Earnings Call Transcript
APPLIED MATERIALS INC /DE (AMAT)
Earnings Call Transcript - AMAT Q3 2022
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 will now 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 2022 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 and 8-K filings 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. Before we begin, I have a calendar announcement. Applied plans to host our Services Master Class five weeks from today on Thursday, May 26th at 9 o’clock Pacific Time. We will describe the market opportunity for our Services business, explain why 87% of AGS revenue is truly recurring and give you the growth formula for the business through our 2024 financial model horizon and beyond. We hope you will join team members of our global services team for presentations and Q&A. And now, I’d like to turn the call over to Gary Dickerson.
Gary Dickerson, CEO
Thank you, Mike. In our third fiscal quarter, Applied Materials delivered results at the high end of our guidance range and record quarterly revenues. The actions we have been taking to mitigate supply chain challenges are beginning to have an impact and we expect steady incremental improvements from here. Resolving supply issues has required new levels of collaboration between our global teams, suppliers and customers. While all of this hard work is yielding results, global supply chains remain stretched. Demand for Applied’s products is still higher than our ability to fulfill it and our backlog continues to grow. In addition, our relentless focus on meeting customer’s needs in this very difficult environment has created margin headwinds that we are working hard to overcome. We are driving actions to reduce costs and improve value capture, including price adjustments. In my prepared remarks today, I will cover three key topics; first, our near-term outlook on supply and demand dynamics; second, our longer term view of the markets and the industry’s roadmap; and third, Applied Materials strategy, priorities and progress. After that, Brice will provide more color on our financial performance in key areas of operational focus. Let me begin with our near-term perspective on the market. Due to large gaps between demand and supply, as well as equipment companies shipping partially finished systems and merging components in the field, overall 2022 wafer fab equipment spending is difficult to quantify with precision. Our best estimate is that it will land somewhere in the mid-$90 billion range. For Applied, the picture is clearer. If we use the midpoint of our fourth quarter guidance, we expect our wafer fab equipment revenues to be up approximately 15% for our fiscal year. As we look ahead to 2023, there are three major factors shaping our view of the market. First, memory spending is expected to be lower than in 2022, as macro uncertainty and weakness in consumer electronics and PCs causes these customers to defer some capacity additions. Second, leading-edge foundry/logic looks strong, with customers battling for leadership and racing to be first to implement major technology inflections. Third, ICAPS customers, who serve IoT, communications, auto, power and sensor markets, are reporting areas of strength and weakness. These customers serve broad and diverse applications. They are seeing softness in consumer-centric markets, which are being impacted by macroeconomic factors. Auto and industrial demand continues to be solid, because those investments are driven by large inflections, such as electric vehicles and industrial automation. In these areas, chip makers are securing long-term capacity agreements that underpin their capital spending plans. While it’s too early to provide a forecast for 2023, we believe our business will be more resilient than in the past if there is a demand pullback in certain areas of the market. We expect Applied to remain supply constrained for the next several quarters. We are working through our very substantial backlog of orders, which provides a buffer to in-year demand fluctuations, and in addition, customers are providing us with longer term visibility and commitments in response to their own customer’s actions to lock in the strategic capacity they need. Although, we are confident in our ability to perform well in a range of market scenarios, we are mindful of the current macroeconomic trends. As a result, we are slowing down hiring, while ensuring we fully fund the R&D programs and strategic operational capabilities that support our long-term growth. Regionalization of supply chains is also something new for the industry. We expect this will provide a small positive tailwind for overall wafer fab equipment spending starting in late 2023. Also, because of the time-bound nature of government incentives in the U.S., Europe and Asia, we see a higher degree of certainty for these investments. Last week, I was in Washington, D.C. for the signing of the CHIPS Act and met with government officials and leaders from across the semiconductor and automotive ecosystems. I am happy to see the critical role that semiconductors play in the economy being recognized and acted upon. The need to build more resilient and flexible supply chains remains a key theme for these leaders and the CHIPS Act will enable many companies to accelerate their investments in strategic capacity. I am also excited about the potential to create a new high-velocity innovation platform in the United States to accelerate the development and commercialization of next-generation technologies. As I look further to the future, I feel very positive about the direction of the industry and our long-term opportunities at Applied. Consensus within the industry is that semiconductor revenues can reach $1 trillion before the end of the decade. That translates to a high single-digit compound annual growth rate from today. In parallel, the technology roadmap is becoming increasingly complex. As a result, we expect equipment intensity, the ratio of wafer fab