Applied Materials Inc (AMAT) September 9, 2026 Conference Transcript

Okay. Welcome. Good afternoon, everybody. Welcome to the Goldman Sachs Community Open Technology Conference. My name is Jim Schneider. I'm the Secretary of State Analyst here at Goldman Sachs. It's my pleasure to welcome Applied Materials and CEO Gary Dickerson to the stage today. Welcome, Gary. Thank you, Jim. Glad to be here. I think it's fair to say that the view of the market is pretty certainly different than we were on your stage last year at this time. Clearly, we see almost everything being constrained around AI you commented on much stronger demand visibility that you're seeing from your customers maybe help frame the level of demand and visibility you're seeing right now either in terms of a duration customer forecast or size of your backlog yeah as you said you know AI especially data center is an enormous driver for our business one statistic I thought was interesting if you look at leading-edge foundry, you go back a few years ago, smartphone wafer starts were four times larger than data center.

Today, they're one-to-one. And in a couple years, it'll be two-to-one data center versus smartphone. So for sure, AI and data center are by far the biggest drivers. And relative to the technologies that are critical for AI data center, the fastest growing segments, 80% of wafer fab equipment growth this year is leading foundry logic DRAM including high bandwidth memory and advanced packaging again that's 80 percent of the wafer fab equipment growth this year and we see that same mix in 27 and going forward and then relative to our customers we've been continually increasing our revenue forecast for 26 in February we said greater than 20 percent revenue growth. In May, we said greater than 30% revenue growth. Now we're approaching 40% revenue growth in what we've communicated here recently. And both our near-term and longer-term outlook has been growing. One of the big drivers this year is agentic AI. So you have agents consuming tokens and compute. And that's driving increase in our longer-term WFE forecast, especially around CPUs and DRAM so we've seen that continual increase and then relative to all of our discussions with customers Applied is in a great position because all of those fastest growing segments of the market are areas where Applied has clear leadership and we're gaining share through those inflections so customers want to make sure that from an operation supply chain capability standpoint, we're ready. Our trained service engineers are ready. So we do have this eight-quarter forecast, rolling eight-quarter forecast, and longer-term commitments from our customers. And again, that has continually went up as we've progressed through the years. And we even have discussions with customers all the way through 2030. My view is AI compute demand is going to remain very strong for many years going forward into the future. I look at Applied Materials and the way we're using AI in innovation, product development, operation supply chain. We have thousands of engineers in our field operations, service and process engineers, and it's just a game changer. And then for me, what is most important, we will drive tremendous productivity improvements inside applied materials, but way more important than that is our ability to bring multi-billion dollar products to market faster and also very valuable service innovations to market faster. So I think, again, AI is the biggest technology inflection I've ever seen in my life. If you look going forward with agentic physical AI, again, you're going to see increased compute demand and the need for compute innovation, tokens per second per watt, has also never been greater. The position for applied enabling these inflections is also a great tailwind for the company.

Great. Now, Gary, you've seen a lot of cycles over your career for this industry. How does the current demand environment compare with past circle cycles you've seen over your career? And is there any sort of warning sign at all that rhymes with past sort of cycle peaks that you've seen?

Yeah, so I think it's pervasiveness of demand. I mean, I look through my career. I'm an engineer, been innovating at three different companies in the industry. I've never seen a driver that's as broad and pervasive as what we're seeing today. I mean, certainly when we went to mobile social media, everybody has a computer and a camera in their pocket. You know, that increased the demand. But AI is a whole different level of demand driver. So when we look out for a number of years, again, it's just so disruptive and fundamental to every single industry. my view is that, you know, companies that are not adopting this technology will be left behind. And so, and the growth, Agentic is adding additional WFE growth going forward. Physical AI in the future will add more compute demand going forward. And I don't really spend time worrying about macro effects over a near term. Again, for me, it's very clear this compute demand is going to be strong, secular growth over many years going forward.

Now, your direct customers are incredibly profitable right now, as profitable as I've ever seen in my career, certainly. But some of your customers' customers who are driving the ultimate spending on chips, they're spending well over a trillion dollars run rate at this point. That appears to be moving higher. But many of the same companies are tapping capital markets just to sustain that little current level of CapEx. So how do you think about the ultimate returns for the AI value chain as you see it big picture? And do you see any kind of systematic risk that could kind of cause a pullback in demand?

