Q1 2025 Earnings Call Transcript

Welcome to the Applied Materials First Quarter Fiscal 2025 Earnings Conference Call. Afterwards, there will be a question and answer session. I would now like to turn the call over to Liz Morali, Vice President of Investor Relations. Liz, you may begin.

Good afternoon, and thank you for joining us for today's call. With me today are Gary Dickerson, President and CEO, and Brice Hill, CFO. Before we continue, let me remind you that today's discussion contains forward-looking statements within the meaning of the federal securities laws, including predictions, estimates, projections, or other statements about future events. Actual results may differ materially from those mentioned in these forward-looking statements as a result of risks and uncertainties.

Information concerning these risks and uncertainties is discussed in our most recent Form 10-K and 8-K filing with the SEC. We do not intend to update any forward-looking statements. During today's call, we will also reference non-GAAP financial measures. Reconciliations of GAAP to non-GAAP results can be found in today's earnings press release in our quarterly earnings materials, which are available on our Investor Relations website at ir.appliedmaterials.com.

I will now turn the call over to Gary.

Thanks, Liz. In our first fiscal quarter of 2025, Applied Materials delivered record revenues surpassing the prior high we set last quarter. The major technology trends reshaping the global economy are made possible by advanced semiconductors, underpinning long-term secular growth for the industry and especially Applied Materials. We are providing our customers a unique and connected portfolio of solutions to accelerate the technology roadmap, positioning us for continued growth and outperformance in the years to come.

In my prepared remarks, I'll share our latest market insight, I'll describe how our innovations are enabling the major device architecture inflections that are critical to advancing energy-efficient AI, and I'll talk about why high-velocity co-innovation is more important than ever as the industry races to bring next-generation technology to consumers faster and at lower cost. Starting with the market, AI remains central to our outlook. With almost infinite possible uses, AI is the most transformative technology change of our lifetimes and a major catalyst for innovation and growth across the technology sector.

Early deployment of AI supported approximately 20% year-on-year growth of global semiconductor sales in 2024, and the market remains on track to exceed $1 trillion of annual revenues by 2030. We're only at the beginning of what's possible. And as we look ahead, we expect disruptive innovations to significantly improve the energy efficiency and cost of AI, opening up new applications and growing the overall market opportunity. To unlock this potential, innovation is required across the technology stack from the models and software, as we've seen in recent weeks with DeepSeq, to data center architecture, chip design, and how those chips are made.

Advancements in foundational semiconductor technologies will have a dramatic impact on system-level energy and cost reduction in the AI data center. I've previously described four critical areas the industry is currently focusing on: leading-edge logic, high-performance DRAM, DRAM stacking referred to as high bandwidth memory or HBM, and advanced packaging to connect the logic and memory chips together in an integrated package. There's also a fifth theme emerging, as we are seeing major innovations in power electronics. These innovations can address data transfer energy consumption within the data center as well as significantly reduce grid-to-data center power losses.

Applied has strong leadership in all these areas, and we're best positioned at future device architecture inflections including next-generation gate-all-around transistors, backside power delivery, 4F squared, and 3D DRAM. Advanced packaging, compound semiconductors for power electronics, and silicon photonics. These device architecture inflections in logic, compute memory, packaging, and power devices grow the market for wafer fab equipment, increase the relative mix of materials engineering technologies, and provide opportunities for Applied to gain market share. Taking leading-edge foundry logic as an example, the transition from the most advanced generation of FinFET to the first nodes with integrated gate-all-around and backside power delivery grows our total available market by more than 15% to around $14 billion for every 100,000 wafer starts per month of capacity.

At the same time, we expect related Applied revenues to grow in the 30% range for the equivalent wafer fab capacity. While the bulk of spending for these inflections is ahead of us, we are already seeing a positive impact on our business. In 2024, we believe we outperformed the market in aggregate across leading-edge foundry logic, DRAM, advanced packaging, and the ICAPS markets outside of China. The ability of US companies to serve the China market is constrained and has been further limited by updated trade rules announced in December and January.

We estimate the incremental impact of these new rules will be around $400 million of revenue in fiscal 2025, approximately half of which is service revenue. We also see China being a smaller portion of global wafer fab equipment spending in 2025. At Applied Materials, our strategy is to develop and commercialize the most enabling technologies for the industry across leading-edge logic, memory, advanced packaging, and ICAPS. We have focused our investments on these high-growth inflections that allow us to create and capture more value. One of the ways we are implementing our strategy is to provide our customers unique and connected solutions that take advantage of our broad portfolio of technologies, capabilities, and partnerships.

