Well, good morning. Welcome to day one of Canaccord Genuity Tech and Industrial Conference. This is our second year. Very pleased to have Applied Materials and Brice Hill, CFO of the company. Welcome.
Thank you. Thanks for hosting us, New York. Wonderful weather.
Yeah, yeah. We brought this lovely weather for you. Be assured it'll snow on Thursday. You know, to start, you know, I think the world has dramatically changed in the last three months, both from, you know, your outlook, your competitor's outlook. You called for revenue growth for silicon of greater than 20% growth here in 2026. This is of course limited by clean room space availability, resulting in seeing plenty of room for another double-digit year in 2027. Do you agree with this line of thinking? What do you see as the biggest risk to this view?
Well, certainly the demand signal is extremely strong. I've been talking to people about artificial intelligence and AI, and we've expected, you know, our business to pick up based on the demand. When we look at cloud service provider investments, you know, top cloud service provider investments in data center AI CapEx are $600 billion this year, projected to be $700 billion next year. We've seen a lot of pull from our customers for more advanced logic, more DRAM, and more advanced packaging solutions. Right now the market is constrained with the leading-edge semiconductor components, those three areas. We expect that demand signal to continue very strong, and that dynamic of being constrained not to change in the foreseeable future. That's the expectation. CJ, you mentioned that it's constrained by a fab space.
We did of course increase our expectations for this year, so there was more space available to utilize this year. To your point, it's we think it's fully utilized at this point with the space available. The ramp will be metered by space and leading logic and DRAM as we go through the, you know, let's say next, it might be more than a year that we experience that.
With that as the backdrop, are you starting to see customers slot tool availability in 2027 or even 2028?
We definitely see slotting into 2027 at this point, but I'll back up and say, foreseeing this ramp that we're talking about, we have been working with customers on improving our visibility to two years with all of our top customers, and in fact, all the customers across our network. We're asking for two years of visibility into the equipment that they need, and then we provide that signal to our suppliers. I've highlighted before that we have over 2,000 suppliers that we work with on a day-to-day basis. You have to give those suppliers a signal if they're going to change their capacity, if they're going to hire people and train people. You have to give them enough lead time to do that because this is a significant increase in output.
We've got 2 years visibility from our customers and providing that to our suppliers. When it gets closer, within 1 year, that's part level detail, so the suppliers can truly, you know, ensure they can meet your needs.
in terms of the two-year slotting, are all customers willing to share that information or only, you know, the majority, let's say?
Well, I looked at it this morning, just so I would know that, but I would say it's, you know, just thinking generally about the world, first of all, it's all customers. It's an ask of all customers. I will say that the visibility into the longer list of China customers is more difficult for that period of time. In some cases, you know, they haven't completed those plans. I think if you think about the largest customers, leading logic, DRAM, NAND, largest customers, those are very complete views.
Yeah. If you think about operational readiness, and I know your goal based on that backdrop is to be ready for everything, but this is the first cycle that I've ever seen, and that is a 26-year view, where you're seeing leading edge logic, DRAM, and even NAND all in an upturn. When you put it all together, you're potentially talking about during COVID where WFE grew by $35 billion nominal dollars, where this time it could be $60 billion, $70 billion, $80 billion, $90 billion, you know, over a 1, 2, or 3-year period. Can the industry support that kind of rapid growth?
We think the industry can support that growth, and that's why the supply chain is so important in this process. As you highlighted during COVID, we experienced, you know, there were different pockets of the supply chain that were very difficult to improve. We've never stopped working on supply chain since COVID. We've had to re-engineer it to be more regionally self-sufficient. We've had to re-engineer it to make sure we have fewer sole reliances across the supply chain. We've made our own supply chain more global than it was in the past. We've increased our capacity, we've increased our inventory positions, and we've improved the signaling to the suppliers. I would say at this point, we don't see any roadblocks to the supply chain being able to support the lift that we're talking about.
Maybe a wild card question that's arisen in the last, I guess, nine days of war, and how important oil production is to helium. I guess, are you hearing anything from the supply chain?