So I think the value creation, to me, is crystal clear, as I mentioned, for Applied. We're bringing to market products that are worth billions of dollars. uh so that time to market is extremely high roi another area that i would say that we're getting tremendous pull higher than any point in my career is not just for performance innovation again applied as the leader in material innovation and all of these fastest growing parts of the market being driven by ai but the other and that's critical for our customers for design wins so we're co-innovating with them on all those architectures for generations out in the future. The other big driver, larger than I've seen, is in yield and output innovation. So our customers, as you can imagine, every incremental chip that they can ship is worth an enormous amount of money for those customers. So if we can innovate in our services, and that business is growing over 20% today, year over year. Margins are up 180 basis points in that part of our business. And so innovations that we're driving there for predictive models, for preventative maintenance, for more output, or chamber matching, where I can get more good chips output per wafer, those are enormously valuable for our customers. So, again, for me, what we're focused on are driving products to market faster that are worth billions of dollars, and we're doing that. It's very, very clear. Same thing with these very high-value services. That 20% growth in services over the last year, again, we see the opportunity to create more valuable services for our customers because the value of the yield and output is so high, in some cases, if we go to a different service contract, we can more than double revenue per tool for those innovations. So, again, for me, that is a complete game changer in terms of applied position in the industry, the value that we create for our customers. And, again, I have to believe that everybody else is looking at this in a similar way. So as I said earlier, if you're not implementing these technologies, you will absolutely, by the way, I hope our competitors are not doing this. They're going to be left behind. There's no question. And so relative to financing or any of those types of dynamics, what I look at more so are the fundamental value creation drivers. As you said, the profit pools in this industry are larger than they've ever been because this technology is more disruptive than any technology that we've delivered in the past. And so, you know, I think this industry, we create miracles if you look at the technologies that we've been able to deliver in the past that have had enormous impact. this is a whole nother level. So I frankly, I don't worry so much about what you just talked about. I think that this is so fundamental, the value creation is so significant that that compute demand is going to increase significantly going forward. Now, are there going to be periods of time where it's not growing as fast for whatever type of a macro effect? That could happen. But I think the trend over a number of years, to me, is crystal clear.

Now, as you said, AI permeates everything we've talked about in this conference. One of the things I'd like to do is explore how companies are looking at AI internally. So you just raised that question. So maybe give us examples of how Applied is using AI internally, and are those mostly kind of cost efficiency and efficiency-led kind of applications or using it to drive higher revenue for the company in some cases?

By far and away, so if I look at doubling the size of applied materials over the next few years, we definitely, we are incredibly clear in all of the swim lanes that we're driving relative to AI implementation in the categories I talked about earlier. By far and away, most important to me is top-line growth, bringing products to market that are worth billions of dollars. You know, one example is in coding. In some of our products, there's a high software and algorithm content. And, you know, we're driving tremendous productivity in that part of the product development. So 50% improvement in productivity has nothing to do really near term with headcount, it's all about bringing those multi-billion dollar products to market at a higher velocity. So we're using this technology in a number of different areas, hardware and software. There's no question that the value is tremendous. And I mentioned the value of yield and output innovation in services. So when I'm meeting some of our top CEOs every month, You know, they're racing for tokens per second per watt in their new chip and packaging architectures. That's really important. But they're also phenomenally focused on increasing output of good chips per wafer and wafers through the use of these kinds of technologies. In our services, we have over 37,000 chambers in the field today connected to AI-enabled servers, most of them connected remotely. And so, again, our ability to, there's a massive amount of data there, our ability to use AI with predictive models to increase output and good chips per wafer is off the charts valuable. And as I said, that business is growing. It has grown in the last year over 20%. The value there is higher than ever. And in some cases, we're improving the hours per task in order of magnitude. But for me, what I care about is I can accelerate scaling these high-value yield and output services faster for top-line growth. So we will add headcount, but we're going to grow revenue many times faster. I understand.

Okay, I want to ask just briefly about U.S. semiconductor capacity because obviously the U.S. has lagged the world in the last 20 years plus, but it seems like that is starting to change a little bit with increased investments from TNC in Arizona, Samsung, potentially Intel. So maybe speak to your market position specifically in the U.S. market. Do you think it basically matches what you see globally, or is it higher or lower? Maybe talk about why.

