Applied Materials Inc (AMAT) June 2, 2026 Conference Transcript

All right. Oh, too loud. Okay. Good morning. Welcome to the Bank of America Global Technology Conference. Vivek Arya from Bank of America's Semiconductor and Semicap Equipment Team. And really delighted to kick off the semiconductor part of our Global Tech Conference with the team from Applied Materials. I'm really delighted to have Bryce Silf, the Chief Financial Officer. Warm welcome, Bryce.

Good morning. Thank you for having us, Vivek. Glad to be here. Yes. Thank you so much for joining us again.

And I'll go through my questions, but please feel free to raise your hand if you would like to bring up something on your own. So, Bryce, I guess, understatement that very exciting times in semiconductors, you know, every day you wake up, there's like some more news about demand growing. Maybe just, you know, walk us through your state of the union.

Right at the start of the year, Applied was looking at a growth rate of 20 percent in your semisystems business. you upped it to 30 percent where have been kind of the incremental growth drivers in the near term and then we'll talk about you know what what you're seeing on over the horizon sounds good vivek so state of the union the union is strong uh we increased demand you know and we increased our forecast as you uh highlighted there to over 30 percent growth for our semiconductor systems business and that was an increase over a prior quarter as we saw new orders coming in from customers. And no surprise, at least relative to the news flow, we were just chatting about incremental investments that are being announced across the ecosystem. I think what's different about what's happening today is people can really connect the dots between the demand function of AI. Our companies are using AI. We're deploying it in multiple ways. People are using it personally. So when they hear the cloud service providers talk about hundreds of billions of dollars of capacity ads to drive the compute behind AI, nobody's surprised. They can connect the dots to the demand, and that's certainly what we're seeing in our business. We talked about how leading-edge logic is growing very strongly. We talked about how DRAM is growing very strongly, and we talked about how advanced packaging, which is used to build the connected systems of all these components and drive the AI usage models, that's also growing very strongly in our business. And those things, we received new orders in the last quarter. Customers are being more and more creative about finding clean room space and options to expand their output. That translates into new orders from us and then translated into a higher growth expectation for this year. And I know we'll talk about this, but the customers are working closely with us to give us a good perspective of what their growth plans are over the coming years. Then in our services business, we had previously said our services business would grow in the low double-digit growth range. I think the easy way to think about this is there's two drivers of growth in the services business. One is the installed base of equipment, and the other is the new products that we announce and create each year, which grows the value of each tool in your installed base. Because the systems business is shipping more and more tools, the demand we just talked about, the installed base for the services business grows. And so we see that happening. We increased our expectation for growth in the services business to mid-teens, and we said actually this year will be a little bit higher than mid-teens because this year gets It's a plus also from the increasing utilization across the entire ecosystem. So as the DRAM fabs went from whatever utilization they were at to 100% utilized, and as leading edge logic goes to 100% utilized, and even the ICAPs, the mature nodes, utilizations improve, that helps drive some uplift for the services business. So really a strong signal across all of our businesses as we look at the demand type today.

If we were to try and dissect this upgrade of the growth rate, does any specific area stand out, Bryce? Whether it was FoundryLogic or DRAM NAND or Advanced Faxing, did something really start to grow much faster than what you had thought before?

Well, I think in the short term, it's hard to separate leading edge logic and DRAM. I think both of those are a very strong signal. And we didn't call one higher than the other. I guess as we look at factory projects that have been added over the last quarter, this is more longer term signal. I think there's more DRAM ads than there are logic ads. But at least the way I think about it, and everybody can start to dissect the architectures of newly announced server systems and system platforms, but these things are traveling together. You've got a significant amount of leading-edge logic between GPUs, CPUs, and accelerators paired with different memory types in a system, and so those things are being driven together. Yeah. Got it.

And what are the main areas of constraints, you know, that you see? So, you know, theoretically, what can make, you know, this X percent growth rate, you know, more than X, you know, right now? Why can't it be 35 or 40 percent? Are you limited just by clean rooms? Are you limited by your ability to produce new tools, the ability for the customers to like what are the main areas of constraints right now?