I don't have any perspective into our customers. I know from an Applied perspective, we have reviewed that, and we don't think it'll be a constraint for Applied at this point in time, but that would be a good question for the customers and how much they use of that particular, you know, gas.
Perfect. Maybe moving on to end markets, you obviously talked about a number of growth drivers here in 2026. Maybe to narrow in, for leading edge foundry, you know, we're seeing a broadening of spend. I guess maybe if you could speak to that, and is that, you know, breadth something that can really help 2026, or is that more of a 2027, 2028 story?
Well, you know what you're seeing, I think the strength, the fastest driver are these AI systems. Data center now is about 30% of demand for wafers on a leading edge. That has just eclipsed demand for PC components. On leading edge, we expect it to overtake smartphone components by 2029. That data center growth on the leading edge is really where the strength of the demand cycle is coming from. I just looked at a GPU system for 2027 that's being planned. It's got double the GPUs of a previous system. It's got about 50% higher transistor count per GPU. It's got 33% more memory per GPU. When you tear apart these AI data center systems, you can really see the concentration continuing to improve in all the various compute and memory components.
When those systems are built in more and more high complexity solutions, that's what pulls on the advanced packaging techniques. But that leading edge, that is the strongest pull for leading edge. You asked for breadth. I think those three markets are all, you know, growing, and the market is constrained at this point on leading edge. We see 100% utilization across all the leading edge nodes.
Maybe on DRAM, I guess, can you speak to kind of the dynamics there? Obviously, we're in a supply-constrained environment, but would love to hear kind of how you're thinking about your leverage to HBM, and as we transition to HBM4 and beyond, how Applied Materials share of wallet should grow.
Yeah. I think, DRAM similar. It's being pulled by that same, demand function. About 15% of the DRAM wafer starts right now are allocated towards high-bandwidth memory. High-bandwidth memory is a, you know, double opportunity for the equipment industry because not only are you selling equipment to make the DRAM, the high-bandwidth memory is more intensive from a wafer perspective. It takes, three times as much, wafer area to make, the same amount of memory with a high-bandwidth component. Then you stack the high-bandwidth memory, so there's additional process steps in order to stack that memory. We think about, 19 extra steps. 15 of those are, equipment steps where Applied Materials provides, solutions, and we sell more than 50% of the value of the equipment that goes into those additional packaging steps, for high-bandwidth memory.
You know, very strong demand signal. I think the roadmap will continue to build out. Customers are working to accelerate floor space so that they can add capacity. You know, as new technologies come on, we think there'll be also other stacking and bonding solutions that the industry will develop and we'll participate in. Those will be inflections that will be of value for Applied.
Maybe I'm getting ahead on the service question, but I'm hearing upgrades of tools, whether it's, you know, even Micron adding an extra layer of EUV to clear up clean room space, replacing KrF tools for higher throughput. Are you seeing that, you know, particularly from the DRAM market?
We have heard that. I think we've heard that both for logic and DRAM, where customers will look to optimize floor space in various ways. It's not surprising. We're trying to maximize output at this point in time.
Maybe to combine leading-edge foundry and DRAM and the advanced packaging side of the house. Your business has grown from $500 million to $1.7 billion 2020 to 2024. Last year, it declined while others saw growth. Can you talk to the divergence and how we should think about the business from here?
Yeah. 2024, we're talking about advanced packaging. 2024 was a very strong year. There was the initial build-out of the HBM equipment on the DRAM side, and that was a high number. I think it was about $700 million in 2024. It was a little less in 2025 after that initial build-out. That slowed down. As we're looking forward, we put it in the fast lane of growth. CJ, when we talked about semi equipment growing more than 20% this year, the way to think about it is advanced logic or leading logic and DRAM and advanced packaging are all in the fast lane, so they'll grow faster than that 20%+ growth rate. ICAPS and NAND will be on the slower growing side.
