Applied Materials, Inc. (AMAT) 2024 Q3 Earnings Call Summary

Optimistic Highlights

• Record Revenues and Strong Results: Applied Materials achieved record revenues in Q3 of fiscal 2024, with earnings towards the high end of the guided range, demonstrating strong financial performance.

• Leadership in Semiconductor Equipment: The company has established clear leadership in process equipment, particularly in DRAM, and expects to benefit from significant advances in semiconductor technology driven by AI, IoT, and clean energy.

• Growth in Advanced Packaging: Revenue from advanced packaging product portfolio is expected to grow to approximately $1.7 billion in 2024, with a potential to double in size over the next several years as heterogenous integration is more widely adopted.

• Expansion of Services: Applied Global Services (AGS) delivered another record quarter, marking the 20th consecutive quarter of year-on-year growth, supported by double-digit growth in services.

• Positive Outlook for Semiconductor Systems: Semiconductor Systems sales were up 5% year-over-year, with strong demand in DRAM and high-bandwidth memory, indicating robust market demand.

Pessimistic Highlights

• Challenges in China Market: Revenue from China declined by 11 percentage points sequentially to 32%, mainly due to a decrease in DRAM sales, reflecting geopolitical and market challenges in the region.

• Foundry-Logic Sales Decline: Foundry-logic sales were down 4% year-over-year, indicating some softness in this segment despite overall strong performance in other areas.

Company Outlook

• Strong Q4 Guidance: Applied Materials expects Q4 company revenue of $6.93 billion, plus or minus $400 million, and non-GAAP EPS of $2.18, plus or minus $0.18, both up 3% year-over-year at the midpoint, reflecting continued growth momentum.

• Long-term Growth Driven by AI and Advanced Technologies: The company is well-positioned to benefit from secular growth trends over the longer term, driven by the increasing demand for chips and significant advances in semiconductor innovation.

Q & A Highlights

• Q: Can you speak to how your outlook for WFE in the second half of the year and for all of 2025 has evolved over the last three months? (CJ Muse, from Cantor Fitzgerald)

  A: We're seeing particularly strong pull related to AI and data center computing. Our forecast for $2.5 billion of gate-all-around related equipment in this fiscal year hasn't changed. We're enthusiastic about gate-all-around and the technologies we've talked about on the leading edge. (Brice Hill)

• Q: I wanted to dig into the China revenues a little bit. (Stacy Rasgon, from Bernstein Research)

  A: The 32% revenue from China is almost no DRAM to China. Our business mix to China declined to 32%, and we expect that mix approximately normal, which we call 30% for the next quarter. (Brice Hill)

• Q: Can you talk to your visibility as to when DRAM to China might come back? (Srini Pajjuri, from Raymond James)

  A: DRAM globally is very strong, should be a very strong year for DRAM. We expect investment in DRAM. Utilizations are improving, and we saw inventory positions improve at the vendors. (Brice Hill)

• Q: I'm curious if we should bake in the impact of any CapEx cuts that were announced recently at Intel. (Vivek Arya, from Bank of America Securities)

  A: Our outlook, we're not changing our outlook. We're still saying $2.5 billion on the leading-edge for gate-all-around in this fiscal year. We've had every quarter accelerating this year in the leading-edge. (Brice Hill)

• Q: Question is on foundry-logic, and perhaps you could give some color on the growth you're expecting into '25 driven by some of the new process nodes such as gate-all-around as compared to capacity. (Chris Caso, from Wolfe Research)

  A: Utilizations improve in every single end market this quarter and our expectation is for that to continue next quarter. No change to our expectation on absolute leading-edge investment, gate-all-around technologies. (Brice Hill)

• Q: I'm kind of curious about DRAM and NAND WFE next year relative to this year. (Krish Sankar, from TD Cowen)

  A: We do think that DRAM will put new capacity in place, so we expect investment in DRAM. NAND still remains fairly low, but we did see utilizations improving. We see prices improve. (Brice Hill)

• Q: It looks like you had some good solid growth from the services business again. Are you benefiting there from the utilization increases in memory? (Joseph Moore, from Morgan Stanley)

  A: Services business, very exciting for us. We grew 8% year-over-year in Q3, 9% is our expectation for Q4. Utilizations are improving across the whole system. (Brice Hill)

• Q: Wanted to ask about the advanced packaging. (Joe Quatrochi, from Wells Fargo)

  A: In our forecast, we highlighted that advanced packaging was $1.1 billion last year, should grow to $1.7 billion this year, and we highlighted that $600 million of the growth would come from HBM-related equipment. (Brice Hill)

• Q: I was hoping you could speak to gross margins and how you're thinking about profitability going forward. (Toshiya Hari, from Goldman Sachs)

  A: 47.4% gross margin for us in the quarter. We expect to make very gradual improvements as we work towards that 48%, and that would still be my expectation. (Brice Hill)

• Q: As we look at those companies that are pushing the absolute limits on advanced manufacturing technologies like 2-nanometer and 3-nanometer, what's the timeline for introducing these integrated solutions? (Harlan Sur, from JPMorgan)

  A: Heterogeneous integration is one of the biggest areas of focus for Applied and for the entire industry. We're in deep engagements, really multiple technology nodes, five, 10 years out into the future. (Gary Dickerson)

• Q: I want to follow-up on the China question. Looks like your China revenue has well past the peak around almost the $3 billion per quarter level. (Charles Shi, from Needham & Company)

  A: We had three quarters with elevated shipments that we described where we caught up on what was allowed from a DRAM perspective. Our expectation over time is that the ICAPS market will grow. (Brice Hill)

• Q: So, if I look at the past three years, past three 10-Ks, TSMC was your largest customer. Did TSMC cross the 10% threshold in fiscal 3Q? (Brian Chin, from Stifel)

  A: TSMC was a 10% customer in Q3 and we think obviously they're a large part of that leading-edge investment when we think about the gate-all-around technologies. (Brice Hill)

• Q: I was maybe a little confused on some of the history with ICAPS and the strength. Can you just relate that to how July played out? (Blayne Curtis, from Jefferies)

  A: In the quarter, we did see strength in both end markets, leading-logic and ICAPS. Leading-logic is accelerating every quarter this year and we said ICAPS is very strong and continues to be strong throughout the year. (Brice Hill)

• Q: Just a very quick follow-up for Brice. If you could give us an update with the progression towards that 48%, 49% gross margin target. (Mehdi Hosseini, from Susquehanna)

  A: The gross margin at 47.4%, we expect to make very gradual improvements as we work towards that 48%, and that would still be my expectation. (Brice Hill)