Our co-optimized and integrated solutions address higher-value device challenges for customers and are difficult for competitors to replicate. A good example is our integrated hybrid bonding interconnect solution that combines six technologies, including one module from a partner, into a single integrated system. In the past quarter, we successfully completed important qualification milestones and received volume orders from multiple leading-edge customers. Our integrated hybrid bonding system is one of our next-generation solutions that is allowing us to extend our leadership in advanced packaging.

In 2024, our packaging business captured more than half of the market we serve, and we remain on track to double our revenues over the next several years. Another key pillar of our strategy is high-velocity co-innovation. We believe this is key for Applied and our customers to bring next-generation technology to market faster and at lower cost. By speeding up cycles of learning through tighter ecosystem collaborations, we are accelerating new chip architectures, driving higher mutual success rates, and optimizing R&D efficiencies.

Among our accomplishments in the past quarter, we launched our EPYC advanced packaging strategy at a technical summit we hosted in Singapore that brought together R&D leaders representing more than 20 global companies. We were part of two teams that received CHIPS Act grants to develop advanced packaging substrates for 3D integration. We are leading the team for silicon substrates, and we have a long-term partnership and investment in the company that won the grant for glass core packaging. We made significant progress with the construction of the EPIC Center in Silicon Valley, which is on track to come online in 2026 and will become the centerpiece of our global EPIC collaboration platform.

And we partnered with TPG to transition Applied Thin Film Battery business into an independent company. We're also evolving our collaborative model and services where we are helping customers manage increasing complexity in their business as they ramp next-generation technology into high-volume manufacturing. We are deploying our advanced service products, including our Actionable Insight Accelerator data platform or AIX, to help accelerate customers' R&D programs, reduce technology transfer times, and optimize device performance, yield, output, and cost in their fabs. Through these closer working relationships, a high percentage of our service revenues is generated from subscriptions in the form of multiyear agreements.

While our near-term service growth is negatively impacted by trade restrictions, we remain confident that we will still grow AGS at a low double-digit annualized growth rate over the longer term. Before I hand over to Brice, I'll quickly summarize. As major technology trends reshape the global economy in the semiconductor industry, Applied continues to deliver strong financial performance in the near term. We are best positioned at major device architecture inflections in fast-growing areas of the market that are critical to energy-efficient AI, and we are focused on high-velocity co-innovation with our customers and partners to bring breakthrough technology to market faster than ever before.

Brice?

Thanks, Gary. And thank you to everyone joining us for today's call. We had a strong start to the fiscal year, with healthy revenue growth and meaningful margin expansion, which helped drive a 12% year-over-year increase in non-GAAP earnings per share. In addition, we distributed $1.6 billion to shareholders with $1.3 billion of share repurchases and $326 million of dividends.

For fiscal Q1, our results were largely in line with our expectations with total net sales of approximately $7.2 billion, up 7% year over year with growth in both semiconductor systems and applied global services. Non-GAAP gross margin was 48.9%, up 100 basis points year over year and our highest quarterly gross margin since fiscal year 2000. The strong margin performance in Q1 was the result of a very favorable mix and increasing adoption of our leading-edge technologies and advanced integrated systems. In addition, we progressed on our value-based pricing initiatives and cost reductions. Non-GAAP operating expenses were $1.31 billion with increased R&D investments to support our technology growth areas.

Non-GAAP EPS was a record $2.38, up 12% year over year given the revenue growth, better profitability, and share repurchases. Moving to the segments, semiconductor system sales were $5.36 billion for Q1, up 9% year over year driven by 20% growth in foundry logic, partially offset by an expected decline in DRAM sales as prior year sales to customers in China did not repeat. Non-GAAP operating margin of 37.3% was up 160 basis points year over year. Sales for the ICAPS nodes, which serve customers across the IoT, communications, automotive, power, and sensor markets, were down slightly year over year, flat quarter over quarter.

Moving to applied global services, AGS delivered revenue of $1.59 billion in Q1, up 8% year over year with healthy growth in services partially offset by a decline in sales of 200-millimeter equipment. Non-GAAP operating margin of 28% was down 30 basis points year over year. Lastly, our display business delivered revenue of $183 million. Moving to the balance sheet and cash flows, we ended the quarter with cash and cash equivalents of $6.3 billion and debt of $6.3 billion.

Cash from operations in the quarter was $925 million, capital expenditures were $381 million, and free cash flow was $544 million. We distributed $1.6 billion to shareholders in the quarter, including $1.3 billion in share repurchases and $326 million in dividends. As of the end of the quarter, approximately $7.6 billion remains available under our share repurchase authorization. Turning to our outlook, we are seeing strong momentum for leading-edge foundry logic where we are particularly well positioned as our customers ramp the most advanced technology nodes with gate-all-around transistors into high-volume manufacturing.

