웨이퍼팹 장비주의
두 번째 챕터,
'서비스 비즈니스'

Yes. Nice to be here, Harlan. Thanks.

We're going to start off at a high level. The team just reported very, very strong results and growth outlook last week. So I'm going to start off there, but we are going to touch upon Tim's AGS franchise because it's just — it's a great ratable, highly profitable cash flow generative franchise. But starting off at a high level, team reported strong results outlook last week.

On the better revenue growth outlook for this calendar year, I think you guys are now calling for 30% growth in your systems business versus your prior growth outlook of 20%. On the incremental upside this year, is it being driven by new brick-and-mortar greenfield programs being pulled forward? Or are customers just accelerating technology migrations on existing capacity? Or just solidifying plans and now sort of locking in sort of tool slots, right?

And so trying to figure out like what drove that sort of incremental upside over the last 90 days? And then can you just talk about which end markets, advanced foundry logic, DRAM, advanced packaging contributed most to the sort of incremental improvement in the outlook?

Sure, Harlan. Happy to talk about that. So there's — I would say there's not fundamentally a pull-in from '27 into '26. There's a lot of brick-and-mortar being built out there, greenfield facilities. So there's a pipeline of projects that are coming online. To the extent that customers can accelerate them, they obviously want to do it as quickly as possible given the environment. But there's a lot of creativity going on in the existing spaces out in the factories globally today.

There's at least one case where a customer procured a completed shell from another customer. And obviously, they're going to put product into that as quickly as they can, which helps us with our business. But the other areas that we see are primarily in-fab changes. So if customers are looking at their full production lines, if they see pinch points in their production, maybe an older generation tool that's a lower throughput that's limiting the output of the factory, we're seeing lots of cases where customers are coming to us and saying, okay, we're going to remove this platform. We're going to replace that with a higher productivity platform, which is good for wafer fab equipment.

Additionally, we see cases where — or there's at least a case where a 200-millimeter factory was being shut down and repurposed into a packaging factory. So you were asking kind of which areas do we see the growth. Packaging has got intense growth pressure in demand in end markets. So we're seeing customers being as creative again as possible to get capacity in as quickly as possible.

And then we see another example where there's an older generation 2D NAND factory that's being converted to a DRAM factory. Again, DRAM, advanced packaging are kind of themes that you will hear over and over again where customers are trying to get more good die out. So that creativity is leading to these incremental upsides that we see. And then just from a services perspective, interject, as we work with customers across all their facilities, I think in every place that touches AI, those customers are coming to us saying, how can we optimize output for the factory, which is kind of driving the service business as well.

Yes. I think that's a little bit under the radar screen for most investors is that we all tend to think about greenfield capacity. We all tend to think about technology migration. But as you pointed out, there's a ton of installed capacity out there where throughput may not be as optimized, yield may not be as optimized, right? And any little improvements in current factory throughput or defect density improvements can have a pretty significant impact in terms of output and good die per wafer, which ends up being millions and millions of dollars for their customers, right?

No, that's a good point. If a fab is fully installed and that's operating, every percent of utilization improvement that you can make in a factory is a huge lever for productivity for customers. And as we partner with them, particularly in the factories, whether it's with upgrades to existing tools, placements of key tools or just service optimization, these are all kind of win-win scenarios that we see with customers. So it's a great environment out there to be working together really closely.

And at earnings, the team called out having historically high visibility, 8-plus quarters type of visibility to your backlog, customer forecast. And this gave the team the confidence last week to qualitatively talk about continued strong growth profile in WFE spend '27 and '28, right?

And in line with that, Brice talked about the Applied team having 100-plus projects, programs that are on your radar screen. These projects sit at different stages, some near-term ramps, some longer-term commitments. Some of these programs are technology migration focused, greenfield build-outs. What's the rough mix of this 100-plus project pipeline, right? Is it technology migration more biased? Is it greenfield capacity biased? And how does this pipeline sort of convert over the next, call it, 2 to 3 years?