Yeah, I think the primary, we said that demand right now is metered by clean room space. And I think that is the right way to think about it. We've been talking about getting an eight quarter rolling forecast from our customers, which we consolidate and give to our suppliers. And we've talked about Vivek, how we added capacity, our own manufacturing capacity. So I think with the right signal, we can increase our output. and we're not the limiter from that perspective. We certainly have manufacturing capacity available. And if we give our supply chain a lead, we think so. What's really the governor here? The governor here is it takes three or four years to build a fab. And so you need a pipeline of fab projects, which there is a pipeline of fab projects. But if you want that to go even faster, it takes some time to increase that pipeline. And I think that's what all the customers are working on. So in the short term, it's really clean room, making more clean room available and that's what in the in this year that's what we saw some of the customers doing is even optimizing the clean room they do have available yeah actually i wanted to pick up on that when you say optimizing the clean room are they upgrading to tools you know sooner than they would have otherwise like what what does optimization mean to apply yeah i think uh we saw a number of different example types of literally just optimizing clean room floor space so you might change layout, upgrading tools that were underperforming, upgrading process technologies from one node to another node. Those are some of the examples we saw as well as even some utilization of 200 millimeter space for 300 millimeter purposes. We see all of these things going on in the ecosystem.

Gotcha.

And then, you know, you mentioned there is a eight quarter kind a rolling visibility uh what is your normal visibility like how should we put this eight quarter in in context of what applied has seen historically yeah it's it's great because i first i want to say that we have uh we always actually have a little bit longer than that so we know just like uh people here know uh because you see public announcements we know all the fabs that are being built uh by our customers uh although it's more precise for the largest customers than it is for example of some of the smaller customers in china right but uh you have an indication of what is out there four years from now five years from now three years from now that goes into the fab tracker that we talk about and the like but when we start talking about eight quarters what we get when from our customer when you go to eight quarters is you get the precise process technology the actual tool recipe that they're going to deploy which tells us the types of tools the number of tools and the specs of those tools that will be needed for that particular project as well as when they need to land and we install those tools also so we have to have install tool teams available to do that work so it's really connecting the dots at a much more precise level and then when we get that from our customers we consolidate that forecast turn it into a forecast that we can provide to our suppliers our 2 000 suppliers so uh you know adding up all of if you think about adding up tsmc and intel and samsung all of our large customers and they all might need power supplies and you're aggregating that and saying these are how many power supplies we need for the company specific types and translating that to your supply chain so that they can put the capacity in place to deliver that product. That's really the purpose of getting that type of visibility, and I think it's working very well for us at this point.

Got it. So, you know, historically, the semi-cap industry and then, you know, CapEx has kind of grown, you know, 8% to 10% a year, and now the industry is at a place where, you know, you could have multiple years, you know, conceptually on 20%, right, 25% plus type of growth rate. What are you doing differently from an operational perspective to make sure that you're able to support customers for that kind of growth?

Yeah, I think since COVID, you know, applied materials and I'm sure a lot of companies in the ecosystem has been strengthening its manufacturing from a regional diversity perspective and also the supply chain from the same perspective. So we have more suppliers, we have more regional diversity, we have more regional diversity in our manufacturing, and more raw capacity in our manufacturing. Those are definitely some of the things that we've been doing, as well as working more closely with the customers than ever before on what their plans are, and what the scenarios are for the business. But I think, too, that since these are long lead investments, when we were evaluating our own capacity additions over the past few years since the business is profitable you are sort of looking at what would be the max output required and you don't want to miss capacity solutions if that max demand signal occurs so you have to balance that in your planning which comes to scenarios now you know did anyone forecast what's happening today exactly no but you know, from a capacity planning perspective, you want to make those things possible. Got it.

Now, specific to, you know, the growth rate for this year, how much of that do you think is share gains? How much of that is just kind of broader, you know, industry growth? You know, last year, there was a share shift, right? And just the SAM kind of, you know, moved against applied. This year, do you think kind of the addressable opportunities move towards you? So how much of this is share gain versus just broader industry?