Offsetting leading edge is a more measured level of investment in the ICAPS nodes following strong spending in 2023 and 2024. In DRAM, we are seeing healthy demand but face tough year-over-year comparisons given the purchases from Chinese customers in 2024 that do not repeat this year. We are also seeing growth in NAND, albeit from historically low levels. As Gary mentioned, as a result of the expanded export controls announced in December and January, we expect to face a headwind to revenue of approximately $400 million in fiscal 2025. Nearly half of that impact will be in Q2. The impacts in the second half of the fiscal year will be more weighted to AGS as we are no longer able to service certain customers, and following the step down in revenue in Q2, we would anticipate a return to growth in Q3 for AGS.

Based on these trade restrictions and our view of our business, for Q2, we expect that China as a percentage of total revenue will be about five percentage points lower than in Q1. This is below the normalized level of approximately 30%. Taking all of these factors into account for fiscal Q2, we expect total revenue of $7.1 billion, plus or minus $400 million, which represents a 7% increase year over year, and non-GAAP EPS of $2.30, plus or minus $0.18, which represents a 10% increase year over year. We expect semiconductor systems revenue of approximately $5.3 billion, up 8% year over year, AGS revenue of approximately $1.55 billion, up 1% year over year, and display revenue of approximately $250 million.

We expect non-GAAP gross margin and non-GAAP operating expenses to be approximately $1.3 billion. We are modeling a tax rate of approximately 13%. In closing, our business is strong, and we remain confident in our growth opportunities across all of our business segments. We are making significant investments in R&D to grow our share at the leading edge, and we are increasing our capital investments to be the leader in high-velocity co-innovation with our customers.

This is an important indicator of the confidence we have in the growth, and with our differentiated technology, unique insights, and deep industry relationships, we are poised to benefit from the technology transitions and semiconductor growth that is expected over the coming years. Liz, we're now ready to begin the Q&A.

Thanks, Bryce. To help us reach as many people as we can on today's call, please limit yourself to one question. If you have an additional question, please re-queue, and we'll do our best to come back to you later in the session.

And our first question comes from the line of Toshiya Hari from Goldman Sachs. Your question, please.

Hi. Good afternoon. Thank you so much for taking the question. I know you guys aren't or haven't been giving specific WFE numbers, but at a high level, Gary and or Bryce, I was hoping you could provide a little bit of context on how you're thinking about the year.

I know you gave a couple of comments, but by application, by geography, you know, how is 2025 likely to shape up in your view and more importantly, your outperformance vis-a-vis the market, you know, where key drivers that we should be focused on and if you could speak to the magnitude of outperformance relative to what you achieved in 2024, that would be really helpful. Thank you.

Okay. Thanks, Toshiya. Nice to hear from you. So first, we'd say that, you know, our Q2 guide gives a really good indication.

So leading edge with all the strength that you see in AI and, you know, pulling DRAM, advanced logic, and HBM. That factors into what we see in the market today. So leading edge is growing. We've been thinking it will be accelerating through the course of the year, and we do see that growing strongly in Q2. And we highlighted that we've also been watching the ICAP market after the significant build-out the last couple of years in China.

And that is lower in Q2. So those things offset consistent year-over-year growth in the overall market. So that's the big change from a market perspective. If you look at the memory side, our memory is roughly flat quarter over quarter. We do see some additions on the NAND side, and that's offset by a slight reduction in DRAM.

NAND's growing, but, of course, that's from a smaller level. The last thing I would share is when you think about advanced packaging, we had a significant amount of capacity adds last year in the HBM side for the initial burst of capacity. And we're still, you know, selling into HBM, still adding equipment into that market, but it's at a slower rate. So that's part of the outlook also.

So the key thing there is we've all been waiting to see if Advanced Logic would ramp strongly enough to offset any slower rate of investment in ICAPS, and that is what we're seeing in Q2, and that's, you know, our best what we try to do is share what we're seeing today, and we think that's our best indication on how you can think about the year at this point.

Yeah. Toshiya, relative to the outperformance questions. Over the last four years, including last year, we outperformed in aggregate across leading-edge foundry logic, DRAM, high bandwidth memory, advanced packaging, and ICAPS markets outside of China. And we've been talking about this a lot.

We're focused on major device architecture inflections critical to AI energy-efficient computing. When we're meeting with all of our customers, that's where they're all focused. So, you know, for us, we're on track to capture greater than 50% share of our served market in gate-all-around and backside power and foundry logic. We gained 10 points of DRAM share, and we're positioned to gain share as 4F squared and 3D DRAM architectures are adopted.

Packaging was around $1.7 billion in 2024, up 3x in four years. And as we've said many times, we're positioned to double this business in the coming years. In ICAPS, we gained several points of share since we formed the group six years ago. We brought several new products to market.