You can see the faster groups will grow much faster than the 20%, and the slower is much slower. We've said ICAPS, for example, will be approximately flat this year, is the expectation. You know, back to the advanced packaging. We think it'll be fast-growing this year. We think there'll be continued investment in HBM, and that will continue to grow. We think advanced packaging overall will continue to grow with that same AI packaging driven need.
Life in the fast lane Eagles then ?
Life in the fast lane.
How about on NAND? That's a market that you've talked about as not growing as fast. However, we're obviously in a very tight environment. You've got one player adding wafers, everyone else adding layer counts. I guess why do you think it's not, you know, comparable to the other parts of the market?
I think NAND is interesting. The bit demand, the bit rate demand has been very strong and continues to be strong. I think we've said in the past that it's in the high teens for bit growth. The issue with NAND is that the technologies have been so, you know, excellent in terms of providing more bit density each advance in the technology that you just don't need more wafer starts to grow the bit supply by 20% each year, and that's been what's happening. If you look at the NAND wafer starts over the last four or five years, they're relatively flat. We count about 1.4 million wafer starts a month on the NAND side, and that's been roughly flat.
What you see is companies adding capacity for those additional layers, but they don't need to expand the number of wafers out. We think that continues for the near future. At some point, they'll have to add capacity, but it's not in the near future. That's what keeps it, you know, at a lower growth level from an equipment perspective. Again, there's plenty of NAND demand, the bit demand in the marketplace.
Makes sense. Maybe the last part, ICAPS in China, obviously a place of concern from investors. You know, how do you think about the trends there, given your overexposure to both?
Well, it's you know, I don't know if I would agree with characterizing it as overexposed to ICAPS. ICAPS is our mature node technologies for Applied Materials. The ICAPS stands for IoT, Communications, Automotive, Power and Sensors chips. It's those chips that are built on, like, 28, 40, 45, 60 nanometer-type nodes. We have a very strong position in those nodes. You know, if you look over the last few years, we typically have for our equipment and services business in the high 20% of the business that goes towards China, and most of that demand has been ICAPS. We had a very small period of time, CJ, where our you know, the reported percent of China business for Applied was much higher, and that was when we were serving DRAM.
We had a build-out of DRAM capacity in China, so it went into the 40%. Otherwise, I would think as an investor, 25%-30% is the reasonable range where we're serving business in China, and all of that is our ICAPS business. Very important business to us. We don't think we're overexposed, and we think that business continues. It'll be flat over the near future because you know, there's been a significant amount of investment and capacity in China. It's a very good business for us. A lot of that future growth will be on 28 nanometer. We have an excellent position in the 28-nanometer node, and you know, the customers that we can serve will serve will do a good job of serving. We're also continuing to innovate in that space.
Makes sense. It sounds like means we're de-risked. You know, I think President Trump and President Xi will have a meeting at some point in the next month or so. I think there's hope for some sort of grand bargain. Just curious, given the very tight nature of both DRAM and NAND, do you think there could be relaxation of restrictions for perhaps the consumer memory market? Have you heard any inklings of that out of Washington, D.C.?
Well, we've heard nothing from Washington, D.C., as far as I know. I have read in the press what you mentioned, that some device companies may be trying those memories because of the constraints in the market. Certainly, that would be upside to our outlook if we were able to serve those customers again. The China market has been constrained. That's one of the reasons we grew more slowly. It's been constrained by the trade rules. Currently, U.S. companies are more constrained by trade rules than non-U.S. companies. That's something that we continue to work with the government on. That would be an upside to our forecast if we could serve those customers.
Perfect. Now maybe moving to service, you've guided for double-digit growth here in 2026. At the same time, we discussed earlier, upgrades, and customers at near peak utilizations. I guess how are you thinking about the drivers this year? Is there potential, you know, as we layer in, maybe more aggressive capacity adds, you know, I don't wanna say an uptick to that number, but, you know, maybe that number proving to be conservative.