Yeah, this year, the mix, I think there's two things going on. This year, the mix is certainly friendly to apply it, as you said. Having leading edge and DRAM and advanced packaging where we have leading positions as process equipment suppliers, that's going into our wheelhouse, as you might say. But at the same time, even if that mix wasn't there, we expect to grow share in leading edge logic. And we've talked for several years about how the transition to the gate all-around transistor and to the newest wiring techniques will add share for applied materials as we've got solutions in those spaces. We have been effective at growing share in DRAM over the last decade, and we expect to continue to grow share in DRAM. Some of the construction techniques used in leading-edge logic are being deployed in DRAM, and that's helping us add share there. And then in advanced packaging, We have a leadership position in advanced packaging, a lot of investment in advanced packaging. As we move from 2.5D, which is sort of lateral connection of chips, to 3D when you're stacking chips, Applied has been investing in a lot of different packaging technologies that will be used in that roadmap, as well as different substrates that may be used in that roadmap, like panel, like glass, different substrates. We've invested in hybrid bonding. We recently did an acquisition of an x-ray technology that will help us with evaluating the quality of those interconnects. We're in the process of another acquisition that helps us on the advanced packaging with fine line interconnects between devices. So we're really focused on that portfolio as a huge opportunity for the industry and a big opportunity for Applied.

One last question on kind of the broader market, and then we'll go to the individual areas. Historically, when we just look at the ratio of, you know, wafer fab equipment to semiconductor industry sales, that's kind of varied between, you know, say 12%, 13% to as high as 17%, 18%, right? So the assumption has been that somewhere in the middle, right, 15% is a decent long-term number. But this year, a lot of semi-industry growth is coming from ASPs rather than units.

So do you think over the next two, three, four years, years that this this will mix more towards units rather than asp because units is really what will drive wp right how do you kind of conceptually think about that you're right intensity it's a great question because at least for me i don't use that equation to think about it uh but to your point i think it was 14 ish uh percent last year if you use last year's numbers um and it is subject to movement because of the different ASP trajectories that we see but I like thinking about as you're sort of suggesting actually that what's happening is more units are being acquired and more important for applied materials more wafer starts are being required so if you think about for example DRAM there's 2.3 approximately million wafer starts of DRAM every month and when we look at the roadmap we expect to see three or four hundred thousand wafer starts of added capacity every single year uh in DRAM so I think you you sort of led in this direction Vivek the way we think about it is the actual wafer start output the capacity of wafer starts is growing at the strongest rate it ever had has for DRAM for leading edge logic and then the good news also is you have to connect those devices so that will lead to packaging factories and packaging equipment that supports that so um you know that indicator may or may not be the easy way of calculating equipment it might be look at the amount of factories that are being built look at the amount of wafer start increases that will go out and that'll give you an indication of the equipment business.

You know, you mentioned, you know, DRAM, you know, as you know, many investors are very happy to see, right, the strong performance of, you know, DRAM and a lot of memory stocks. But there is also kind of this lingering concern that how much of this is right cyclical. And so just theoretically, let's say if DRAM prices go down next year, do you think customers will be as motivated to add capacity or will they want to protect pricing?

What has happened historically first it's hard to picture that but i'm with i'm open to scenario planning so we can scenario plan i think that you know one benefit the equipment side of the business has is back to our discussion of what is metering the industry and what is currently the gate for the industry i think it'd be very difficult to argue that we're in a position where we have too much capacity and we've overbuilt capacity in almost a good way since it is metered you're sort of behind the demand curve from a capacity perspective certainly if prices go down in the end devices that will you know all the customers will recalculate their ambitions and their you know interest in how much capacity to add but right now the profitability is so significant that you know, I think they're really trying to figure out how can they maximize output over the next five years. Right.

And I would assume that, you know, as many of them are signing long-term agreements with their customers, right, they are also on the hook to make sure that there is some capacity, right, to support all those agreements. Absolutely. Right, agreements. Staying on the topic of memory, how has your content evolved, right, from the various versions of HBM 3, 4? And I saw, you know, last night Samsung is now starting to talk about HBM5 as well. So how has your kind of opportunity and content evolved in these different HBM generations?

