Conference Transcript - AMAT 2026-03-02

Shane Brett, Analyst — Morgan Stanley

All right. I think we'll get started. Hi, I'm Shane Brett, U.S. Semiconductor Equipment Analyst. With us today is Dr. Prabhu Raja, President of the Applied Materials Semiconductor Products Group. To get started, Dr. Raja, can you start by giving the audience just an introduction and a sense of what you do in your role at Applied Materials? Thanks, Shane.

Prabhu Raja, Other

Yeah, about me, Prabhu Raja. I joined Applied 30 years back as an engineer. This is my first job, and I led some of the valuable businesses in applied materials like a PVD business and SIM3Edge and integrated products. I spend lots and lots of time with the customers. Sometimes I think I spend more time in the flights than at home. And recently I've been to multiple customers throughout Asia, and also the governments right now. Governments want to be talking about semiconductors. So the good news is I have a lot of valuable feedback, feedback from the customers on the demands, where they are, the challenges. And the bad news is I sleep about three hours these days. So if I mess up, just assume it's a jet lag, not me. But the air miles are pretty good. Yeah, you're right. Thanks.

Shane Brett, Analyst — Morgan Stanley

I guess just to get started then, as president of the Semi Products Group, just what are your key priorities to say, just where is your focus is with Applied?

Prabhu Raja, Other

See, if you really look at those right now, it's all about demand. As I said, I talk to a lot of customers. The demand is very high. They all want to know, are they getting the tools on time? And I can tell you, pretty much I get emails every single day. I want to make sure they're delivering on time. So we have incredible visibility. from the customers, I'm focusing on making sure that we can scale and if we want to deliver the tools on time. That is right now, right now. When you really look at the long term, so what do you think about? When I'm in the flight, what do you think about? I think about this semi-cap market, how big and how sustainable it is. Number one. Number two, within semi-cap, which part of it semi-cap is growing faster, where we should focus on? Number three, the customers are having the tough challenges right now with all the inflections, and how can we work together with the customers in solving those challenges? These are the three high-level, is a way for overall semi-cap market. As you can see that the demand is high, the fab utilization is pretty high. We are tracking around 100 fabs today. They're all in various stages. That part is really good. From what I hear from customers, they want me to be ready for the super cycle. That's what they call super cycle. I don't know what does that mean? Super cycle, that's why they say that, right? I want to make sure I'm not the bottleneck, okay? Number two, if you really look at those, if you segment within those semi-cap, not long ago, one year back, we say that, hey, it's a $1 trillion market by 2030. and one third is leading edge, foundry logic, one third is ICAP, one third is memory. That's all changed. Now we are, potentially we can do one billion, one trillion semi can do one trillion this year. Potentially we can do that. And also if you really look at the mix, what I see that is the fastest growing markets are the ones which are enabling artificial intelligence right now. The data centers. So let me look at those leading edge Foundry Logic, DRAM, Advanced Packaging. These three are growing faster. And then other ones are slow growth areas, we call it NAND and ICABS, which are more in general computing. The good news is the fast-growing areas, three areas we talked about, applied is number one in all those three areas. And we thought about areas, we invested in those areas. The last one is we talk about tough challenges. What are the customers concerned about? If you really look at those, there are multiple inflexions that are happening in this area. Each of those areas, multiple inflexions are happening in each of the areas. So what is customer doing? They are trying to integrate the devices to address their tough challenges. That means you put advanced logic and DRAM together through advanced packaging to solve their challenges. So what we are doing, we are making it possible with our unique portfolio-integrated solutions.

Shane Brett, Analyst — Morgan Stanley

Those are those. Got it, got it. And I guess just on this operating environment, so you've talked about just the semi-cap model, your focuses, and then customer challenges. So we'll focus on the semi-cap model first. You threw out the word super cycle as it relates to sort of AI driving kind of this equipment market. How does that sort of AI drive this equipment market, and how is it sort of beneficial to you guys focused on DRAM logic and advanced packaging?