Yeah, so I think relative to market share, The most important thing for us is how we're positioned in the technology inflections. So Applied is the leader in Leading Edge Foundry. We're working across all of these different companies. We have the most valuable enabling portfolio, whether it's in transistor inflections, backside power, you know, all of those different areas. In DRAM, one of the big inflections there is in higher speed DRAM. So adding transistor innovations in the periphery to get the data on and off the chip, that's an area where Applied has extremely high market share. And, again, that's another inflection that's important for our customers. And then packaging, multi-chip connectivity, you know, that is also one of the fastest growing segments of the market or overall semiconductor market. That's growing over 70% this year for applied materials, you know, kind of midpoint between $2.5 or $2 and $3 billion relative to the size of that business. Extremely high growth rate. So for us, it's really more of our positions in enabling those really important AI data center inflections than it is whether it's U.S.-based or Asia or any other location. Now, the one thing I would also say, though, that is a very big positive for us, as customers are moving into new locations, that is a tailwind for our service business because that infrastructure is not set up in those new regions. And also, the level of experience to ramp yield very quickly is less in some of those new regions. So I would say that we're well-positioned in terms of those technology inflections, and the regionalization is a tailwind for us in our service business.

One example I want to ask about is Elon Musk and his being more vocal about building TerraFab in the U.S. Can you talk a little bit about the extent of your technical and commercial collaboration with TerraFab, sort of what you expect your market position to be with TerraFab as it ramps, and then maybe how big an opportunity this could be for you over time?

Yeah, so I'm not going to talk about – I have a lot of respect for Elon, very smart person. I'm not going to talk about any specific customer. What I would say is that we're engaged with every one of these companies. They're all in a race for AI compute leadership. So every technology node, whether it's 2 nanometer or A14 1.4 or, you know, different DRAM technologies, I said, you know, adding the transistor innovation in the periphery for higher speed memory, advanced packaging, multi-chip connectivity. We're engaged with every company. Applied has the broadest, most unique portfolio in enabling those technical innovations. Applied is by far the leader in deposition for all of those different segments and essential for customers in bringing those new innovations to market. So we're in deep, high-velocities, co-innovation relationships, co-creating those architectures. Whether it's a new customer or an existing customer, the depth of the relationships are very strong. When you have a new customer, the most important first thing is the R&D relationship to create competitive technology. So, you know, every single company, we have those deep relationships in all of those different areas. and then how that transitions into high-volume manufacturing depends on how fast you can create a competitive technology. And then it's not, as I said, just about performance. For design wins, you need performance and yield.

And again, when you have new companies that are entering into these markets without that level of expertise, it creates an even much stronger pull, not just for our innovation teams but also for our yield and output teams great and then maybe last regional question on China because this has been an area where you know there seems to be like a resurgence of capex on the part of those customers but you export export controls have obviously put a damper on how much of that market you can address you've talked about that market now being expected to be up for you in 2026 maybe help profile for us how do you expect that level of structural growth in China for applied and, you know, in light of all those kind of export controls you're subject to?

Yeah, so China really for us is mostly an ICAPS. We call ICAPS market, IoT, communication, auto power sensors, more consumer electronics. And as I mentioned earlier, 80% of the WFE growth in 26, we think the profile is similar in 27 going forward, is really driven by AI data center, leading edge foundry logic, DRAM, high bandwidth memory, advanced packaging, those segments, for us, we're seeing growth this year in China and overall ICAPs and gaining a little bit of share in the areas where we can compete inside of China. So we think longer term, if you think about the fastest growing segments of WFE, again, it's still going to be driven by AI and data center, the segments I described earlier. We think ICAPS grows at kind of mid to high single digits over time, but not as fast as some of those other segments. And what we're seeing near-term, even in ICAPS, the growth there is being driven by power in data center, photonics, that's adding some incremental growth in ICAPS. Next year, we see that business also growing a little bit faster than what we're seeing this year. But still, growth rates are slower than what we see in data center. And, you know, again, one thing that I've seen over the last few years was that smartphone ratio to DRAM, four to one, going to one to one and two to one. The data center versus smartphone, that's going to be the driver for the next several years.