We have a strong pipeline of new products that will grow our available market and position us well in this segment. And materials engineering intensity, where Applied has clear leadership, is increasing in next-generation chip architectures. So, you know, going forward, I like how we're positioned to win these major inflections. Again, we've been outperforming in all of these segments over the last four years, and we're well-positioned to continue to outperform going forward.

Thank you. And our next question comes from the line of Atif Malik from Citi. Your question, please.

Hi. Thank you for taking my question. Bryce, I appreciate the color on the April quarter. The still consistent down a little bit explained by the China impact. And you're talking about the return to growth in AGS. Can you also comment on the silicon systems? Do they return to sequential growth in the July quarter, or will we have to wait and see?

Yeah. Thanks, Atif. I think we'll have to wait and see on the semiconductor systems, but what we're sharing is we've been expecting the leading edge to accelerate. When you think about the gate-all-around and backside power nodes in the market and the advantages of those nodes for leading-edge architectures, we expect a significant amount of capacity to be put in place in those nodes, and that is what you see in Q2. And we expect that, you know, that is a good indication of where the market will be going.

And then on the offset for that, we highlighted the ICAPS, and we've been watching that, but I'll just say that market. Our forecast for ICAPS and for ICAPS China seems to change every single quarter. And so we'll see how that evolves through the rest of the year. And then on the services business, yes, this will be similar to 2022 when there were new trade rules.

We'll have a step back, as you can see in our guide in Q2, but we expect to grow from there at the low double-digit rate as we continue to add new types of services, and the new customers and new locations will make it more likely that the services business is utilized by the customers.

Thank you. And our next question comes from the line of Stacy Rasgon from Bernstein Research. Your question, please.

Hi, guys. Thanks for taking my question. You said that the China impact in the second half will be weighted to AGS, but you also said AGS returns to growth in Q3. So, like, how do I square that circle on what's offsetting the China impact in the second half? And just, like, broadly, if I were to add the $200 million-ish or so that AGS is getting hit by the China sanctions, if you added that $200 million back in, would it still grow double digits this year?

Yes. That's a good question. Thank you, Stacy, for the question. So on the AGS side, the way to think about it is approximately half of the impact will be taken in Q2, and then it'll be a continued impact in the following quarters.

But we don't expect it to be a sequential reconciling line item. In other words, whatever business we can't support in Q2, that's the same business or less in Q3 and Q4. So there is an impact in Q3 and Q4, but we think you shouldn't worry about it from a modeling perspective. We'll just begin to add from there, and we'll grow at the rate that we've described, you know, low double digits as we continue to add installed base and tools to support. And then, didn't do the calculation.

I guess what I would say is from a core AGS perspective, if you take the 200-millimeter out, we're absolutely growing at low double digits or higher.

Thank you. And our next question comes from the line of CJ Muse from Cantor Fitzgerald. Your question, please.

Yeah. Thank you for taking the question. I was hoping you could speak a bit to gross margins. You talked about base pricing starting to come in in the January quarter.

Would love to hear more about, you know, how you see that going through the model throughout all of calendar 2025. And I guess as part of that, how should we be thinking about kind of evolving mix in terms of modeling gross margin either first half, second half, or kind of exit rate for calendar 2025 would be very helpful.

Okay. Thank you, CJ. Good to hear from you. So on the gross margin, 48.9% and 48.4% in our guide in Q2, very strong mix.

In both quarters, obviously, with the China impacts for Q2, it's a little bit lesser mix strength. We're still going to reiterate our 48% underlying rate. So we think, you know, when we don't have those quarters with ultra-strong mix, that's still about the ballpark for our normalized rate. So think in the second half that unless we maintain the exact same mix, which we likely don't expect, we will be closer to that 48% gross margin for the year or not for the year.

Sorry. We're not giving a guide for the year, but that is our underlying baseline rate to think of as you think about where the business is normally. And then if you think about the pricing, you know, there I think of two dynamics with pricing. One, the solutions that we're developing that Gary has pointed the company toward, those are increasingly valuable solutions for the customers.

And so there's an increasing value proposition for the equipment itself. Then our pricing mechanism is to make sure that we're including that in our thinking with respect to the pricing, and we also have a disciplined infrastructure to have those discussions with customers. So as we allocate our R&D, we're, of course, allocating to the areas that we think are most valuable in the market. And we think, you know, it's a matter of execution to achieve that value in the marketplace, which is what we're trying to do.

So I said third inning last quarter on the process for pricing, and I think that's still accurate.

Thank you. And our next question comes from the line of Vivek Arya from Bank of America. Please proceed with your question, please.