Yes. So just the first part of your question about the 8 quarters visibility, I think — those of us that were around post-COVID during that ramp, there was an awful lot of learning that happened during that period. In my prior role, I was kind of at the nexus of that with Applied working with customers as they were trying to kind of plan capacity on what was kind of an unexpected ramp.

This time, it's a little more of an expected ramp because we know with AI and the Agentic components of AI now that are coming online, there's just huge demand across, in particular, leading logic, DRAM, HBM and advanced packaging. Those are the ones that we see as kind of the primary drivers. So it's in our best interest as a supplier and a customer to collaborate as closely as possible because we want to make these transitions smooth.

Bringing up these factories is extremely complicated. We or me, I'm hiring people across the globe in order to do installs, meeting customer schedules. So the collaboration is coming naturally, I would say, at the moment, particularly with our largest customers because it's in our mutual best interest to do that.

Now on to the pipeline. So when we look at the pipeline, 100 projects is a lot. And I think Brice also mentioned, 10 or more that's come fairly recently. The biggest part of the greenfield capacity that's coming online is actually in the advanced logic and DRAM spaces because there's just not enough physical capacity today. There's so much silicon that's needed for these advanced technologies that it's really being driven by the greenfield space.

I would say advanced packaging is in the same boat, so to speak, just because we're moving from something that's been relatively straightforward for decades, we're moving kind of the front-end type processes into the back end, which is, again, requiring more physical space in the factories.

NAND is a little bit different. You get so much leverage on a NAND wafer whenever you upgrade. So as we're present in all the NAND factories around the world. We see the wafer starts have kind of dropped a little bit over the last couple of years in NAND as customers have converted from one technology to the next. So it's a little more complicated. The technology — the wafer starts drop a little bit, but the bits go up significantly.

So there's a lot more leverage that you get with upgrade NAND as compared to the other spaces. We've done some analysis, a typical, say, HBM wafer versus a NAND wafer, you're getting somewhere between 40 and 50x the bits on kind of apples-to-apples comparison for an SLC NAND. If you go to quad level, you're quadrupling that. So we think there's just a huge amount of capacity, and it's very efficient for customers to do that as conversion. Now I think there will be some greenfield NAND over time, which is great for us. We're very — we're actually kind of excited about that as well. But we just see the leverage in the other 3 spots for greenfield.

Got it. And semiconductor industry is on track to drive over $1 trillion in revenues this year. I mean it was just a couple of years ago that we were all talking about a $1 trillion market by 2030. And on your recent — these are very valuable sessions, but in your recent Master Class, you brought up an important insight, which that the mix of leading edge — the mix of spending was longer term thought to be 1/3 leading-edge foundry/logic, 1/3 memory, evenly split between DRAM and NAND and 1/3 sort of mature and specialty analog power products, which you guys call your ICAPS business.

But given the rapid growth AI and data center compute, networking and memory, which biases strongly towards leading-edge logic and memory architectures, there's now a strong divergence, it feels like in growth between these various segments. So help us understand like how do you see — is there a new way to kind of think about the mix of spending by markets, not only this year, but over the next kind of few years?

Yes. So for this year, we think about 80% of the incremental wafer fab equipment spending is really in those 3 areas that you talked about, the advanced foundry logic, DRAM and advanced packaging. And that really is driven by the AI demand. If you look at the various waves that have come up over time with compute and then to mobile and now into AI, there are different focuses for each of those areas.

ICAPS is still a very important market for us. And I would say we're — I think Brice made the comment that we're incrementally positive on it compared to where we were, say, 3 to 6 months ago. We think it's kind of flat to up both China and non-China. But the bulk of the spend is really going to be in those 3 focused areas where Applied is #1 in advanced foundry logic. We're #1 in kind of DRAM in a lot of areas and then also for the advanced packaging.

Again, going back to the — you guys held a great Master Class on transistor and interconnect architectures, right, on current and next-generation platforms. One of the big differentiators in my view, at the transistor level is Applied's what you guys call integrated material systems, right? So various aspects of the gate formation or the interconnect formation, you've got a tool that integrates up to like 7 different processes into a single platform, right, surface treatment, etch, deposition, clean, anneal, integrated metrology and so on, right? And these integrated solutions now represent about 30% of Applied's overall system sales. Obviously, the benefits of IMS is not only technology enablement, but as you could appreciate, better defectivity, better — higher throughput, lower overall system footprint, it seems like a big differentiator for Applied, but why is it that the mix of IMS-based platforms hasn't increased that much over the past several years? And how does IMS create opportunities for your AGS franchise?