Yeah. Okay. So maybe shifting to a discussion of your end markets for a moment. I know you don't like to give quantitative market forecasts for WFE growth, but I'd love to get your qualitative perspective on 2027 if I could. You've seen, obviously, very robust demand visibility, as you talked about. One constraint you've mentioned on your conference call back in August was clean room space. That was a constraint this year. Talked about it being a constraint next year. But this year, your customers kind of overcame that and accelerated that space completion. So, directionally, how would you sort of handicap the chances of growth in 2027 for you being better than in 26?

So, growth in 27 will be strong. Again, compute demand is increasing. I mentioned, you know, agentic on top of what we had been forecasting previously and physical AI going forward. So, 27 is going to be strong, and beyond 27, growth is going to be very strong. So, I'm not going to give a specific number for 27 at this point. But 27 is going to be a great year for applied.

Got it. But you see growth into 2028 as well.

You know, again, I just believe compute demand, this technology is going to transform every single industry. Compute consumption is going to keep going up. Again, you have a genetic adoption where the compute is being, compute demand is being driven by agents in addition to people, and then physical AI on top of that going forward in the future. So I just think that compute demand is going to keep going higher.

Now, specifically on memory, that really appears to be leading growth in the industry, at least short term. Do you see that relative strength continuing into next year, or is there a point in time where you expect, say, leading-edge foundry or one of the other areas to sort of go faster?

So 80% is in the areas I talked about, including both of those segments you just described. I think longer term, those are going to be two of the fastest growing segments. I'm not going to give exact numbers here today, but both of those areas are, if I thought about what are the areas that are going to grow the fastest, there's no question that Leading Edge Foundry is going to grow at a very high rate going forward. DRAM will also grow at a very high rate going forward. and advanced packaging, the multi-chip connectivity is one of the biggest areas of innovation in the entire industry. That's also going to grow very quickly. So I don't know why I want to handicap one versus the other. They're both going to be in that top tier of growth, those segments. And again, I would say ICAPS, that is not as exposed to the AI data center growth. So that will be kind of mid to high single digits. those other markets will be growing at a faster pace now advanced packaging you just mentioned that's an area outgrowing the industry as well there's expanding range of competitive offerings from different vendors there you know what's your revenue currently for that segment and you know what are your expectations for the ramp and and sorry has the expectations for your ramp in that revenue stream changed at all in last few months so I think how you connect computing components is enormously important for the industry so these system companies they would love to have the package the body size as large as possible as many computing components connected as possible at the highest I O density so you know I'm highly confident in the next three to five years, you'll see incredible inflections in this technology beyond where we're at right now. This is a really important race for AI computing leadership. So for Applied, that business has grown or is forecasted to grow over 70 percent this year, kind of midpoint between two, three billion dollars in terms of the size for Applied Materials. And I would say going forward, again, And I would put that in top tier relative to growth rates. Applied, that's one of our strongest segments from an overall market share standpoint. High bandwidth memory and 3DIC are the fastest growing segments this year. And that's, again, where you're stacking chips closer together for higher performance and lower power. And there will be tremendous innovations. Applied has this broad, unique portfolio. We just acquired a company in panel-level plating that will be a great return for us. We acquired another company with X-ray technology that's important for advanced packaging. Applied, our inspection measurement business is growing over 50% this calendar year. Packaging is an area where Applied has leadership in all of those process equipment technologies, but also we have unique technologies for yield innovation in advanced packaging, and that will be one of the fastest-growing segments for us going forward. There's no question.

Excellent. So I want to ask you a couple of product-level questions for you, too. On the earnings call last month, you talked about process control, that segment for you growing over 50% this year. What is it about that segment that kind of gets you so excited and gives you confidence in growth?

I love that segment. So, again, as I mentioned earlier, what's important for customers is winning inflections in computing performance and power. So that is something that every single customer, we have deep co-innovation relationships with their teams. But also, yield innovation is absolutely critical. For design win, you've got to have both. You've got to have performance at a certain level and yield at a certain level. Applied is the leader in the industry by a large amount in electron beam technology. That business is growing at a very high pace. We have very unique technology leadership and imaging, speed of imaging. And for material analysis, this is becoming more and more and more important. So both our E-beam technology and our optical technology are growing at a very fast pace, over 50% this year. I have very high confidence, especially with the products that we have in the pipeline, that this is going to be a very high-growth business for applied for a number of years in the future. And one thing I would say that's also unique for applied materials is the combination, innovation, the materials innovation in chips and packaging applied has strong leadership. If you think about what is enabling power and performance in a chip and package applied is much larger than our nearest competitor. Then we are unique in that we have this leadership in e-beam technology so we can drive not only performance innovation, but also yield innovation, and that combination is incredibly important because that also gives us visibility in terms of how to drive innovations in our process equipment at a faster pace. So that combination certainly as a growth driver, 50% growth in revenue, great growth driver, it's going to be a great growth driver going forward, but that combination also is unique for our entire portfolio.