equipment investment to semi revenues to remain at today’s level or increase over this period. Then the major technology roadmap inflections, including gate-all-around transistors, backside power distribution networks, new materials for interconnect and contact, and heterogeneous integration of chips and chiplets, are enabled by materials engineering, where Applied Materials is the leader and this shifts more dollars to our available market over time. We have invested ahead of these inflections to create a portfolio of differentiated solutions that positions us to outperform as these new technologies transition to volume manufacturing. Applied Materials strategy is built upon the breadth and strength of our technology and capabilities. This provides us with a unique ability to engineer, co-optimize and integrate solutions that address our customer’s highest value technology challenges. Co-optimized solutions, where we optimize adjacent process steps and Integrated Material Solutions or IMS, where we optimize a combination of process steps in a single system under vacuum are becoming an increasingly important part of our product portfolio. In our recent Master Class, we talked about a breakthrough IMS approach for tungsten-only contacts that are free of conventional barrier materials. This provides significant improvements in contact resistance and is critically enabling for smaller foundry/logic nodes. The number of process steps are growing as these customers migrate to this pure metal technology and these low resistance integrated solutions for contact and wiring represent new multibillion dollar revenue opportunities. Over the past two quarters, we have secured multiple tool of record positions at all leading customers. Our ability to co-optimize materials engineering solutions with novel inspection and metrology is also driving record performance in our Process Diagnostics and Control business. We expect PDC revenues to be up almost 40% in fiscal 2022 with broad-based customer adoption of our eBeam Metrology and new optical wafer inspection platforms. In the quarter, we also strengthened our ICAPS portfolio with a tuck-in acquisition. Picosun is a leader in batch ALD technology and we are delighted to welcome their talented team to the Applied Materials family. Turning to Service, AGS delivered record quarterly revenues despite headwinds for our transactional spares and 200-millimeter equipment businesses due to supply chain constraints. The subscription portion of AGS continues to demonstrate strength. Installed base tools under long-term service agreements grew 9% over the past 12 months. Our renewal rate for these agreements continues to be strong and is currently running at 93%. Before I hand the call over to Brice, I will quickly summarize. We are beginning to see gradual improvements in our supply chain, which enabled us to deliver record revenue for the quarter. We expect demand to remain higher than supply for the next several quarters and we are continuing to drive actions to close the gap. The changing macroeconomic environment is causing some customers to adjust the timing of their investments. However, we are confident that our business will be more resilient, thanks to strong pull for a uniquely enabling technology, our large backlog, longer term visibility from our customers and industry-wide investment in strategic regional capacity. Our long-term view of the market remains unchanged as multiple parallel secular trends drive the semiconductor and wafer fab equipment markets structurally higher. At the same time, large technology inflections that are enabled by our core capabilities in materials engineering create outsized growth opportunities for Applied Materials. Now, I will hand the call over to Brice.
Brice Hill, CFO
Thank you, Gary. I’d like to begin by saying thank you to our teams and our supply chain partners for helping to increase our output, despite ongoing constraints and unexpected shortages. Our factory and logistics teams operated with agility, adjusting to almost daily changes in supply schedules. We are still not meeting all of our customer’s demand and solving the supply chain shortages to increase our manufacturing output remains our top priority. Before I summarize our Q3 results, I’d like to emphasize four points. First, our overall demand remains healthy. Specifically, our orders remained strong in Q3, our backlog increased, overall factory utilization remains high and customers have added four new factory projects to the long-term roadmap. There are pockets of weakness in the semiconductor market and a number of affected customers have asked us to reschedule their capacity additions. At the same time, there are areas of strength and we have broad market exposure and strong customer pull for technology investments. Second, our supply chain improved incrementally in the quarter, as Gary mentioned. We have added significant investments in talent to our supply chain teams to resolve bottlenecks and to improve our inventory and overall output. Third, we remain committed to our long-term gross margin targets. Today, we are still experiencing the effects of higher costs and unfavorable mix, which are being partially offset by pricing adjustments. We expect to incrementally improve gross margins over the coming quarters, driven by forecasted improvements in manufacturing volumes, product mix, pricing, and logistics costs. And fourth, we are confident in the industry’s underlying growth trajectory and our unique materials engineering capabilities for process innovation. While we are slowing our headcount growth, we have increased our R&D spending by around 10% year-to-date and remain fully invested in enabling our customer’s roadmaps. Turning to our Q3 results, we delivered record revenue of $6.52 billion, which is in the high end of our guidance range. Non-GAAP gross margin of 46.2%, declined 80 basis points quarter-on-quarter. Non-GAAP operating spending was $1.06 billion, which is right on