That's right, IMS. Sure. So I do think IMS is one of the things that's really — it's unique for Applied Materials, right? We have a very broad connected portfolio of products. And the ability to bring them together into a single mainframe where you don't break back and you don't expose the wafer to ambient is, in some cases, it's very critical. I think in that Master Class, if I counted correctly, there were 4 IMS platforms that we talked about, right?

There was Trillium that you mentioned for gate formation. There was an Epi and etch combination for forming the contact that was talked about and then 2 versions of copper berries integrated tools for the super tight pack lower layers is one configuration and then kind of the mid-layers is another configuration. So from Applied's perspective, we will work with customers as closely as possible to integrate steps that make sense to integrate because it does drive complexity on a single platform, as you can imagine. What used to be a single PVD platform Endura now is a 7 different applications. So managing that platform in production and just kind of redundancy on the platform, you want to optimize for where that's really needed. And it's really these absolutely critical steps that we do that.

The other thing we do at Applied, again, because of the portfolio is we co-optimize applications. And that's another big piece of the business. So they can be sequential steps or nonsequential steps that still need to be co-optimized because they interact across multiple layers. I think a good example of this is we're seeing great synergy between our PDC group, our metrology inspection group and our development teams, in particular with PROVision, where you can do thousands of measurements across the wafer, we can optimize processes faster than we have in the past.

So we tend to look at it pretty holistically, where it makes sense to do an integrated platform with a customer, if that's the demand, then we will do it. And we are constantly co-optimizing applications kind of into the flow where it makes sense to give the customer a little more flexibility. So it's not really about increasing that number. It's really finding the optimal space in the flow. But again, I think this is one of the areas where Applied is truly unique in the industry because of all these capabilities that we have across different product lines.

And complexity — system complexity in my mind, means good things for the services organization that supports that. Is that a fair — is the service intensity a bit higher on these IMS platforms?

The service intensity is higher on the IMS platforms for the reasons that you stated. If you think about — just think about parts, if you had a 7 or 8 chamber, 9-chamber Endura that was all PVD, there's a lot of commonality in the parts. If now you have an ALD and an anneal and you got CVD and PVD, those are all kind of unique capabilities. So it causes us to prepare differently with customers to support those tools to make sure they're getting maximum output in the factory.

Your DRAM revenues were $1.7 billion in the most recent quarter, up 18% year-over-year. The team has roughly gained 10 percentage points of WFE-related DRAM share over the last decade. The next 2- to 3-year DRAM road map is meaningful for Applied, right? 6F-squared continues with its high-volume ramp on the next-generation 4F-squared and then eventual move to 3D DRAM architecture, Applied has been pretty consistent that materials intensity increases meaningfully at 4F-squared and especially at 3D DRAM. Can you just frame for us the share opportunity for Applied in 4F-squared specifically versus where you sit today at 6F? And is the right way to think about it, given the historical share gain track record that maybe Applied gains another, call it, 3 to 5 percentage points of WFE DRAM share at these upcoming inflection points?

Yes. So let me start by putting a little plug in for Master Class because on June 25, we are going to do a DRAM advanced packaging masterclass, kind of the level of detail that you saw with the advanced foundry logic. With 6F-squared, in particular, we see there's a lot of runway. Customers are pushing those technologies. Again, the demand — Manish is coming up next. I'm sure he's going to talk about the demand in the end markets is pretty incredible.

So when you have a technology, you want to extend it as long as you can. And the place where we see the road map going for 6F-squared is really right into the sweet spot for Applied's portfolio. There's going to be more advanced wiring. We also see that the transistor formation is moving more to the advanced style that kind of moved into advanced foundry logic a few years ago. So we're able to take that knowledge, the experience on the tools, the productivity and cost down benefits that we've seen by optimizing those tools and move those into the DRAM into the next couple of years.