Prabhu Raja, Other

I think I talked about, I mean, one trillion, one third, one third, one third. That's not there anymore right now. Right now, everything has changed right now. And a lot of right now, really that, what is AI data center? That's all you've got to think of. What is enabling AI data center? When you really look at those advanced logic and, sorry, leading edge, Let me put the leading-edge logic, advanced packaging, and DRAM. These are the fastest-growing markets as compared to that, as compared to the other market. And so the multiple inflections are happening in these areas right now. Now, if you really look at the gate all around, it's extremely complex, and it's going through, everything is going to 2D to 3D right now. You see that, that a lot of complexity is there right now. And the complexity means that a lot of more steps, a lot of new steps are coming in more steps. And applied is in a very, very good place to solve the complexities right now. Okay, that's where I see that where the market is going. And then I think the good part is we had a strategy. We call it inflection-focused innovations. And, you know, we kept talking about it for four or five years. We talk about inflections are coming, coming, coming. It's a time. Now you see that. Wherever we strategize, wherever we invest, that is happening right now. So we are in a very good place in all those three areas. So that's why if you really segment it, that's the area we are biggest focus right now. It's paying off. Got it.

Shane Brett, Analyst — Morgan Stanley

So those inflection-focused innovations have sort of led you to DRAM leading logic and advanced packaging and sort of the stars have aligned with AI.

Prabhu Raja, Other

Yes, you're right.

Shane Brett, Analyst — Morgan Stanley

Got it, got it. I want to talk about 2026, because you sort of talked about more than 20% shipment growth for the calendar year. I think if the year plays out as you've sort of called it out to be, that will be the highest growth for applied since 2021, which was, you know, back then the semiconductor industry, just equipment was a big bottleneck at that time, with chip shortages just affecting a lot of other industries. Just how is the industry and applied prepared relative to 2021 to sort of meet this kind of massive surge of demand?

Prabhu Raja, Other

OK, the short answer is we are a much, much better place. I can tell you that. And it's a great opportunity. We are not going to let it go. OK, this is the number one. So really look at those. And, you know, like I said, I talk to customers a lot. They are giving us great visibility. They are forecasting the demand much, much early than ever before. The reason is they want to make sure they're getting the tools. I can see the demand is sky. They want to make sure they're getting the tools. More important, when the tools are coming in, these tools need to be installed. It has to be serviced. And for that, you need a manpower much, much earlier. Applied does that. So you can't just hire a college graduate and ask them to go and do that. These are complex areas you need to learn. So these guys need to be trained for one year or so. So for that reason, the customers are giving a visibility much, much earlier right now. That's a great visibility we get. And so that really helps us right now to plan. And what do we do with that? I, you are right, COVID was a stress test for us. We learned our lessons. and we fundamentally change how we do that in terms of how we plan, how we forecast and how we scale, how we execute. We fundamentally change that. We are in a much better place if you really look at those manufacturing. We can, the capacity should double compared to what we had before COVID. And since we get a very good visibility from the customers, sometimes two years early, even beyond that. And what we do, the visibility is We are going and talking to our suppliers, partnering with the suppliers early enough. We see where the bottlenecks potentially could be. We are well prepared for it. The suppliers are more ready right now. And the third part is that we talk about service and support. And we are expanding our service team. We are training them. I think we are in a much better place. Like I said, we are not letting it go this time. For sure, we are more ready right now.

Shane Brett, Analyst — Morgan Stanley

Yes. But rallying 2,000 suppliers cannot be easy. So just how have you gotten ready for this inflection? I know we kind of spoke about earlier, you guys kind of talk about a five-year strategy. What were kind of the steps you put in place during the kind of five years leading up to this that have allowed you to kind of meet this demand?

Prabhu Raja, Other

I think if you really look at those applied, if you really look at applied revenue, even after COVID, applied revenue never went down. We didn't come down. We kept in the same every year. We kept increasing that, increased the revenue the last 20 years. That kind of helped us to customers to have more of a confidence on us. Other one is we changed the model. Right now, we really look at those. With the customers, we truly work with the customers as partners rather than just a supplier-customer. We work with the partners. I think we do the same thing for our suppliers. We work with them much more closely, so they're a lot more open. Not only their capacity, they're also more open with their sub-supplier capacity.