target and up $39 million quarter-on-quarter, as we increased R&D and added supply chain resources. Non-GAAP operating margin declined 60 basis points to 30%, driven by the lower gross margin and headcount additions primarily in engineering. Non-GAAP earnings of $1.94 grew $0.09 quarter-on-quarter and matched our previous record. Turning to the segments. The Semi Systems team did a great job maximizing shipments, growing revenue by $276 million, up 6% quarter-on-quarter. Segment non-GAAP operating margin declined 100 basis points sequentially to 36.1% due to higher materials, freight, expedite, and labor costs, partially offset by price adjustments. The AGS team delivered record quarterly revenue, growing $37 million or 3% quarter-on-quarter. We continued to deliver healthy year-over-year growth in subscription revenue while the supply chain shortages constrained our growth in transactional parts and 200-millimeter systems. AGS non-GAAP operating margin was 30.6% and slightly up quarter-over-quarter. I will take a minute to share a few observations about AGS. Next month, we will host a Services Master Class where you will have an opportunity to learn more about our strategy to increase our recurring revenue. The three key drivers are the growth of our installed base, equipment service intensity, and long-term service agreements. AGS is making excellent progress toward our 2024 financial model. We exited Q3 tracking around $500 million ahead of the base case of our AGS revenue plan and around $250 million ahead of our high case. In addition, the Services business is capital light and produces excellent cash flow. Moving on to Display now, the market is weaker due to its high exposure to the consumer portion of the economy. During the quarter, we lowered spending in line with the current market environment. Our Display revenue declined by $48 million or 13% to $333 million. The business contributed $70 million of non-GAAP operating profit, which is down sequentially by $12 million or 15%. Turning to our cash flows, we generated $1.47 billion of operating cash flow during the quarter, which was 23% of revenue. We returned $1.23 billion or 97% of free cash flow to our shareholders, deploying $1 billion to repurchase 9.8 million shares of company stock and paying $225 million in dividends. We also deployed around $440 million for two strategic acquisitions. We expanded our ALD portfolio with the addition of Picosun, and we acquired a talented simulation software team. Year-to-date, we have produced over $4.5 billion in operating cash flow and nearly $4 billion in free cash flow, and returned $5.25 billion to our shareholders. Now I will share our guidance for Q4. We expect revenue to increase to $6.65 billion plus or minus $400 million. We expect non-GAAP EPS to be $2 plus or minus $0.18. Within this outlook, we expect Semi Systems revenue to increase to $4.93 billion or up 14% year-over-year. We expect AGS revenue to increase to $1.43 billion or up 4% year-over-year, with continued healthy growth in Services and ongoing supply chain limitations in 200-millimeter systems and transactional parts. Display revenue should decline to around $250 million. We expect to incrementally increase our non-GAAP gross margin to 46.4%. And we expect non-GAAP operating expenses to increase slightly to $1.08 billion. We are modeling a tax rate of 11.8%. Before we begin the Q&A, I’d like to summarize our company’s position in the current environment. We continue to see very strong customer pull for advanced technology in all of our markets and our backlog continues to grow. We believe some of our customers will moderate their capacity additions in areas that have been impacted by weak consumer spending. However, I expect Applied’s business to be more resilient than in past periods for three reasons. One is that we have strong exposure to technology investments, particularly in the foundry/logic market, which has grown to become approximately two-thirds of wafer fab equipment spending. Second is that we have multiple quarters of backlog for products that are essential to our customer’s technology road maps and we expect to continue to increase supply over the next several quarters. Third, our Services business has grown to over $5.5 billion in size and generates 87% of revenue from recurring demand for parts, services, and software. And now, Mike, please begin the Q&A.
Operator, Operator
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 will do our best to come back to you later in the session. Operator, let’s please begin.
C.J. Muse, Analyst
Yeah. Hi. Thanks. Thanks for taking the question. I guess a question for me would be in light of record backlog and extended lead times, and then some of the puts and takes around customers moving out production plans. How are you thinking about the timing of easing of supply constraints? How are you thinking about kind of internal tool production into 2023 and as part of that driving, I assume, gross margins higher throughout that time, would love to hear your thoughts around that?
Brice Hill, CFO
Good afternoon, C.J. It’s Brice. That’s a great question regarding supply constraints and timing in relation to demand. Over the past couple of weeks, we reconfirmed all of our 2023 demand with our customers. This is something we do regularly, allowing customers to make any changes, additions, or deletions. In a constrained environment, this helps us balance our supply among our customers effectively. We have just completed this process and while there are several changes, we still see that demand for 2023 and beyond is significantly higher than our supply capabilities. However, we are confident in our recent reconfirmation. Regarding supply, we have made substantial investments in our supply chain, addressing issues to improve supply and resolve problems with both our direct and secondary suppliers. We expect to increase output over the next several quarters and will continue to address our growing backlog.