When we start talking about 4F-squared and 3D DRAM, again, we just — we see that the materials engineering intensity on those applications going forward is also moving into the Applied space. And this is one of the fundamental reasons why we created this EPIC platform. So we've announced a number of customers, Samsung, Micron, Hynix, TSMC last week. Advantest is joining as a partner. We have universities coming in, RPI, ASU and Stanford. And just this morning, we announced that Broadcom is joining the EPIC platform as well. They're specifically advanced packaging — they're specifically interested in advanced packaging.

And these processes today are so complicated, it takes an ecosystem to essentially bring these to market. So I think there's recognition that partnering in this vehicle, which is EPIC for Applied is going to be a way to accelerate that. And our goal is to take what was a 10-year development pipeline and ultimately cut it in half by bringing everybody into the same facility and co-optimizing in an environment where the innovator is there, the customers are there, the customers' customers are there, industry partners are there, just to fundamentally change the way that development is done.

And from a service perspective, I view this as the best thing ever because historically, when we've done development with customers, we've done a demo in our facilities, a couple of wafers or chiplets. Now we're going to be developing a process with a customer in a facility where we can put our AIx capability around it, our eco solutions around it. We'll have our service folks there working on developing a fingerprint on these brand-new tools so that when a customer puts it into their R&D facility, we can fingerprint it immediately, bring it up faster, increase speed to market for customers.

So it's a whole ecosystem from the upfront R&D process pure research, all the way through how do we optimize it and get it up into production faster for customers in their R&D and ultimately in the HBM facilities.

Yes. No, I think now is actually a great time. So let's focus on your AGS, your services franchise. As the Head of Applied Services business, you're in contact with all of your major customers. I mean what are their priorities right now? And how is the Applied team helping them out?

So the priority — in a word, priorities are output. It's good die out. And so it's not just optimizing throughput on an individual tool. It's literally optimizing good die out on every single wafer. So we're leveraging some of the capabilities that we've been developing over the last 10 years in AGS, specifically the AIx platform, which is actionable insight accelerator. This is the way that we bring AI, predictive models, digital twins, recipe optimizers.

This is the way that we bring these to customers in the factory on their tools. So we're working very closely with them on a project basis and a contract basis to optimize output and again, primarily to optimize good die out in this environment. So it's great for us given 2/3 of the AGS revenue today is driven by long-term contracts. So we've got really tight relationships with customers, and they're leveraging the footprint that we have in the fab to help them drive output.

2/3 of the business, long-term contracts and close to high 90s type renewal rates.

So we publish at a greater than 90% renewal rate when our portfolio and services is pretty broad. So we have kind of basic level services, warranty-like services. And then we have managed and performance services, which we really co-optimize with customers, how they manage individual tools and we try to drive output. When we look at managed and performance, the renewal rates are actually quite a bit higher even on those levels. So the stickiness of this because of the value that it provides customers is quite high. And this is a change that we pivoted to about, I'd say, 10, 12 years ago, shifting to more of an outcome-based services type solution. And yes, it's growing quite rapidly.

Your services franchise, 20%, 22% of the company's total revenue base, very, very strong recurring revenues, as you just articulated, within striking distance of 30% operating margins. Through the first half of your fiscal year, AGS is driving 17% year-over-year growth. You did raise your long-term growth outlook from low double digits sort of percentage CAGR to sustainable annual growth in the mid-teens range, right, and potentially higher at least this first year. What's driving the higher growth outlook?

So if we look at the business in the sort of the component parts, so the contract business continues to grow, and it's growing faster in the managed and performance space, which is great. That's exactly what we want with customers because we think that's where we can provide the most value. Those contracts, we are — I think our average contract length at the moment is about 2.9 years. And the sweet spot for us is somewhere in the 2.5 to 3-year range.

So we're kind of right where we want to be from a visibility standpoint. It helps us plan better for parts and people and performance with customers when we're in that range. So that piece of the business, we're very, very happy with. The next component, I would say, is sort of our on-demand business, and that's on-demand spare parts or if people need contracted labor to come in and do some work. That's a little more tied to factory utilization.