Shane Brett, Analyst — Morgan Stanley

So it's all about partnership, how closely you work with them, how much visibility you give them. this all together yeah got it so tighter partnerships their suppliers but also with your customers and you're talking about two years plus the visibility just we're seeing two years plus the visibility but there's so many tech inflections right now just this change in kind of kind of rapid pace of complexity how is that changing the way the equipment industry works with kind of your customers yeah equipment industry also talk about particularly applied materials you know not long ago you know I've been industry for a long time.

Prabhu Raja, Other

And, you know, the scaling, if you really look at technology, is not that complex looking back and more predictable. All litho-enabled scaling, very predictable. We had a handful of materials. And so customers had their own process design team. They pretty much used to tell us, hey, what is my hardware spec? What is my process stuff? All I have to do is I got to meet the spec. Customers have their own team which can integrate everything together, all steps together. Right now, the complexity has changed. It is really complex right now. It's more of a customer-supply relationship with all the complexity we are talking about, multiple inflections are happening. These inflections are incredibly complex, I can tell you that. Like gate all around, you think about that. You know, more than 2,000 steps. A lot of new materials are coming in. And more importantly, every angstrom matters. I can tell you the good example is in the transistor gate, the small 10 nanometer space, you've got to put five to six different materials. Everything is one nanometer thickness. So that's how one angstrom really matters, those kind of complexities. On the top of it, there is the step-to-step, when I saw 2,000 steps, some of the steps, they're interdependent. Okay, so it's more like the Rubik's Cube, you know, that if you touch one, one step, one material, it impacts everything. It falls apart. So that complexity is increasing, right? That is more that part of it. And on the top of it, the speed. Speed is the game. And a customer, time to market becomes important. And a customer, they don't have a time to put together every piece together. So fundamentally, customers are working very closely with somebody's applied materials. The reason is, really look at applied materials. We understand the steps better than anyone because we have broad portfolios. and with a broad portfolio, we understand the steps and how they are dependent on each other and also we can come with optimized solutions better than anyone. And the customers are coming to us, they're working with us, partnering with us three nodes ahead, in some cases three to four nodes ahead. So when you have three to four nodes ahead and partnering with the customers, working together to solve the problem Rather than just meeting the hardware spec or process spec, now I become the part of solving the device challenges as a solution partner. So that gives me incredible visibility on customer challenges, customer roadmap. I can use that to fund my R&D. And more importantly, when you work that early, you are designed into this. I'm telling you, these complexities are like an open-heart surgery. Once you are designed in, you don't want to touch it. They fall apart. I think the biggest change is that the relationship, what used to be like supplier-customers versus partners. I think this is a really good segue because you've spent billions of dollars to invest in Epic.

Shane Brett, Analyst — Morgan Stanley

And kind of my question here is just how should we see kind of the ROI on that billions of dollars that was spent into Epic? You've had some nice customer announcements there. I'd love to hear about that. And just should we expect to hear about more customers when you're opening, just kind of the roadmap around when Epic is going to come up and up running?

Prabhu Raja, Other

Yeah, no, I talked about complexity, right? And also I talked about speed. Okay. Right now, really look at those, today, if you really look at those, how the innovation works, innovation to commercialization, let's call it how it works. Now, from university, academic research, if you come to the new materials, academic research to the equipment, to semi-manufacturers, to the commercial chip, takes 10 to 15 years. Go back and look at those FinFET and Kaike MetalGate. This is all invented somewhere around 10 years, 15 years back. And that's the time in 10 to 15 years it takes. Right now, nobody has the time to wait for 10 to 15 years with the complexity. You know, speed is the game. Everyone wants to be the first. So what do they do? Rather than sequential way of innovating and commercialize, what applied what we are doing is, can we do it in parallel? Can we co-innovate together? That means universities, equipment, and customers, can we work together in parallel in one place under one roof, imagine you come with the new materials you can validate on the equipment, validate on the customer way force and your success rate goes up and the time to innovation has come down dramatically. That's the whole idea of success rate because I can tell you that otherwise success rate is too low because you can come with the new material, it doesn't work in the equipment Right now, we all work together. Success rate goes up, and also time to market goes down. I think that is the biggest benefit that customers see. That's the reason that customers want to partner with us, not just customers, but universities and also the peers. They all want to be a part of it. Like you said, we announced with the Samsung. We are talking to and working with other customers, universities, major U.S. universities, also with the peers. and you'll see more announcement in coming months.