Gary Dickerson, CEO
Hey, C.J., this is Gary. Regarding the supply chain, the zero COVID lockdown in Shanghai on March 28 set us back overall. We are making steady progress, although it's still gradual moving forward. We are doing everything possible, including investing and adding manpower, but the improvements are more incremental. The same applies to margins. Last quarter, we anticipated seeing incremental progress, and that remains our outlook for both supply chain and margins, focusing on gradual improvements throughout 2022 and into 2023.
C.J. Muse, Analyst
Thank you.
Mark Lipacis, Analyst
I have a question, Gary. Could you help us understand how you handle situations when customers come in and want to adjust their order timings? Do you have the flexibility to push their allocated slots back a quarter or two, or do you reach a point where you have to say they need to either accept the current timing or go to the end of the line? I would appreciate it if you could provide insights on what you're observing in real time, such as how many customers are requesting to push back orders, whether it's one quarter or two, and how you manage that process operationally. Thank you.
Brice Hill, CFO
Yeah. I know Gary is going to comment. I will just make a quick comment, Mark. When we go out and test the backlog with the customers, if they want to make changes a lot of times, that’s a mutually beneficial change. We have another customer that’s interested in taking the tool, because the demand is exceeding supply at this point. So the first thing we do is try to accommodate those changes. We are not trying to demand the customers stay on the schedule that they have, et cetera. So we try to be flexible. And that was really the point of going out and retesting and re-verifying all of the demand that we have across the customer base. So, Gary, you may want to add to that.
Gary Dickerson, CEO
No. I think that’s exactly right. Again, the challenge we face right now, again, many of our customers are really driving major technology inflections. And Mark, I think, you see also, especially in high performance logic, everyone is racing to these new inflections. So we just have tremendous demand from those customers in ICAPS, automotive, industrial automation. So, unfortunately, we are not able to supply to that demand. And as Brice said, memory is weaker, and we try to manage and work with the customers to come up with the right outcome for them and for us.
Mark Lipacis, Analyst
Very helpful. Thank you.
Vivek Arya, Analyst
I am trying to reconcile two aspects. Brice mentioned that you plan to increase capacity over the next several quarters. However, from a demand perspective, Gary indicated that memory may be declining, and your views on ICAPS seem mixed, although leading-edge is expected to grow. My specific question is, while I understand you are not providing guidance for next year, based on your observations, are we anticipating a typical decrease of around 5% to 10% in the spending environment, or is your outlook significantly different? I just want to understand your perspective on the industry as we head into next year, especially since you intend to increase supply.
Brice Hill, CFO
Hi, Vivek. It’s Brice. So to reconcile those two, I think the first thing to be clear on from our side is that, demand for the next several quarters, three-plus is far higher than supply. So we are going to concentrate, like, we say, on increasing our supply and we will do our best to do that over the next several quarters and that’s our expectation is demand will stay above where we can supply across that time period. So I think someone said it before that we are under serving the market so far that such that if there’s a change in demand, it’s still above where our supply line is. That’s the perspective we have. And if you think about or if you are asking about 2023, like we said, it’s too early to make a call on 2023. But what we would point out is different areas of the market, sure, are having some weakness, some inventory issues. Other areas are very strong and are on schedule to build the processes that they need for customer products that are also on schedule. So we think those puts and takes more or less will continue the demand signal for us into next year.
Vivek Arya, Analyst
Okay.
Stacy Rasgon, Analyst
Question, I was wondering if you could comment separately on your memory and your foundry/logic backlog. So I assume the memory backlog is coming down given it’s weaker, but it sounds like your overall backlog is still increasing if your demand is still well exceeding supply. So is it a case of like your foundry backlog is increasing more than your memory backlog is shrinking or like how do I think about the different pieces of that?
Brice Hill, CFO
Yes, that's correct, Stacy. This is Brice. The backlog is definitely on the rise, with the foundry and logic backlog being the strongest aspect in terms of orders and additions to our order book. I consider that to be a positive indication. We are aware that there have been reductions in the memory segment. I'm not entirely sure if the total memory market has declined, but that seems like a reasonable perspective. While some customers have decreased their memory backlog, the growth in the foundry and logic areas, along with some of the ICAPS customers, is significantly outweighing that decrease.