Thanks for taking my question. I actually had a longer-term conceptual question for Gary related to LIDHO versus HNEP intensity. You know, if let's say overall WFE intensity stays around mid-teens, it means WFE will grow in line with semiconductor industry sales over the next several years. And if that happens, do you think, Gary, LIDHO takes more share, or do you think edge or depth take more share and hence grow faster or slower than overall semiconductor industry sales?

I've heard arguments on both sides, but would appreciate your thoughts.

Oh, hi, Vivek. Thanks for the question. So if I look at the major inflections that we're focused on, leading-edge foundry logic, gate-all-around, and backside power, you know, our customers have talked about being able to achieve and backside power 30% area scaling benefit, but beyond power and performance benefits, with really no change in feature size. So, you know, that's basically what we're seeing in foundry logic.

And we think that continues going forward. In DRAM, if you look at what our customers have talked about in 4F squared, they also talk about significant area savings as they implement that new architecture. And, of course, again, for all of these things, we're incredibly well-positioned. And then we get to 3D DRAM. 3D DRAM is more similar, not the same materials, but a similar impact where the relative spending for materials engineering goes up significantly versus lithography.

And then, of course, another area that we're focused on and the entire industry is focused on is advanced packaging. And, you know, when we look at what the AI servers look like three or four years from now, the architectures are going to be very different. And the way the data is connected in those architectures, there's just going to be tremendous innovation again around materials innovation. So when I look across any of these different markets, and, of course, ICAPS is really all driven through materials innovation, we've talked about this before in our master classes.

We see the percentage of materials engineering relative spending to be increasing going forward around all of these different architecture inflections.

Thank you. And our next question comes from the line of Timothy Arcuri from UBS Securities. Your question, please.

Thanks a lot. Bryce, do you think as you look at, you know, I know that you're not gonna give us a WFE number for last year, but do you think you gained WFE share? That's the first question. And then how do you kind of assess, Gary, headwind from these, you know, from these, you know, incumbent companies in China because I know that they have delayed rev rec, so it makes it hard to sort of, you know, measure year to year.

But they're about 5% now of WFE. It's up, like, 400 basis points over the past four to five years, and that's all definition. You know, you've done a, you know, great job, you know, holding share and gaining share. But how do you sort of think about that headwind from China?

Because so much of the income model spending is from there. Thanks.

Okay, Tim. Nice to hear from you. Thank you. On the share in 2024, of course, we don't know yet in terms of the final measures there, but you heard in Gary's script, he talked about, we think we've gained share in all the markets except for, likely China.

So we'll just have to see what the, you know, what that reading is once all the share numbers are in. So we feel well-positioned from that perspective. And even in China, we feel good about the way we compete. It's just, yes, the local Chinese vendors have some advantages with the trade rules that have been put in place.

And then on the headwinds for China, I think, you know, we do have lower visibility, but we continue to add customers. And, you know, we think that's a huge market. It's our largest ICAPS market, and ICAPS is the largest market for Applied. We expect that to grow over time, you know, at the device level, mid to high single digits, as you know.

The equipment investments in the last couple of years have been ahead of the market, so we've expected it to moderate for some period of time. So we'll see how that plays out. But for us, that continues to be one of the most important markets for the company.

Yeah. Tim, just so I would add, and again, I talked about this a little bit earlier. Leading-edge foundry logic, we're incredibly well-positioned for those inflections. DRAM, we've gained 10 points of share.

And again, really well-positioned for 4F squared and 3D DRAM. Bandwidth memory, you know, that's another one where we have a very strong leading position. And advanced packaging is another area where it's up 3x in four years, and we anticipate that we'll double that business. And then that'll keep going into the future.

And again, we're just really well-positioned for all those inflections. In ICAPS, we have room to grow in PDC and H, and we have momentum in those segments. And I talked earlier about the pipeline of ICAPS innovations. Again, we formed this group six years ago.

We brought 20 new products to market, and we have new products in the pipeline that will expand our total available market. We have new products for cost-competitive applications, and we have innovations to enable new ICAPS device architectures that we're co-innovating with leading customers. So as Bryce said, in the areas where we can compete, I feel really good about our positions and our pipeline going forward.

Thank you. Our next question comes from the line of Harlan Sur from JPMorgan. Your question, please.

Hi, good afternoon. Thanks for taking my question. You know, we track many of your end customers in the semiconductor industry, both fabulous and IDMs, and two nanometers. Design starts appear to be we're tracking their design starts, especially at accelerating since the second half of last year, especially in areas like AI, accelerated compute, mobile.

Is the team in talking with your customers, is the team getting a sense on how big the upcoming two-nanometer node transition and more importantly, volume production potential could be relative to three nanometer?