Well, our just reported quarter, our service business grew 15% year-over-year. Low double digits is our outlook, and it's, you know, when you think about that business, every single quarter, the installed base of equipment that we can serve from a services perspective grows. We expect the installed base to grow 5%-10%, you know, depending on the market, each year. We're adding service products every single year to our portfolio, which allows us essentially to provide more value to customers. Finally, the attach rate to our equipment in terms of applying services goes up each year. Customers are building in new cities, new areas. They tend to use the services more because they're looking for qualified labor to help them ramp the factories.
Those three dynamics help grow that services business in low double digits. Certainly, if we have higher utilization or we have more growth on the equipment side, then that grows that installed base and gives us upsides to that. We think that low double digits is a high confidence forecast.
Perfect. Then maybe a part of the business that's not asked much about these days, and you actually just put it into the other category, display. I think there's been hope that there would be an OLED-led inflection at some point. Where are we in that? You know, at what point and what magnitude could that start to help the story?
Yes, OLED, very important. We've got some innovations. We launched a technology called MAX OLED, where we have more of the share of wallet in terms of producing the OLED solutions going forward. We do think that there will be an inflection with more penetration in the laptop form factor and even larger devices. Television would be, you know, the place where you get the most screen size. Nothing to announce at this point, but we think penetration for OLED will continue to increase across the industry. We're not reporting that as a reportable segment any longer, but we did say that we would share with investors when the business changes in size. We can look forward to that going forward.
You know, I forgot to mention something on the services side that I wanna come back to. We recently did a reorganization. We used to have our 200 millimeter equipment business inside of our services business. We reorganized and moved that 200 millimeter equipment business and put it in our semiconductor equipment business. So when investors now look at our services business, it is pure recurring revenue. So it is, you know, it is the spares you need for existing tools and then the services that we sell along with those tools. And that gives us, you know, when we talk about that low double-digit growth rate and the confidence in that growth rate over time, about two-thirds of that business is under contract. Those are, you know, on average 2.9-year contract businesses, contracts.
There's a high renewal rate, over 90% for those contracts. Those are all the elements that give us, you know, confidence that that business, you know, will continue to grow at that rate.
Perfect. Maybe moving to gross margins. You know, I think the market's been happily surprised, record 49.3% in the most recent guide. I think as folks take a step back and think about, you know, where margins are pushing downstream at your customers, particularly memory, wondering why can't the equipment guys get more? I know it's a very different market. You have to add value in order to derive that increase in pricing and margins. I'm curious, you know, as you sit here, you've talked about, you know, trying to raise pricing. How should investors think about that progression, and what are the key underlying drivers that support those higher margins?
Yeah, I think that's a great question. First of all, the portfolio becomes more valuable every year. By the way, investors can look, we report now with the, you know, new guidelines on segment reporting. If you look at our segments for our equipment business and our services business, we report our gross margins. You can see those separately. It was 54.5% in recent quarter in our equipment business. The portfolio, as we do our R&D and make our investments in R&D, we think the portfolio becomes more and more valuable every single year. You're working on higher complexity problems for the customers, in some cases, providing integrated solutions that, you know, basically deliver modular level, solutions to the customers.
These become more and more valuable, and you should expect the gross margin to improve over time with that higher value. At the same time, over the last couple of years, we've invested in our pricing process, which means we've got a much more you know, sort of disciplined process in the company to determine the value of the equipment that we're selling, to set a target price for the sales team, to have the sales team try to achieve that targeted price. That's a much more disciplined process than what we've had before. Our pricing has gone up over the last few years with that general improvement in the overall portfolio, and we expect that to continue, CJ.
Perfect. How does EPIC fit within kind of the gross margin story? Obviously, you're partnering even closer with your customers. You announced this morning a partnership with Micron. I would assume that speaks to years down the road of higher margin. I'm curious today, what's the impact of that investment? How should we think about the progression of margins related to that partnership?
I think investors and customers expect Applied to be working 3 and 4 generations out with our customers. In order to do that, you need lab space. What we've built in Sunnyvale, right near our Santa Clara campus, is a large lab to host all of our customers and to do this long-range work with our customers on future technologies. That is really the core of the industry. You have to be, you know, 5 to 10 years out in the materials identification, in the interaction between those materials, in the tools that apply and remove those materials. It takes that sort of long-range investment to work with customers and provide those solutions.