Gary Dickerson, CEO
Hey, Stacy. This is Gary. So also the foundry/logic is an increasing percentage of overall wafer fab equipment. So if you look at the percentages, foundry/logic is really around two-thirds of total wafer fab equipment. And so, certainly, the rates for competitiveness in high performance, you see that with companies making significant investments. ICAPS, you have seen a lot of announcements with companies making long-term investments in the ICAPS capacity. So, certainly, you see that in the increasing percentage of foundry/logic in the overall market. So, yeah, I think that, what Brice said and what you had also asking your question, certainly, foundry/logic is strong and that backlog still, unfortunately, we are not able to meet demand.
Stacy Rasgon, Analyst
Got it. That’s helpful guys. Thank you.
Atif Malik, Analyst
First question for Brice. Brice, some of your U.S. peers had talked about expanding China restrictions to sub-14-nanometer. Did that impact your July or October quarter outlook and if you can remind us of your total China sales, what is Display Systems versus silicon?
Brice Hill, CFO
Thanks, Atif. Yeah. First of all, we did get the same notice as our peers did on that. So that is sub-14-nanometer shipments to China customers, and it did not impact our July quarter and very small for October quarter, and that’s included in our guidance. So that part is clear. And we will work to make sure that we are in full compliance with all the changes on trade rules as we always have. So, but nothing significant in July or October periods. And then could you repeat the Display question…
Gary Dickerson, CEO
Yeah. I will take it. Thank you for the question. We are not going to disclose the specific revenue figures for our business in China. However, it is important to note that most of our Display revenue comes from China, alongside our global and domestic customers. We won't be sharing the exact percentages of our different business segments, but I can say that, as we've mentioned before, the majority of our semi foundry and logic business in China is attributed to ICAPS, which focuses on the trailing nodes.
Atif Malik, Analyst
Thank you. That helps.
Krish Sankar, Analyst
Brice, if overall WFE is down, say, 10% next year, how should we think about AMAT’s total revenues, including Semi and Services, given the strong backlog? And more importantly, how to think about the EPS, if you say WFE was down 10%? Brice, any color you could give there and how to think about revenue and operating leverage in that environment would be very helpful?
Brice Hill, CFO
Sure. Thanks, Krish. So the first thing, just to remind investors, you kind of made the point in the question about our backlog. We do have, as you said, a large backlog and we expect for the next three plus quarters, we will just be working on raising our output and serving that backlog. But if you want to do a what if, if revenue goes down or if WFE goes down, the first thing I would remind investors also is that our Services business doesn’t fluctuate or correlate 100% with WFE. It’s driven off our installed base, which grows every time we ship a tool and the utilization across the entire factory network that we are serving transactional, spares and subscription service agreements across that. So that portion of our revenue tends to dampen any weakness that we would have from a lower WFE, I would just highlight that for people that are thinking model. So whatever would change on WFE and change on the equipment side, it would be a dampened signal on the Services piece of the business. And then for overall modeling purposes, I would look at probably as a proxy year 2019 to see how the business reacted to a lower revenue environment, where you can look at the margin performance in 2019, which was down 1 point or 2 points and you can look at spending where it was controlled, relatively flat. I think those would be the same sort of reaction the company would be able to implement in that sort of environment if you were doing a what if, which again is in our forecast.
Krish Sankar, Analyst
Got it. Thanks a lot, Brice. Really appreciate it.
Toshiya Hari, Analyst
Hi. Good afternoon. Thanks so much. Gary, I was hoping you could expand on some of the comments you made regarding the CHIPS Act and the implications for the broader industry, but more importantly, your business. I think you stated in your prepared remarks that you expect it to be a small tailwind or a minor tailwind starting in late 2023. First of all, if you could sort of quantify that for us for 2023 and 2024, that would be super helpful. And then, more importantly, how has the conversations you are having with your customers changed since the CHIPS Act has gone through? I guess the main question that I get from investors is, if a big foundry in Taiwan decides to build capacity in the U.S., isn’t it sort of a zero sum game where you sort of subtract from what could have happened in Taiwan and you just kind of take that over to the U.S.? So net-net, isn’t it sort of a zero sum, but how would you kind of respond to that? Thank you.