Shane Brett, Analyst — Morgan Stanley

Okay, well, let me move forward to that then. I guess let's talk about, dive into the roadmap here. So leading-edge foundry logic, you sort of highlighted that from FinFET to GAA with backside power, that sort of increases your revenue opportunity by about 30% for equivalent fab capacity. Just where specifically, could you kind of give Kyra down, where specifically applied is winning for those kind of inflections?

Prabhu Raja, Other

So let me see. When you say leading-edge foundry logic, we are number one that process equipment provider in the space right now. If you really look at those there are two big pieces if you really look at those the one big piece is the transistor, other big piece is the wiring. Let me start with the transistors okay. Transistors are the ones I'm talking about the complexity FinFET we are number one if you really look at non-lipo we are very close to 50% maybe with a little less than 50% share right now. That gate alarm makes it even more complex. Like I said, number of steps are increasing significantly. A lot of new materials are coming in. And these materials are interdependent. They really interact with each other. So the complexity is happening where applied as a leadership positions. Like for example, EPI is a very critical. and PVD is critical, metal yield is very critical, CVD is critical, implant, treatment, you can see that where conductor h, those are the, these inflections are happening, complexity is happening, where applied material has a leadership position. On the top of it, I talked about interdependencies between the steps. That means if you touch one step, it will impact the other step. So that means these all steps need to work together to get the solutions. That means Applied knows how to optimize better than anyone because we have all those pieces, and we know how to connect those pieces to make it work.

Shane Brett, Analyst — Morgan Stanley

Integrated material solution.

Prabhu Raja, Other

That's why we call it integrated material solutions right now, how we integrate. In some cases, you can't take it out of the tool machines. It's all under vacuum. And imagine I talked about one nanometer, that's 10 angstrom. Imagine you're exposed to air. It's not the same material anymore. They all need to be integrated in one system. That's where Applied comes in and really helps. And the customer, what they do is that these are the places we work together three to four nan technologies ahead right now because this is not the one that you can just come and change it, something. So we work three to four technologies ahead. I think it benefits both of us for customers they can do early validation on the way for what we do and also time to market for us we get this visibility into the road map visibility into the technologies road map challenges also our R&D funding I don't have to put R&D in 10 different ways right now I know I can validate I can fund it in R&D funding, guide up my R&D funding. And even more important, I'm designed in. I know three nodes earlier I'm designed in most cases. So win-win for both of us.

Shane Brett, Analyst — Morgan Stanley

I want to talk about two more things within leading-edge logic, wiring and just copper. I think the first question is just wiring module and leading-edge chips, just how is it changing and where's the opportunity for applied? And I guess the second part of that question is, you know, there's been concerns about PVD copper being at risk from ALD Mali. Just what is your sort of answer to that concern?