Hi, Harlan. Gary might also add on to this. You know, I've seen various estimates for two nanometers based on the performance benefits of two nanometers. I think we're expecting that to be a large node.

If you look at some of the third-party estimates, you know, that should be a good landing spot for designs just like seven nanometers in the past was a good landing spot for designs. So we're expecting it to be, you know, on the large side from a node perspective.

Yeah. Harlan, I would just add that, you know, everybody's focused on energy-efficient computing for AI, and if you look at what our customers are saying, they're very bullish about the size of that two-nanometer node.

Thank you. Our next question comes from the line of Krish Sankar from TD Cowen. Your question, please.

Yeah. Hi. Thanks for taking my question. Gary, I had a question on gate-all-around.

You've spoken about getting over 50% share of the incremental TAM there. It seems like the Epi stack is one of the more critical ones, and your Epi taxi competitor seems to be making some strides. I'm just kinda curious. Can you talk a little bit about your IP market share and if you still feel confident in the 50% share gain of the overall gate-all-around opportunity?

Thank you.

Yeah. I mentioned earlier, we're in deep partnerships with all of our customers focused around this concept of high-velocity co-innovation. And, you know, we're working with every one of our customers out a decade into the future on multiple technology nodes. For gate-all-around, we still are on track to do what we had talked about earlier with gaining more than 50% of the incremental spending for gate-all-around, and Epi is part of that.

We're in a very strong position. I think 85% of those Epi steps are selective Epi where we have tremendous strength. We have new innovations we're bringing to market in Epi, and so we still feel very confident in our outperformance going forward.

Thank you. And our next question comes from the line of Srini Pajjuri from Raymond James. Your question, please.

Thank you. My question is on China. I think, Bryce, you said for Q2 outlook, you use the word, you know, China will be below normal in terms of percentage exposure. I would think that the export restrictions, those are permanent.

I'm just curious as to when you say below normal, are you expecting China to recover to, like, 30% level that you previously communicated? And then when do you think we might get to that level? And then maybe for Gary. Gary, you know, for over the last 90 days, excluding the export restrictions, can you talk to, you know, how the demand conditions are within China?

Okay. Thanks, Srini. So first of all, 30%, we still think will be a good long-term rate for us or a good long-term estimate of the share to China. You know, when you think about the market, of course, for us now, that's an ICAPS market.

We can't serve the leading edge. That will be a growing market over time. The devices will grow mid to high single digits, if not more, heading to, you know, the one helping to get to the $1.3 trillion semiconductor market by 2030. So that market will continue to grow. We may pause a little bit less.

We may have a little bit lower rate of investment as we go, you know, through the next short period of time, will that adjust? But that's a very strong market for us. So 26% in Q2 and 30% is a good estimate for the company, and, of course, that includes all of our businesses, AGS, and display also. And then, Gary, on what we're seeing with respect to demand.

Yeah. I think I'll just make a comment on that. It's still our largest market. So you see leading edge accelerating, but ICAPS is still our largest market, and China is, you know, the largest country inside that market.

And so when you're thinking about it and you're thinking about what we're describing as a step back in the rate of investment, you should still think about it as just, you know, a very large opportunity and growth opportunity going forward. And so we think the rate slows down a little bit after two huge years of investment. But we expect that market to grow over time. We've continued to add customers.

We're tracking a large number of projects that are underway. We expect capacity to be added every single year, and, you know, that forms the backbone of our expectations.

Yeah. The one thing I would add is that, you know, we believe that the ICAPS market over the longer term will grow kinda mid to high single digits. And as I mentioned earlier, we have new products in the pipeline that expand our total available market, new products for cost-competitive segments, and opportunities to grow in large segments where we have momentum. So I think, you know, longer term, we're positive on the market and positive on our position in the market.

Thank you. And our next question comes from the line of Brian Chin from Stifel. Your question, please.

Hi there. Good afternoon. Thanks for letting us ask a few questions or maybe one question. Maybe for Bryce, I think you previously disclosed that $549 million reduction in backlog for the fiscal year in a filing.

You're quantifying a $400 million impact for the year. Did you revise what that actual impact would be, or is there some maybe a residual amount of $149 million that sits outside of the 12-month horizon?

You've got it exactly right, Brian. So it's not much of a change. That $549 million was our backlog, and it covered, you know, more than just the year. And so we shared, I think, what was in the 12 months, and if you did that math, I think it was about $380 million. So we're still very close in terms of what we're thinking the impact is for the year.

Thank you. And our next question comes from the line of Joe Quatrochi from Wells Fargo. Your question, please.

Thanks for taking the question. I was wondering if you could talk a little bit more about your expectations for DRAM growth. If we were to exclude just the benefit of China DRAM spending in the comparison a year ago, how should we think about the growth in your business this year?