Gary Dickerson, CEO
Thank you, Toshiya. I’m pleased to see the CHIPS and Science Act passed and becomes law; it's a positive development for the United States and the industry as a whole. Regarding your investment question, I view it as a minor positive factor for overall wafer fab equipment spending, starting in late 2023. The announced investments are largely focused on high-performance logic and some ICAPS projects. Currently, about two-thirds of wafer fab equipment is in the foundry and logic area, which will contribute positively as we approach late 2023 and beyond. These investments also have specific timelines for the incentives, which creates more certainty. I’ve spoken to many of these companies, and as they transition to new locations, there will be startup costs and some initial inefficiencies in their operations. This presents an additional positive opportunity for our Service business. I anticipate small increases in spending starting in late 2023 as these factories begin operations. Over time, the scale of these factories will affect their efficiency; larger factories tend to be more efficient than smaller ones. There will be some inefficiencies during the build-out phase, which could take many years. In the broader context of overall wafer fab equipment, it may not be a significant boost, but it is certainly a favorable factor.
Toshiya Hari, Analyst
Got it. Thanks so much.
Harlan Sur, Analyst
Good afternoon. Thanks for taking my question. I wanted to expand on some comments that Brice had on services. Maybe this is a plug for your upcoming Master Class. But I mean in the event of a weaker WFE environment next year, you have several positive buffers. I think the biggest one, your Services business historically does not decline during downturns, in fact, over the past 11 years, and I think that’s four WFE down cycles, I believe that there’s only been one year that AGS was down and it’s driven a pretty stable like 8% to 10% sort of revenue CAGR over that period of time. So outside of the annuity like subscription contracts that I assume will be partially offset by, let’s say, 200-millimeter equipment sales, which may fall off in a weak WFE environment. What is the team doing to ensure continued outperformance of Services doing WFE weakness and your confidence on driving growth in Services if WFE is down next year?
Brice Hill, CFO
Thank you for the question, Harlan. To clarify, our focus is on two main drivers for that business. First, the installed base increases every time we ship a tool. Second, as you pointed out, our capability to serve that installed base through transactional support, spare parts, and services, along with subscription agreements. These agreements provide spares and insights on optimizing yield and capabilities. We're enhancing our portfolio of service offerings to create more value for our customers, allowing them to ramp up more quickly, achieve higher yields, and benefit from the intelligence we possess across our entire ecosystem of tools. This focus reassures us that as the installed base expands, our subscription agreements will continue to grow. Additionally, you're correct that we see a similar analysis regarding our relationship to WFE; even if WFE experiences changes or revenue declines, the primary concern remains the utilization rates in existing factories and their ongoing need for services and intelligence. Those are the key drivers for us.
Gary Dickerson, CEO
Thanks for reminding everyone about the Master Class coming up next month. Over the past 10 to 11 years, we have nearly doubled the percentage of our subscription agreements compared to transactional ones. Additionally, we have extended the duration of these agreements to two and a half years. This increase in long-term agreements contributes to the resilience of our business. Given the current environment, where there are chip shortages and a focus on producing quality chips, our services have gained more value. For example, managed part services allow customers to have parts available rather than competing for available options in a transactional setting. All of this has reinforced the value of our longer-term subscription agreements for our customers.
Operator, Operator
And Harlan, this is Mike… Yeah. Hey, Harlan. It’s Mike. I think that earlier I gave the right timing for the next Master Class. It’s in five weeks from today, but I think I heard myself say May 26, which is the last date. It’s September 22nd, of course. So thank you.
Harlan Sur, Analyst
Yeah. Thank you.
Joe Quatrochi, Analyst
You mentioned that there is still strength, particularly in leading-edge foundry and logic investments, with some consumer-driven demand as well. Have you noticed any shifts in the capacity your customers are considering, while still maintaining their technology roadmaps?
Brice Hill, CFO
Thanks for the question, Joe. I would say that demand currently surpasses our supply levels, although there have been some changes. Overall, demand has decreased slightly but remains higher than what we are able to provide in the upcoming quarters. When considering a leading-edge foundry, it's important to note that they are implementing processes for their customers' products and are committed to meeting those timelines. The volumes will vary based on market conditions for those products. However, when setting up equipment for a logic node for a product anticipated two years down the line, customers need to consider what the market will look like at that time. It’s not simply about analyzing the current quarter's economic conditions or reducing demand. A forward-looking perspective is essential. You are correct about the dynamics; we've just reassessed all demand for next year, and that is what our customers are focused on.
Joe Quatrochi, Analyst
Thank you.
Timothy Arcuri, Analyst
Around some of the mixed signals around what’s happening this time around, and on one hand, customers are pushing out, but you also mentioned that you are getting long-term commitments from some other customers. I was wondering what that means, because it kind of sounds like you are confident that foundry/logic is going to hold up at this time even as memory pushes out and that’s not usually how it works. Is it something that there’s such a concentration of leading-edge foundry capacity and there’s going to be others such as your neighbor that are trying to compete to get back in the foundry business? Is that what’s different this time, because I am hearing these mixed signals and there’s something obviously different. So I am just wondering if you can call on your past knowledge to help on that?
