Applied Materials, Inc., Q1 2024 Earnings Call, Feb 15, 2024 - NasdaqGS:AMAT

NasdaqGS:AMAT

Michael Sullivan, Vice President of Investor Relations for Applied Materials, made several announcements and provided introductions during the earnings call:

1. Opening Remarks:

   • Welcomed everyone to the Applied Materials' First Quarter of Fiscal 2024 Earnings Call.
   • Introduced Gary Dickerson, President and CEO, and Brice Hill, Chief Financial Officer.

2. Forward-Looking Statements Reminder:

   • Reminded participants that the call contained forward-looking statements subject to risks and uncertainties.
   • Directed listeners to Applied Materials' most recent Form 10-K filing with the SEC for information concerning the risks and uncertainties.
   • Noted the inclusion of non-GAAP financial measures and provided guidance on where reconciliations to GAAP measures could be found (earnings press release and quarterly earnings materials on the company's website).

3. Calendar Announcement:

   • Announced that Applied Materials would host a panel at the SPIE Advanced Lithography + Patterning conference on February 26, 2024.
   • Mentioned that leading experts from NVIDIA, Intel, IMEC, and Siemens EDA would join.
   • Noted that there would be demo stations with new products and technologies being introduced at the event.
   • Stated there would not be a webcast and invited attendees to join in person in San Jose.

4. Introduction of Gary Dickerson:

   • Passed the call over to Gary Dickerson, President and CEO.

5. Transition to Q&A Session:

   • Passed the call over to Brice Hill for financial details.
   • Provided instructions for the question-and-answer session after Brice Hill's presentation.

6. Closing Remarks:

   • Thanked everyone for joining the call.

   • Announced that a replay of the call would be available on the IR page of the company's website by 5:00 Pacific Time.

   • Expressed gratitude for continued interest in Applied Materials.

Gary E. Dickerson, the President, CEO, and Executive Director of Applied Materials, provided several insights and updates during the Q1 2024 Earnings Call. Here is a detailed summary of his statements:

Opening Remarks

• Applied Materials had a strong start to fiscal 2024 with first-quarter revenue at the high end of guidance and earnings exceeding the guided range.
• The company's inflection-focused innovation strategy is delivering results, with five consecutive years of outperformance in the markets.
• Applied Materials is well-positioned as customers transition major new chip innovations to high-volume production over the next several years.

Market Environment

• The overall market dynamics are improving, with a reacceleration of capital investment by cloud companies, increasing fab utilization across all device types, and normalization of memory inventory levels.

Business Outlook for 2024

• Leading-edge foundry logic is expected to be stronger year-over-year, despite some project delays.
• ICAPS demand is forecasted to be slightly lower than 2023, with weakness in some end markets offset by strong regional investments.
• NAND revenues are expected to be up year-on-year, but NAND is projected to remain less than 10% of total wafer fab equipment spending.
• Continued strength in the DRAM business is anticipated, driven by customers ramping production of high-bandwidth memory (HBM).

High-Bandwidth Memory (HBM)

• HBM is a key enabler for the AI data center, with dies that are more than 2x larger than standard DRAM, requiring more than twice the capacity to produce the same volume of chips.
• Packaging steps for die stacking further increase the total available market.
• HBM made up only about 5% of DRAM output in 2023 but is expected to grow at a 50% compound annual growth rate over the coming years.
• Applied Materials' share of the DRAM market is more than 10 points higher than a decade earlier, and DRAM revenues were larger than its two closest process equipment peers combined.
• The company is well-positioned for future growth in HBM packaging, with leadership in logic technologies, DRAM patterning, hard mask solutions, and advanced packaging.

Gate-All-Around Transistors

• These transistors provide more than a 30% improvement in a chip's energy efficiency, particularly enabling for high-performance AI data center applications.
• The shift from FinFET to gate-all-around grows Applied Materials' available market by $1 billion for every 100,000 wafer starts per month of capacity.
• The company is on track to gain share and capture over 50% of the spending for the process equipment used in this new transistor module.

Metrology and Inspection

• Major advances in leading-edge foundry logic and DRAM are driving the need for more and better metrology and inspection.
• Applied Materials has developed industry-leading cold field emission eBeam technology that enables highly sensitive 2D and 3D imaging at up to 10x higher speeds.
• CFE systems revenue is expected to grow by a factor of 4 in 2024 and represent 50% of total eBeam system sales.

ICAPS

• ICAPS customers have invested about 10% of their revenues ($30 billion annually) in R&D to accelerate the roadmap for IoT, communications, automotive, power, and sensor technologies.
• ICAPS technology depends less on shrinking device features and more on new structures, materials, and integration approaches, which plays to the core strengths of Applied Materials.
• The company formed a dedicated team five years ago to focus on the needs of ICAPS customers, releasing more than 20 new ICAPS products and having a robust development pipeline.

Future Opportunities

• Major end-market inflections such as AI, IoT, electric vehicles, and renewable energy are still in the early stages of adoption.
• The technology roadmap for semiconductors is rich with possibilities but also incredibly complex.
• Applied Materials is uniquely positioned to address this complexity with its broad and deep portfolio of capabilities and products.