Yeah. Thanks, Joe. I'll start on this one. I think we've seen, you know, two record years of DRAM.

And, of course, 2024 was buoyed by the extra China demand that we saw in, you know, I can't call the year here, but we see the rate of investment in DRAM continuing in the rest of the world. So there's a lot of pull, you know, for the HBM solution, and there's a lot of pull in for DRAM in the advanced, you know, compute performance systems. So I would expect continued momentum in DRAM, and that's included in our outlook in Q2.

Yeah. Joe, I would just say that I mentioned earlier, we're more bullish on compute memory than we are in storage memory. And then what our customers have said is it takes three times the number of wafers to produce the same number of bits for HBM. So that's gonna certainly help the growth rate over the longer term.

Thank you. And our next question comes from the line of Charles Shi from Needham and Company. Your question, please.

Hi. Yes. Good afternoon. I have a question about the expected revenue from gate-all-around nodes.

You previously said more than $2.5 billion in fiscal, I mean, in probably calendar 2024, and they expect to double that number? And has the 2025 number moved up or down or any changes? Maybe the other part of the question, I think, that you previously said, last year's gate-all-around revenue plus this year is kinda implies a 100k global capacity built on two nanometers by the end of this year. Do you see potentially that that gate-all-around spending could actually accelerate further into 2026?

Because we were trying to think about what the end capacity could be in 2026, but do you wanna get your early thoughts on 2026 if possible? Thank you.

Okay, Charles. Thanks for the question. So first thing, yes, we have not changed our expectations for growth looking into 2025 with the gate-all-around related equipment. So $2.5 billion in 2024 and then the opportunity to double that in 2025. And if you put those together, you know, that's just over $7 billion.

And when we describe the SAM for us with gate-all-around and backside power, yeah, you can back in and say that implies that there's approximately 100,000 wafer starts of, you know, pilot in HBM or HVM, excuse me, high-volume manufacturing capacity being put in place in the beginning. And then, of course, you know, you'll have to do your own research to see what size you think the node would be. I would just suggest that nodes are generally larger than that. So we would expect that to continue and the ramp to continue beyond 2025 for sure.

I would say the one thing incrementally is that as you go forward, you're going to add in backside power. That also is growing our available market, and we have a very strong share there. So once you have gate-all-around and backside power together, our opportunity grows significantly.

And our next question comes from the line of Chris Caso from Wolfe Research. Your question, please.

Yes. Thank you. Good evening. I guess the question is regarding sort of where your level of confidence is in your customer forecast right now.

And I know you haven't given us guidance for the full year obviously, but I know the customers have generally given you pretty good visibility on the forecast. Maybe you could talk about the different segments, and you sound, you know, pretty constructive with regard to foundry logic spending for the year. Your comments suggested that ICAP, the forecasts have been changing a lot, so I'd imagine that there's some uncertainty there. Perhaps you could speak in those terms for the different segments.

Sure. Thanks for the question, Chris. So I think, you know, I would put the level of confidence for larger customers is fairly high. So especially since COVID and, you know, the inflation events that we saw, we've asked for longer perspectives from all of our customers.

So we have more visibility with the larger customers. So if you think about leading logic, more visibility, certainly for DRAM, certainly for NAND. And then I would split up ICAPS. It would be the same sort of observation for the more mature, longer-standing companies in the ICAPS space.

Good visibility, same practices. And then just much less experience there on both sides. And the visibility gets lower, and that's where we've seen a lot of volatility in our forecast. I think in the past couple of years, we've continually increased our China forecast as we've gone through the year.

And so you just have less visibility, and the plans change as that goes forward. And then just a last comment, you know, thinking about foundry logic, because there's lots of questions about the various foundries. Our perspective there is, not only do we have the market expectations, and so, you know, we think we're pretty comfortable with our forecast for leading logic being driven by, you know, data center, PC, smartphone, and understanding what the end demand is for those markets. Thank you.

Thank you. And as a reminder, if you have a question at this time, our next question comes from the line of Vijay Rakesh from Mizuho. Your question, please.

Yeah. Hi. Just a question on the packaging side. I know packaging is gonna be one of the more important and on the memory side. I'm just wondering if there's a way to look at what the mix of, you know, just packaging was of total WFE. If we were to look at 2025 and how you see that mix of WFE growing as packaging becomes a bigger and bigger chunk of both memory and logic. Thanks.

I'll try, Vijay. We said last year that in 2024 that our packaging-related revenues in advanced packaging were $1.7 billion. And so, you know, that we have an advantage share in that space. So you probably have to do some backward math to imply what packaging is.