Brice Hill, CFO
Sure, Tim. Just two comments, the first is we have definitely expanded the horizon with all of our customers from a planning perspective. They are giving us longer signals than before and giving us the opportunity to engage in the discussion on capacity planning with them. And second, some customers are also giving us a sense that or a promise basically that they will operate within a certain band of capacity. So they are giving us additional confidence to what we should plan for from a high confidence perspective and that’s a little bit different than what we have done before.
Gary Dickerson, CEO
Hey, Tim. This is Gary. I want to mention one other factor that is benefiting us during this period. When you examine the investment focus for the upcoming advancements, a larger portion of the funds is directed towards new materials and structures. We previously discussed gate-all-around in the Master Class. The investment in wiring for interconnect increases significantly, with costs rising threefold per wafer as we transition to the 3-nanometer node, which involves more processes. Our Integrated Material Solutions merge seven technologies into one platform to reduce wiring resistance by 50%. Recently, one of our customers mentioned a notable increase in materials and structures concerning power performance as they move towards their future technology nodes, highlighting backside power distribution as a significant advancement. This approach can decrease the area by up to 30% without reducing features by positioning some structures on the backside of the wafer. Therefore, our relative contribution and investment in these technologies is rising, which is another factor that is aiding us.
Timothy Arcuri, Analyst
Thanks, both.
Joseph Moore, Analyst
Thank you. Regarding the outlook that you are expected to be more resilient moving forward compared to the past, can you confirm if this applies specifically to memory? Additionally, if we consider this memory downturn to be similar to 2019, should we anticipate that wafer fabrication equipment will decline similarly to 2019, or do you believe that would be overly pessimistic? Thank you.
Brice Hill, CFO
Thanks, Joe. I haven't really considered it that way, but I believe we are more resilient, particularly in terms of memory. One reason for this is the backlog we have discussed; even though memory demand might be weaker than last quarter, we still have a strong backlog for memory customers. This ongoing strength in our overall backlog is a key reason we feel more resilient than in previous periods. Additionally, our Services business contributes to this resilience, as it benefits memory customers as well as those we support from a spare parts perspective. This aspect of our business is larger now and demonstrates more resilience against changes in wafer fab equipment. Lastly, I want to clarify that I was not suggesting that our financial performance will return to 2019 levels. We won’t revert to 2019, but I used it as a reference for how gross margin and spending might react in a weaker market environment.
Gary Dickerson, CEO
Yeah. Joe, this is Gary. If we look at what's changed or remained the same, the percentage of foundry and logic is significantly higher than it was during that timeframe, tracking around two-thirds. There's a competition for leadership in high-performance logic along with substantial investments occurring in that segment of the market. We are witnessing our customers announcing longer-term agreements with their clients, which was not something we observed back then. Therefore, the foundry and logic percentage and its relative strength are certainly different compared to 2019 in relation to the overall wafer fab equipment market.
Joseph Moore, Analyst
Okay. Thank you.
Sidney Ho, Analyst
For taking my question. My question is on, another question on China. When I look at the revenue from China, it came down about 7 percentage points quarter-over-quarter. I think that’s more than some of your peers. Can you walk us through the dynamics there, I know in answering a previous question, you talked about the new export restriction have no impact in the July quarter. Maybe you can talk about the demand strength from domestic Chinese customers versus multinationals and the foundry versus memory, that will be great? Thanks.
Brice Hill, CFO
Thanks, Sidney. This is Brice. I want to highlight one specific factor and offer a general observation. The specific factor contributing to the decline in our Display business is primarily tied to customers in China. This is the main element causing change. The remainder of the situation reflects the typical fluctuations of a normal quarter. We don’t anticipate any weakness in the Chinese market moving forward. The ICAPS investments there are largely on track, and there are no significant changes in that regard. It’s mostly a matter of different-sized deliveries this quarter, which was slightly smaller overall than the previous one. I would emphasize the Display factor, along with the usual ups and downs accounting for the overall changes. Additionally, just to clarify, there hasn’t been any change due to trade regulations, as mentioned earlier.
Sidney Ho, Analyst
Okay. Thank you.
Quinn Bolton, Analyst
Really ask you a clarification and then a quick question. The clarification is, when you talk about memory reschedules, are these memory customers just pushing out delivery dates by some number of quarters or are they canceling the tool entirely and you are just taking that slot and reallocating it out to one of the foundry/logic customers? The question is just on the memory rescheduling, is that equally happening across DRAM and NAND or is it predominantly on the DRAM side? Thank you.