Prabhu Raja, Other

Maybe particularly this topic is more personal to me because I joined the company in the PVD wiring. That is my first job. Okay. And I've been hearing this. You know, when I joined the company, people say that, hey, copper is going to end, PVD is going to end. don't join that group. That was 25, 30 years back. And yet, copper continues to extend and PVD continues to extend. I think, if you really look at the wiring, it's a very valuable and large business for the company right now. And really look at those in today's GPU, there are 800 plus miles of wiring in this. It's complex. Look at those. And people, the complexity in wiring is equally there as transistor. People don't give importance to the wiring. Wiring is extremely complex. If you talk to the customers, any customer, they tell you, Lito is not my bottleneck. Wiring is my bottleneck. That's the first thing they say, that wiring, focus on a wiring. That is the most important message. So what we see that is now 20 plus layers right now in the GPU right now. so we see that copper number of copper layers are increasing layers are increasing what has changed is to put one layer we used to have three different technologies integrated together ten years back today can you imagine the seven different technologies are integrated into the one system, machine under vacuum to get one layer of wiring number of layers are increasing number of technology steps inside each layer is increasing on the wiring. Wiring is big and I can tell you that with the breakthrough innovations at least we have three plus nodes of copper would extend I can confidently say copper is going to extend for three layers, three more nodes or even more. We have a path and that brings to the MOLLE question there is always a misconception that MOLLE is going to replace copper, clearly the answer is no, MOLLE is not going to replace copper copper is going to stay here copper will continue to be here, continue to grow and more and more layers where MOLLE comes in really look at those wiring then you have a transistor something in between which connects them is contact. There are three layers of contacts today. Not three, yeah, three layers roughly contacts. Tungsten is the materials, contact material today, tungsten. That molly has benefits over tungsten. That's where I see that people are talking about sometimes we call the contact also as wiring. That also molly could be replacing tungsten. I think we recently announced the product the spectral ALD molly and with the foundry logic we already have a PTR position right now because the ALD molly is replacing tungsten it's a very critical layer it is and really look at those molly is not as big as what you think really look at this market overall copper is at least a magnitude or more than the molly itself and copper will stay, continue to stay and Mali has its own place it could inflect but copper will be much, much bigger and copper will continue to grow

Shane Brett, Analyst — Morgan Stanley

quite honestly, copper is growing layers are faster than anything So the people that doubted you 25, 30 years ago will be reminded in 5 years that copper is still around?

Prabhu Raja, Other

Copper will be still around, I can tell you that I told you, I work with a customer 3 to 4 nodes I had I know exactly what's going on It will accept.

Shane Brett, Analyst — Morgan Stanley

There we go. The next question I want to move on to is DRAM, because I think there's a perception that Applied is a bit more of a leading edge, like a Foundry Logic company, but you guys have gained a lot of share in DRAM over the last decade. Can you kind of remind the audience where those DRAM share gains have come, just how you sort of position yourself with this sort of inflection in DRAM spending?

Prabhu Raja, Other

So one thing I always thought about underappreciated, applied is that they think we are a foundry logic company. You're right, not a memory company. Really look at DRAM. I think over the last 10 years, we increased the market share in DRAM significantly. Where it came from is that patterning. Conventional patterning, UV patterning, in both places, we increased the market share significantly. Particularly UV patterning, we increased a lot more than conventional patterning. One thing. number two is that the capacitor module it's a pretty complex structure we had a lot of key wins because a lot of new materials as a hard mark we talk about integrated approach there is another term we use co-optimized approach when we said integrated, one machine multiple technologies are all inside the one machine not exposed to air, right? co-optimized is the one that A, they don't have to be in the same system, but they interact with each other so that we've got to optimize for each other's steps. The step could be a neighboring step or even after 10 steps. Simple example is, if you come with a new material, you should know how to deposit the material, you should know how to etch the materials, you should know how to remove the materials, you should know how to analyze the material. If you give to the customer new materials, if they talk to four different suppliers, It will take 7, 8 years, 10 years. They want you to come out with a complete solution for that. Hey, give me everything so that I can just insert in my flow. That's where there will be a lot of key bins in the capacitor. That is what happened. The moving forward, let me break down to two, conventional DRAM and HBM DRAM. Conventional DRAM, DRAM is following logic roadmap. transistor is going from planar transistor to high K metal gate to FinFab so where you get all the learnings, nobody wants to reinvent the whole thing applied as a great share in all of them very easy plug and play there customer want to work with us and DRAM also adopting copper layers, number of copper layers are increasing in DRAM so our market share position over many years in foundry logic is really helping us right now. When you go to H and on the top of it you talk about even conventional DRAM, you talk about 4F square, you talk about 3D DRAM, these are less UV, less UV or more material sensitive, these are the ones, all materials engineering, everything going in the third dimension and these inflection will further help us because it's all lot more materials, lot more process technology, lot more integrated tools. That's for conventional data. HBM is very simple. HBM you need 3 to 4x more number of vapors per die. That's it. Very simple. So that's where HBM is growing. On the top of it the HBM packaging part alone is more process intensive. So that's where HBM is growing. It's a combination of inflection, what is happening, combination of number of copper layers growing, and the combination of where the HBM is going right now. And I think we are really in a good place in all those DRAM inflections right now.