Okay. I want to ask a couple of financial questions, but before I do that, I want to get an update from you on Epic. Sure. Because that's an area of customer collaboration. Obviously, you're trying to be close to your customer to drive, ultimately, revenue and market share. How are investors going to know that it's working?

So Epic, again, as I mentioned, every customer, they're in a race for AI compute leadership. And it's all about time to market in bringing those new technologies to market. Innovations in advanced foundry logic. Innovations, I mentioned the CMOS transistor innovation for high-speed memory or advanced packaging innovations. And with Epic, this is where those architectures will be created. So bringing our top customers and other ecosystem partners together to innovate to create these new architectures is incredibly important for our customers and for applied materials. For us, it enables us to be designed in with our systems and our advanced services for yield innovation. As those new architectures are created and adopted in high volume, it gives us great visibility. We're co-creating these architectures for generations out in the future. So we have tremendous visibility in terms of where to invest, what is going to give us the highest returns. And for the customers, it's all about design wins. their ability to bring these new architectures to market that give them an advantage in tokens per second per watt and then being able to ramp faster than their competitors. So that's really the value for them. And we have so deep relationships with every one of these leading customers, deep relationships to co-create those architectures going forward.

Got it. Okay, then, one investor debate that I hear a lot is pricing and the ability for you to price the value you're creating in the market. Historically, that's been difficult because you've got a concentrated customer base. Maybe talk to, but I think some of your customers have publicly stated that they see tool costs rising. So maybe help us understand your ability to raise price both in the short term and the long term, the impact of that on margins.

Yeah, so I think that we're in a position where the value we're creating is higher than ever in performance, and I also mentioned in yield and output. So if you look over the last year, we've increased our semi-systems gross margin is in the mid-50s, and we've increased our gross margin about 190 basis points. I have very high confidence we're going to continue to drive that higher because the value in winning the race for these inflections for our customers is very high. And those profit pools are larger than they've ever been. So for us, for them, it's really about this co-innovation relationship, bringing those technologies to market, winning designs based on being first to market with the best performance and power. And then we also increased our services margins, 180 basis points in the last year. And there again, the value of yield and output innovation, as I mentioned, is higher by far than I've ever seen at any point in my career. And the good news is we have those over 37,000 chambers connected to AI servers. We're bringing to market many service innovations that are incredibly valuable. We're increasing revenue per tool, and we're increasing the margins. But you can imagine the incremental profit for our customers for every wafer and chip increase is off the charts valuable. So that's pulling those service innovations. And, again, it's all about the race for AI compute leadership, and we have tremendous value that we're creating there. So I have high confidence. We've been increasing margins, high confidence. We'll do that going forward.

Closing on M&A, this is something that's kind of come in and out of the aperture of applied over time. How are you thinking about M&A as a strategic priority? Do you see opportunities? Is it more important or less important longer term than it was before?

Yeah, I think that so, you know, in terms of we're going to generate a lot of cash. You know, we'll return 80 to 100 percent of cash to shareholders. I wish we could do more M&A but in the current geopolitical environment it's just not possible to do large M&A we have done, I mentioned in panel plating I think that was a great acquisition small acquisition we did recently the return is going to be great for that we did another acquisition with x-ray technology again that's going to be a really great acquisition for us so we're doing those smaller types of M&A. We've also made some strategic investments where we've had really good returns that strengthen applied technology opportunities. Hybrid bonding is an area where that is going to be a really important technology for compute innovation, higher I.O. density, and synergistic where we're combining a partner technology with five technologies from Applied Materials on an Applied Materials platform. So we're doing some of those strategic investments. We're investing in small M&A, but really most of the cash will be returned to shareholders.

Great. Well, I think with that, we are out of time. Yuri, thanks so much for doing this. We appreciate it. Thank you so much. Thank you, guys.