Yeah, I think, you know, the way to think about it for applied materials is as you move forward on these HBM technologies, we talk about, you know, it increases the overall demand for DRAM. And it also, there's a trade ratio on the HBM DRAM where it was around three to one. So it takes, you know, three times the wafer dye area to make a DRAM device if it's going to be stacked. And that trade ratio is moving to four to one now with the newer generations of HBM. And so DRAM is already operating at full utilization. we're only adding more requirements onto DRAM so I think this just ups that demand signal even more strongly than where it was before and our customers we expect will be adding factories like we saw in the last quarter they'll be adding factories and you know telling us shortly with our eight quarter forecast that they'll need more equipment for those factories and so it's just it's just a, you know, since it's a great solution for the AI data center servers and the best memory for those, then it's an added demand signal for, you know, for us.

Got it. So I think Applied has mentioned many times that you gained 10 points of data on WFE share, right, over the last, you know, decade or so. What do you think helped to drive those share gains? And as you look at the next three to five years? You know, what can help, you know, maintain or expand that market share?

Yeah, I think it's what we've discussed is some of the same capabilities that we built in leading edge logic on the transistor side are being deployed in DRAM from an equipment capability perspective. And that's really what's helped the share gain over the years. And I think that roadmap continues so we talk about periphery io logic and other you know elements of the architecture that require those techniques i think that's what uh is helping us you know win positions in the forward uh d ram and you know we've said that uh if companies move to 4f squared that will be a share increase for applied materials as we have a stronger position in the 4F squared than even in 6F squared. And when they go to 3D DRAM, same thing. We expect an uplift in our share position in those because of the long lead work we've been doing with the companies on the architecture and the equipment solutions.

Do you have some sense of timing of when we move to 4F squared or 3D DRAM?

For that, we just say you should talk to customers. So I think our customers, the roadmaps have been changing. They've been adding more 6F F-squared process upgrades in the recent. So I think each customer has a different expectation for when they would deploy those.

Got it, okay. On advanced, you know, packaging expected to grow over 50%, right? Even faster than the overall. So if you look over the next two, three years, are there certain new emerging areas in advanced packaging where you think Applied might be a better position to participate?

Well, definitely. So on the 3D stacking in general, Applied has technologies that will be deployed by customers. And then I mentioned a few of them a little bit before in highlighting that we're building a portfolio of solutions for packaging. So one acquisition that we're underway on right now, for example, is for fine line interconnects. you can think of at the substrate at the top of the substrate between chips that are being interconnected. The x-ray acquisition that we did is to examine the quality of interconnection of micro bumps between stacked chips and allow you to see things that we couldn't see before the industry couldn't see before. And we've been working for years on hybrid bonding. We've been working for years on panel technology. We have lithography technologies that we're deploying in different packaging solutions. So we really feel like we have a strong portfolio and we're examining the evolution of larger and larger systems with more and more chips, which create all these different materials and equipment problems like warpage, like thermal management, hotspots, just the ability to get the signals on and off the chips and what technology should be used for that. Applied Materials is investing in a portfolio that we think will be very strong as that roadmap continues to develop. And we think it's a huge growth area for the industry.

On the Foundry Logic side, one very large customer, of course, has been driving most of the industry growth. Are you starting to see any sense of diversification?

There's an emerging new player in in the industry um right have you started to see uh see anything new there like how do you look at the diversification over the next few definitely uh we said in our earnings call i think that we're shipping to four customers today uh on leading edge and that is becoming more and more diverse and robust and of course that's a great thing for the industry i think uh competition in the foundry business will help drive the roadmap and you know from an equipment and a factory perspective, it drives more solutions. So I think that's a good thing. And we do see interest from new customers.

Okay. On gross margins, Bryce, you know, there is always this kind of good problem to have where your customers are making so much more money, right, by way of gross margin. So what levers does Applied have to kind of exert your position in the industry, right, and expand gross margins, right? I mean, you're getting towards 50% now. How much more upside is there?