The factory utilization is high, we see the on-demand parts going up. So that's driven it up a little bit more in the near term in combination with this continued strength that we see in the services business. And then the third component of the business in AGS, which we don't talk about too much is we have a software franchise in AGS. So the manufacturing execution system, Smart Factory, the SIM system, Applied is actually the largest supplier of factory-level software for customers.

And that's a space that we see a lot of opportunity going forward, particularly as we think about what's happening in the larger market with AI and Agentic AI. So that platform is an opportunity for us to engage with customers in different ways than we have in the past. So we actually see strength in all 3 of those, and that's why we think there's an opportunity. I think Gary mentioned in the near term to be above that mid-double digit for the year.

Your installed base of tools last 5 to 10 years has been growing at about a 6% to 7% CAGR. Your services business has been growing up until recently, 11% to 13% CAGR. Now you're forecasting mid-teens as we just talked about going forward. Installed base is accelerating. The team is also seeing good traction driving attach to more higher value-added solutions. You talked about things like AIx. I'm wondering how much of this is also contributing to the AGS sort of growth outlook, right? Last, we got an update from the AGS team. Recurring revenue per tool, which is sort of reflective of capturing more value-added capabilities, recurring revenue per tool was growing at about a 5% CAGR. Has this value capture rate actually gone up due to capabilities like AIx, remote diagnostics, digital twins and things like that?

Yes. I think the way we look at it is we are — we have an innovation pipeline that we think of in AGS. And this consists of these AIx capabilities, supporting these IMS tools, which are different for customers than an individual tool. And then there are other capabilities, cobots and other things that we kind of have in the portfolio that we can deploy to support customers. So as we aggregate these capabilities, what we see is customers are moving up the value chain with respect to the types of service that they're buying from Applied. So more into managed, more into performance type service because they're getting more value out of it.

The other thing I would say that's really important to consider is the process windows today that our customers are dealing with on these really advanced nodes, whether it's memory or advanced logic, they're really small. I mean they're very tight. So part of our focus the last couple of years has been to find ways that whenever there is an event that happens in the factory, first of all, we want to take corrective maintenance events, extend them out. We want to move corrective to preventive.

And we do that with these predictive models that have been created because the ability to take a corrective maintenance activity, move it into a predictive means that now we can work with a customer to schedule that. So they're with moving through the factory, we can look at where there's an optimal time to take the tool down and bring it back up. But it's not just basic maintenance anymore because the process windows are so tight. So we created a capability that we call CROSSMATCH a number of years ago, and we've automated it in partnership with our business units, and it allows us to do a quick fingerprint of the tool before it goes down for maintenance.

When it's a predictive model, we know exactly what we need to do. So we've got the folks trained to come in and do that change. We bring it back up. We refingerprint it and re-center the process so that you get the maximum amount of time from maintenance event to a maintenance event. And this is incredibly important for customers because it allows them to run the tools a little bit longer. And in this environment, as I mentioned, output is king and good die outer king. So if you're not centered in the process window, maybe your edge die go out a little sooner than they would have in the past. So customers are very focused on working with us to kind of optimize that space, and that's where we're seeing a lot of the pull currently, particularly in the contract business.

Got it. We did touch upon advanced packaging. It is a relatively new dynamic for the industry, right? And an incremental growth driver for Applied. We talked a little bit about this, but you mentioned the EPIC partnerships around next-generation advanced packaging development. You have a number of memory customers. Obviously, I think they're focused on things like HBM. But you announced TSMC, which is more the 2.5D, 3.5D advanced packaging. Today, the Applied team announced a partnership with Broadcom, who also has a plan to bring in some in-house capability on next-generation advanced 2.5D, 3.5D advanced packaging architectures. So you've got this plethora of different sort of topologies for packaging, in which case you have a big portfolio of tools that supports all of these like — how does all of this drive service intensity for the package part of the business from an AGS perspective? And is this a new sort of facet of growth for the AGS team as well?