Brice Hill, CFO
Okay. Quinn, thanks. To clarify, all three events are occurring with nearly all customers, including additions, cancellations, and changes to schedules. In the short term, there are more cancellations than additions for memory. There are many reschedules and even a few additions for memory. I hope that clarifies it; it's a mix. Overall, we can say that the memory cycle is lower than it was in the last cycle.
Quinn Bolton, Analyst
And it’s equally across DRAM and NAND?
Brice Hill, CFO
That part I don’t have off the top. I don’t think we would specify that. So I can’t answer that one.
Patrick Ho, Analyst
For you, Gary, since a lot of the industry questions have been answered. You talked about the above average growth in your Process Control business. Obviously, foundry/logic is a big driver of it, particularly on the advanced node side, are you seeing any penetration in terms of your ICAPS business in Process Control or is it entirely within the advanced nodes?
Gary Dickerson, CEO
Hi, Patrick. Thanks for the question. ICAPS is performing very well for the company. PDC increased by 67% in 2021, and we are nearly up 40% in fiscal 2022. Looking at the breakdown of different markets, it’s notably stronger in high-performance logic than in other areas. However, we are also observing growth in memory and in ICAPS. Last year, our PDC business saw eBeam nearly double. We have vertical integration with our electron optics and lead in resolution and imaging technologies, which keeps that business strong into 2022 and beyond. Additionally, we see growing strength in optical inspection and believe we will outperform the overall market in that segment. Overall, PDC has a strong connection to PPACt inflections. Our unique imaging capability allows us to refine processes and fingerprints faster and more effectively than anyone else, leading to strong growth in PDC along with significant synergy with our semi portfolio.
Patrick Ho, Analyst
Thank you.
Operator, Operator
Great. Thanks. And Operator, we have time for one more question, please.
Mehdi Hosseini, Analyst
Asking a WFE question, two follow-ups, what would be your revenue guide if you had all the components that you needed to ship to demand?
Brice Hill, CFO
That’s a good question, Mehdi. Since it’s been several quarters since we have been at that level. It’s difficult to predict. But we did say, I think, two quarters ago that the supply constraints probably impacted us by $300 million. So I would say that and more if we had zero supply constraints and we would be on a higher curve going forward.
Mehdi Hosseini, Analyst
Thank you. Can you clarify the composition of your inventory in terms of work-in-progress and finished goods?
Brice Hill, CFO
The changes in inventory are fairly balanced across the entire inventory ecosystem. However, I am currently reviewing the specific numbers.
Mehdi Hosseini, Analyst
Yeah.
Brice Hill, CFO
It's relatively balanced. Here's what's happening dynamically. We have a significant amount of raw inventory coming in as we address our supply chain issues, and over 95% of our parts are available, allowing us to build inventory. This is reflected in our work in progress with raw materials. On the finished goods side, we have materials or tools that are complete or nearly complete but are waiting for one part or are close to being shipped to customers, and that inventory is also increasing. Overall, I think it's relatively balanced across all these components.
Mehdi Hosseini, Analyst
So the push out by memory customers is not a factor in driving your increase in days of inventory?
Brice Hill, CFO
Yeah. Absolutely not. We are still underserved in total relative to the market. So when any customer delays a tool or cancels a tool at this point, we will be moving that inventory and those parts to another customer and we expect that to be the dynamic for the next several quarters.
Mehdi Hosseini, Analyst
Thank you. Thanks for detail.
Brice Hill, CFO
Yes, I want to highlight that we plan to increase our output over the next few quarters, as we anticipate demand will exceed the current supply.
Operator, Operator
Okay. Thanks, Mehdi, for your question. And Brice, would you like to give us a summary?
Brice Hill, CFO
Yeah. Absolutely. So we have talked about puts and takes, weakness and areas of strength in the market. The overall story is we have multiple quarters of backlog. Job one for us is to increase our output and meet our customer demand as quickly as possible. As we do this, we will incrementally increase both our revenue and gross margin in coming quarters. We are confident in the long-term growth of the semi market and we are working to increase our investments in supply chain, and especially to continue to focus on the R&D to drive the power, performance and area cost road maps of our customers. I look forward to seeing many of you at the upcoming conferences. Gary and I will be at the Goldman Sachs conference in San Francisco, and just before that, I will be in New York for the Citi and Evercore events. Okay. Mike, please close.
Operator, Operator
A replay of the call will be available on our website by 5 o’clock Pacific Time today, and we appreciate your continued interest in Applied Materials. Thank you for joining us today.
Operator, Operator
Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you all for participating. You may now disconnect.