Yeah, investors might notice that we've started reporting our gross margins by reportable operating segments. So you can see our equipment business has 54.8% gross margins, and that's improved quite a bit over the last couple of years. Vivek, I know we've talked about, you know, we've been working on our pricing process, building a robust discipline process where we set targets for every tool. We set, we base it on our value analysis of what the tool is providing and so we we feel like uh we've done a very good job of making that a more robust process for the company and that's helped us with our margin uplift and i would just say that in general applied materials strategy is to work with customers on the forward technology so when we think about epic and our platform that we're building the lab that we're building in sunnyvale where we've announced, you know, 10 customer arrangements at this point where we have some of the top universities and all the top customers partnering with us on that platform to work on collaboratively, work on the furthest out technologies together. that's been our strategy and and so what that helps you know that helps you connect the dots as as um you know those portfolios are introduced our gross margin we expect will increase over time because that long lead work that you're doing is on the most difficult technology problems for those customers and so that's been our strategy and we're increasing our capability of pursuing that strategy by building the Epic platform and having the customers join us and working together. And the simple way to think about that is, you know, your core, your newest tools and your newest capabilities and your top researchers are all there.

And if we can have the customers join us there and bring their architectures and their most difficult problems, then we expect to speed up progress uh in that way all right you know you raised the growth on your uh applied global services ags business towards mid-teens do you think there's a point at which you know you see the growth rates on the product side and the services side converge or this is just a long-term kind of secular you know grower and um right so and it's not not you know it's counter-cyclical to some well even when it was low double digits you know at that point it was probably ahead of where the equipment is.

So we do think it's secular, if you will. We think the underlying drivers are an ever-increasing installed base, and those tools tend to be long-lived. So when you put new tools in place, those can be tools that are serviced between 10 and 30 years, literally. And so it's long-lived from that perspective. And then we continue to announce new products in the service space. Most recently, a lot of these products have been AI driven where we're using AI to help make predictive recommendations on maintenance and upgrades to the tools that help the customers with output. And so as we make new service product announcements, that grows the value of each tool in the service space. So we do think that is secular and goes back to the, you know, sort of the secular growth in the equipment itself.

One question on China, Bryce, you know, it seems as if that exposure for the industry has kind of settled in this 25-30% type of zone. Do you think that that's sort of the run rate from here? Or you think that it will actually come down over time?

Well, when you say it like that, that makes total sense to me because I think China had an ambition to be self-sufficient from an equipment perspective and a semi-cap perspective. And the China share of global semi-device demand is around 30 percent. So if it settles in that zip code, that makes sense from a long-term perspective to us. Our most recent quarter, I think, was 24 percent from a semi-systems and services business, so not counting display, so 24 percent. And that's about the level we'll operate in the very short term. And then as the leading edge grows so quickly, it will probably be a little bit smaller as we get out a few quarters, but that's the right zip code.

Got it. And then on just capital allocation, you know, use of cash, it's interesting over the last decade, we have seen analog companies in semiconductors, right, get very high multiples because of their free cash flow, you know, generation and returns. Although I think for semi-cap companies, it's actually not as well appreciated, right? You have also done a lot of buybacks and retired a lot of cash. So how do you think about capital allocation? Do you think there are opportunities to do M&A, accelerate your growth? Or do you think it's still return of cash that will be the primary use of?

Yeah, I definitely would not say return of cash is our primary objective. Our primary objective is to grow the business. When I think of it, Vivek, our business has a greater than 30% return on invested capital. I expect that to be growing. And so I think, you know, all the finance people here will be thinking well if you have that kind of return on investment capital it probably suggests that you have more projects that you could do at a good return and that's certainly the way we feel uh we're building more lab space we expect to be able to add more projects that will be profitable for the company so the first priority is to invest in the business and grow the business and then to your perspective to your point uh there will be significant cash flow to distribute to shareholders and no change in strategy there. We do that through our dividends, which we've grown nicely over the last four years and our buybacks.

Are there opportunities to do tuck-ins, right? Improve, you know, there's a lot of talk of adding more AI-like capability, right? And kind of, you know, different parts of the business. Are you seeing any of those opportunities come up?

Absolutely. I mentioned two acquisitions that we've done just recently. So I think we're active in that way. And those will be, you know, when we do those, that'll be to add to the portfolio and add to our portfolio capabilities. You know, Applied has a very interconnected portfolio. And that's what we think helps us work out on the edge of the future technology with our customers. We'll continue to build on that. Great. On that positive note, thank you so much, Bryce.

Really appreciate your time.