I think it is a new opportunity for us. I mean we're #1 in packaging in HBM, and we've got a great position in 3D SoIC in particular. And those are the 2 fastest-growing portions of the packaging market as we see it. So as those tools go into factories, it creates a new opportunity for us on service.

Historically, there are sort of front-end tools and back-end tools, and there wasn't a lot of overlap between the 2 of them. With heterogeneous integration, advanced packaging, we're seeing the front-end requirements and that complexity, the sensitivity is moving to the back end. So those customers are looking for support from Applied on the service side because we've got the understanding of how those tools need to be maintained in an HVM environment. So I think we're in the very early stages of this as we see going forward. But I do think it creates an incremental opportunity for us in the service business in addition to the great opportunity that we have on the equipment side of the business.

In addition to the strong revenue growth that your franchise delivered in the April quarter, gross margins improved 30 basis points sequentially, 120 basis points year-over-year. Operating margins grew 100 basis points to 29%. That's the highest level in over 2 years, right? And on the gross margin improvements, how much of this is more attach of some of the higher value-added services offerings like AIx, software suite, remote monitoring, which I assume is gross margin accretive. And on the strong operating margins, you're within striking distance of 30%. And I know the team has historically thought they could drive AGS operating margins longer term into that sort of low 30% range. Is that still kind of the way we should think about the long-term operating margin construct?

Yes. We think about it 2 ways. And you kind of commented on them in your question. I mean the top line growth is really all about value creation for customers. The more value we can create, the more good die out, the higher output from the factories, customers are willing to do more service work with us, which we appreciate. And this really requires deep, deep integration with the customers into their factories, really good communication, complete alignment on what needs to be done in the facilities. So as we continue to put things into the service innovation pipeline, those are things that add value. That's primarily driving the top line.

The bottom line growth is really all about efficiency. I mean we have a pretty big operation, $6.5 billion or so operation on a run rate basis. And it's — that infrastructure is there. And the more that you put through the infrastructure, the more efficient it is. So that's very important. We have continental distribution centers on each of the major geographies. We have 3 of them around the world. They've all been fully automated now with robotics. So where we were touching every part stocking, destocking, packing, now like 60% of that is done automatically.

So it's kind of touch-free until it goes into the box. So that allows us to increase velocity of material through those. It's more efficient from a stocking standpoint for us. And it's better for customers because we can turn things around with higher accuracy and faster.

So we're pretty relentless about looking about how we drive efficiency in the business. And that's really what's going to drive the operating margins for us. So again, we think about it 2 ways. Top line is all about value. Bottom line is all about efficiency, and it's — in this infrastructure. So as utilization has gone up in our customer facilities, we're essentially — it's not the exact same infrastructure because clearly, we're adding, but we're driving a lot more material through that infrastructure, so it's more efficient.

I see. And for the final question, I am going to tap into your many years of running the — being a part of the semiconductor systems business. And now that the team breaks out your semi systems gross margins, it's been a positive surprise for us and for the market, right? Almost 55% gross margins, 35% operating margins for the systems business, significant improvement over the past 2 years, has been driven, I think, by higher value as you bring new capabilities like IMS to the market. As you look at your pipeline of new solutions, does the incremental system gross margin for your next-generation tools carry higher product gross margins? And what is the team doing to drive better cost efficiencies of your systems, which could also help gross margins for the systems business going forward?

Sure. I think as you pointed out, this is really all about value creation, value creation for customers. When you look at these complex tools like an IMS tool, it's a unique capability for Applied to be able to do this. And so they're very high value for customers.

The other thing that if you just look at the data today, in the last, I think, 3 months, we released 5 really advanced new products, not just minor changes, but quite advanced, Trillium being one of them. There's a selective nitride deposition on the precision tool. There's a treatment tool for Veeva that was part of the Master Class. These are all unique capabilities that are helping customers solve really difficult problems, so they've got high value.

So we think — as I think Brice and Gary both talked about, long range, as we continue to see more and more of these products moving out as the technology continues to evolve, it's going to be beneficial for Applied overall from a gross margin standpoint.

Yes. Thanks for having, Harlan. Appreciate it.