When we're effective, you get designed in. So you know you have those designs, and in many cases, since they're modular level, those designs can last for generations and generations in process technology. We needed more space to do that, and CJ referenced an announcement this morning. You know, one of our impressive customers, Micron, longstanding partner, has announced that they're going to be joining the EPIC Lab, and they'll be part of the collaboration process in the EPIC Lab. That's a very important announcement for the company. It joins Samsung as another founding partner in the investment. We expect to have a large number of our customers in EPIC.
It's a very important investment for the company in terms of the future of R&D for the company, and we're looking forward to opening it this fall and fitting it out with the tools that will be the newest generation tools and working with our customers on those.
That's right. At SEMICON last October, I believe you'll be hosting a couple events around this.
Absolutely. We're hosting an event around the opening of the facility, and it'll be exciting and impressive.
Perfect. Maybe to close, I think we've got a little less than five minutes to talk about operating leverage. In late 2025, you had headcount reduction, and you guided OpEx relatively flattish into Q1, which is better than kind of normal seasonality. How should we think about, particularly, you know, thinking about a fairly steep recovery in my view, how should we think about operating leverage for the Applied model going forward?
You know, we expect to deliver operating leverage mechanically by raising spending at a slower rate than revenue growth. That is the expectation. You know, when you say, "Well, why is spending going up?" Most of our growth comes from organic investment. We are building lab space. We are building manufacturing space. We are adding headcount for this ramp. You know, when we sell more tools, we install and service those tools, so we're hiring the headcount and training the headcount to be ready for the ramps at our customers. This quarter, we added a number of new R&D programs that will expand our portfolio in the future, where, of course, we have high confidence in the ROI of those programs.
With the you know with the higher confidence outlook, the longer outlook that we gave to the street from a revenue perspective, we felt we were in position to fund those programs. From an investor perspective, you know, if you look at Applied, the way I think about it, we tend to reinvest about nearly half of our profits, and the rest we distribute to shareholders through buybacks and our dividends. You will see Applied continuing to make investments in our core portfolio and in adjacent portfolios, and those are, you know, high return on investment products from our perspective.
What was the average cycle time from R&D investment dollar in to, you know, ramp, HVM revenue out?
I think it's several years. Of course, it depends on the application, because some applications are modifications of something that's existing, so that can go a lot faster. If you have something that's three or four nodes out, that could be a five-plus-year, you know, roadmap.
Perfect. You alluded to capital allocation, half of free cash flow. In the last 12 months, you bought back $4 billion of shares. You do sit in a position where you are above net cash breakeven. You know, I tend to model you around net cash breakeven and return everything. Has your view changed at all? Is there a certain level of cash that you need to run the business, or is that still a fairly decent kind of philosophy behind modeling capital returns?
I think the way I would look at it from a capital return perspective is, we expect to return 80%-100% of our free cash flow to investors over time. That's not every quarter, CJ. You know, in the recent quarters, we've had pretty significant capital investments with the EPIC lab that we're talking about. We had some other cash needs, so that will fluctuate on a quarter-to-quarter basis. As you referenced, over the last year, our distributions, I think, were about 86% of free cash flow. No change there.
Perfect. Maybe to close, in thinking a bit longer term, particularly around your EPIC Center investment, how will you monitor or measure, you know, success with that investment?
I think that's, you know, if you look at speed of innovation for the company, that's what we're thinking EPIC will provide us. Having our customers in our lab with the brand new, you know, latest development technologies, using those, that will speed innovation. The lab itself is built to speed up your ability to install, hook up tools, change chambers, do new experiments. The lab is built to accelerate that process. I won't go into the construction details since we have two seconds left. It is designed to speed the process up. It is designed to host customers, and we think that will accelerate our innovation and pace of innovation.
Well, perfect. I think we have to close there. Thank you all for coming, and thank you for coming, Brice.
Thanks, everybody.
Good to see you.