Innovation Strategy

• The company is innovating the way it innovates by driving earlier and deeper collaboration with customers and partners.
• An expansion of the long-term partnership with Leti focused on accelerating ICAPS innovation was announced.
• A new collaboration with MIT centered around next-generation power electronics was launched.

Advanced Services

• Advanced Global Services (AGS) has delivered 18 consecutive quarters of year-on-year growth, with revenue up 8% versus the same period last year and at a $6 billion annual run rate.
• A significant portion of AGS revenue is generated from subscriptions, with almost 17,000 tools under service agreements, up 8% year-on-year, and a very high renewal rate of over 90%.

Closing Summary

• Applied Materials outperformed its markets in 2023 for the fifth consecutive year and delivered strong results in the first quarter of 2024.

• The company is strengthening R&D collaboration with customers and partners to drive innovation and commercialization velocity, improvements in mutual success rates, and R&D investment efficiencies.

• Growing demand for advanced services is helping customers manage increasing complexity in their business as the industry scales.

Brice A. Hill, Senior Vice President and Chief Financial Officer at Applied Materials, provided insights and responses on various topics during the Q1 2024 Earnings Call. Here’s a detailed summary of his statements:

Opening Remarks

• Financial Performance:

  • Applied Materials delivered strong revenue and margins in Q1 2024.
  • Net sales in Q1 2024 were slightly down year-over-year to $6.7 billion.
  • Non-GAAP gross margin grew to 47.9%.
  • Non-GAAP operating expenses grew to $1.23 billion.
  • Non-GAAP EPS grew to $2.13.

• Segment Results:

  • Semiconductor Systems revenue was strong at $4.91 billion, including record DRAM and etch system sales.
  • Applied Global Services (AGS) delivered record revenue and its 18th consecutive quarter of year-over-year growth.
  • Display revenue was $244 million.

• Cash Flows:

  • Generated $2.3 billion in operating cash flow and $2.1 billion in free cash flow.
  • Distributed $966 million to shareholders, including $266 million in dividends and $700 million in buybacks.

• Guidance for Q2 2024:

  • Expected revenue to be $6.5 billion, plus or minus $400 million.
  • Expected non-GAAP EPS of $1.97, plus or minus $0.18.
  • Expected Semiconductor Systems revenue of around $4.8 billion, AGS revenue of about $1.5 billion, and display revenue of around $150 million.
  • Expected non-GAAP gross margin to be approximately 47.3% and non-GAAP operating expenses to be around $1.235 billion.

Question and Answer Session

• DRAM and China:

  • High shipments of China DRAM in Q1 2024 were approximately the same as in Q4 2023, with an increase of around $500 million.
  • Expectations for Q2 2024 are for DRAM shipments to China to remain elevated.
  • Over the year, China mix is expected to normalize from the current 45% to around 30%.

• Wafer Fabrication Equipment (WFE) Environment in 2024:

  • Expects DRAM to continue to be a strong market.
  • Expects NAND to improve from its low levels.
  • Leading-edge logic is expected to be larger as gate-all-around and new investments start to ramp towards the back half of the year.
  • There will be some digestion in ICAPS in China.

• Outperformance in 2024:

  • Applied Materials expects to outperform due to exposure to fast-growing markets and inflections growing quickly in 2024.
  • Not making a precise call on the size of the market.
  • ICAPS market and China-related ICAPS business won’t grow as much as in previous years.

• Gross Margin Impact:

  • Gross margin reported in Q1 2024 was 47.9%.
  • Underlying gross margin is approximately 46.7%.
  • Gross margin is expected to improve slowly through the year.
  • Targeting 48% to 48.5% for 2025.

• High-Bandwidth Memory (HBM):

  • HBM accounts for about 5% of industry wafer starts.
  • HBM die sizes are larger than non-HBM, driving up utilization and eventually equipment orders.
  • Customers are shifting some capacity to HBM to increase output.

• DRAM and NAND Market:

  • Utilization improving in DRAM and NAND.
  • Improvements in prices and inventory positions.
  • Technology advances will drive spending.
  • Spending expected to pick up.

• Advanced Foundry Logic Programs:

  • Schedule changes have been incorporated into Applied Materials’ outlook.
  • CHIPS Act delays are affecting schedules but not expected to change the ultimate destination of projects.

• ICAPS Business Growth:

  • ICAPS grew faster than 40% in 2023.
  • Important market for Applied Materials with a focus on serving the growth.

• China Wafer Fabrication Equipment (WFE):

  • No evidence of stockpiling.
  • Large number of projects under investment.
  • Market expected to be strong across the planning horizon.
  • Utilizations are improving and expected to continue to improve.

• Handshake Occurring Mid-Year:

  • Not guiding beyond the Q2 outlook.
  • Difficult to predict the strength of leading-edge vs. digestion in ICAPS.

• Closing Thoughts:

  • Applied Materials has anticipated major market trends and works closely with customers to invest in important technology inflections.

  • Confidence in meeting strong demand and making progress in gross margins.

  • Services growth is accelerating to double digits.

  • Looking forward to the Morgan Stanley conference on March 4.