And it's growing at a strong rate. I think just thinking about the, you know, what's behind that, we all know that there's, Gary calls it a race for performance on these leading-edge systems. Getting the highest utilization out of GPUs, CPUs, accelerators, etcetera. And that's really what's driving the increased demand for these packaging technologies.

So we expect that to grow significantly over the coming years.

Yeah. Vijay, we also talked about doubling again our packaging revenue over the next few years. There's just tremendous innovation happening in this space. We talked about CHIPS grants on new substrate technologies for silicon and glass.

How you connect the AI server and that architecture in three or four years is gonna be very different than what it looks like today. So, you know, I believe this is a great opportunity for Applied where the leader in wiring on the front of the wafer, back of the wafer, and in advanced packaging. And this segment is going to see a significant compound annual growth rate because it's so important for energy-efficient computing.

Thank you. And our next question comes from the line of Mehdi Hosseini from Susquehanna. Your question, please.

Yes. Thanks for taking my question. One question, two parts. Based on the last, okay, the SSG backlog of $8.3 billion down 23% year over year.

And then AGS backlog of $6.8 billion up 32%. When do you expect backlog for SSG to show the inflection point and show growth? And on the AGS, the $200 million that is gonna come out because of the restriction in China, that seems a very small part of the AGS backlog. Is that a reflection of, yeah, the AGS backlog is the multi-year or any color you can add here would be great.

Yes, Mehdi. Thanks for the question. You've got it right on the AGS. We've got multi-year contracts in AGS that tend to make that backlog look, you know, larger and your book-to-bill look much larger when we sign those contracts.

So the average contract life, I think, is in the 2.9-year region, and we're signing some that are longer than that. So that really is what distorts the, you know, the backlog or makes it larger for AGS. And then on the equipment side, you know, since the supply chain and COVID, on the equipment side. So we stopped reporting that on a quarterly basis because it's not a very good indication of our, you know, the underlying business changes.

We're working to get longer visibility with our customers, and we're working to get longer commits on the builds. And so there's a lot of movement in that. So I wouldn't have anything to share other than what you've seen in our 10-K.

Thank you. And our next question comes from the line of Tim Schultz Milander from Redburn Atlantic. Your question, please.

Yeah. Hi there. Thanks very much for taking my question. Maybe one for Gary and one for Bryce, please.

Gary, you mentioned advanced packaging and you referenced volume orders from multiple leading-edge customers. Maybe could you share a little bit of color in terms of what kind of device applications they are and when you'd expect volume manufacturing to begin? And then, Bryce, just a modeling question. On that tax asset revaluation.

Could you maybe just provide a little more color on that? And is there any read across or implication for the remaining $2.4 billion of deferred tax assets on the balance sheet? Thank you.

Yeah. Tim, relative to packaging revenue, it's really coming from all of the different packaging architectures. We have a very strong position, broad, unique connected portfolio. So, you know, I wouldn't say that again, for us, including in HBM or we were at $700 million in revenue this last year.

We have strength across all of those different architecture types. I don't really wanna comment. I'll let customers comment on, you know, which architecture is ramping. I would say, as I mentioned earlier, there's going to be tremendous innovation in this space with very different architectures than what are in the market today.

This is gonna be very important for energy-efficient computing. Applied has been investing to be positioned to win those architecture inflections.

Okay. And then, Tim, thanks for the tax question. So, yeah, good to point out that on our GAAP net income, you'll see a significant difference. And what is happening there, it's one of those situations where good news is bad news.

So we've just renewed our incentive rates in Singapore, and so the tax asset that we have in Singapore that, you know, was created years and years ago when we moved assets to Singapore, that is essentially less valuable because it will protect from lower taxes, if that makes sense. So our tax rate goes down, which is good news. And then the asset that you have to protect from taxes is a little bit less valuable than what it was with higher tax rates. And so that $674 million, I think that number is a revaluation of that tax asset.

And I wouldn't look, you know, we're amortizing the benefits of that tax move of years to go. That's always in our reconciliation, but this particular event that we're talking about, I don't think there's any look forward on that.

Thank you. And as a reminder, if you do have a question, please press star one one on your phone. And this does conclude the question and answer session of today's program. I'd like to hand the program back to Bryce for any further remarks.

Thank you. To recap, we believe we're well-positioned for leading-edge technology inflections, together with our efforts to accelerate industry collaboration, set us up to benefit from the semiconductor growth as expected over the coming years. Thank you for attending today. And, Liz, please close the call.

Thank you, Bryce. And thank you to everyone for joining the call today. A replay of today's call will be available on the Investor Relations website by 5 PM Pacific time today. Thank you for your continued interest in Applied Materials.

Thank you, ladies and gentlemen, for your participation in today's call. Conference. This does conclude the program. You may now disconnect. Good day.