Shane Brett, Analyst — Morgan Stanley

So just to summarize your take on DRAM, to kind of fam around just materials engineers and materials engineering is expanding, which is sort of leading to a bigger opportunity set for applied product. Got it. I guess on the topic of HBM, at the very start, when you kind of talked about this AI inflection, we kind of called out DRAM, leading-edge logic, and advanced packaging. And advanced packaging is a small portion of your business, but it is also a portion of your business where you're very dominant in HBM. Can you talk about just what are applied strengths in advanced packaging and where do you kind of see the opportunities to grow there?

Prabhu Raja, Other

Yeah, like I said, we are number one in advanced packaging overall. HBM we are number one. If you're really at 26, what are the strong growth area? HBM packaging and 3D chiplet stacking.

Shane Brett, Analyst — Morgan Stanley

There are different names, different customer, different names. Within advanced packaging?

Prabhu Raja, Other

No, even 3D chiplet stacking. people call 3D stacking whatever it is so those areas are growing very strong and applied is a position there really look at this advanced packaging right packaging is nothing but on chip wiring whatever the learning what we have we talk about copper wiring what we had all the wiring learning what we had for so many all the machines we developed for so many years on wiring Now all are being adopted off the chip right now.

Shane Brett, Analyst — Morgan Stanley

It's nothing but wiring, right?

Prabhu Raja, Other

So it's a good place to start with for us because all these products are already helping us, all the learnings are there. That helps us. On top of it, we already saw this influx coming 10 to 12 years back. And personally, I was involved in this. I started this. In Singapore, we started a packaging lab. It's a complete flow lab in Singapore. We call it advanced packaging lab. Sometimes we call it epic packaging. It's just similar to what epic, what we have dream right now. What we do there is we have complete flow. We have customers coming in, partnering with us. And we have peers coming in, partnering with us. And some of the areas where we are not participating, we are working with them right now. and that gives us a great advantage if a customer wants to validate a new scheme, they come and work with us right there. That kind of helps us. So we saw that early. We formed a packaging team and this integration flow really helps us right now. The two big influx in what is happening right now is bonding for sure. The other one is panel. Really look at those. In the bonding areas, we can see we have partners with the Bessie. And the panel area, we thought about it even 10 years back or 7, 8 years back. There's a Tango system panel. We occur to the company right now. On the top of it, we are developing multiple products in panel right now. Since we have a display business, for us, it's much easier. We have bigger tools to do the panel right now. And metrology, other area I focus on.

Shane Brett, Analyst — Morgan Stanley

I guess my last question would be, I look at this industry and think with market conditions being so tight you have a once in a generation opportunity to raise prices and improve gross margins I know this is coming What's your view on that?

Prabhu Raja, Other

If you really look at those in terms of margin I think we ever since Gary joined the company we increased 7% margin right now I think we are on the right track right now I think we think a little different I had many questions from you guys. A, one time, can you increase the pricing and all? We think a little differently in this space right now. Right now, I talk about, we believe in creating the value for the customer and sharing the value for the customer. That's what we believe in. Really look at those. I talk about complexity. I talk about working with the customers much earlier, three plus notes I had. This whole customer, what they care about is, device performance, yield, reliability, time to market. I think what we do is we partner with them, work together with them to address those challenges right now. Three notes ahead. This is creating a lot of value to the customers. They get more chips, they get better chips. They are open to share the value right now. We see that already. We see that open to you. You see that complexity is happening where we have high share areas. and partnering with the customer much earlier. And we have a control on the value, what customers can share with us. I think that's the way we think about sharing the value. So what do you do with the value? Something for the margin and also R&D investment. We want to increase R&D investment. Sometimes we want to return to the shareholders in some areas. That is on overall value sharing. But let's not forget that. we have a big, big focus on cost. We talk about cost through technology, cost through innovations. How we can cut down the overall cost. We are working on both fronts. I'm very confident not only we increase the margin over the years, I think it will continue to incrementally increase the margin over the years.

Shane Brett, Analyst — Morgan Stanley

Great. Well, on that positive note, that brings us to time. Thank you, Dr. Raja. Thank you.