, and I want to inquire about Gate-All-Around. Gary, you've clearly articulated how significant this opportunity could be in terms of both revenue and market share. Could you discuss the revenue contribution expected from this inflection in 2024? Thank you.

Gary Dickerson, President and CEO

Yes. Thanks for the question. I think that we're not going to give a specific dollar amount. But what I would say is that, that inflection is just starting to ramp in the latter part of '24. So, it's not going to be a significant driver in '24, but certainly going forward, our opportunity there is significant.

Unidentified Analyst, Analyst

That's great. Thanks.

Michael Sullivan, Corporate Vice President

Great. Okay. Thanks for your question. And I'd like to just see if Brice would like to give us any closing comments before we close the call?

Brice Hill, Chief Financial Officer

Sure. Thanks, Mike. I wanted to add a note about modeling gross margin, as we receive many inquiries on this topic. Our guidance for Q4 is 47%, which is slightly above our expectations due to a favorable mix. We anticipate operating at around 46.6% to 46.7% under a normal mix. When planning for next year, we expect to progress from this range towards 48% to 48.5% by 2025. From a closing remarks perspective, we are executing effectively and outperforming our markets. Revenue in Semi Systems is increasing year-over-year, and our Services division is on track for growth as well. We have aligned our efforts with the fastest-growing markets and are succeeding in areas like leading-edge foundry logic, DRAM, ICAPS, and heterogeneous integration. We are focused on investing in technology leadership and growth, generating strong free cash flow, and enhancing shareholder returns. I hope to see many of you at the Jefferies Conference in Chicago, and Gary will be keynoting at the Goldman Sachs Conference in San Francisco. Now, Mike, let’s proceed to close the call.

Michael Sullivan, Corporate Vice President

Okay. Great. Thanks, Brice. And we'd like to thank everybody for joining us today. A replay of the call is going to be available on the IR page of our website by 5:00 Pacific Time today, and we'd like to thank you for your continued interest in Applied Materials.

Operator, Operator

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