Applied Materials, Inc. (AMAT) Q1 2023 Earnings Call Transcript

Applied Materials, Inc. (NASDAQ:AMAT) Q1 2023 Results Conference Call February 16, 2023 4:30 PM ET

Company Participants

Michael Sullivan - Corporate VP

Gary Dickerson - President and CEO

Brice Hill - CFO

Conference Call Participants

C.J. Muse - Evercore ISI

Stacy Rasgon - Bernstein

Vivek Arya - Bank of America

Krish Sankar - Cowen

Atif Malik - Citi

Toshiya Hari - Goldman Sachs

Timothy Arcuri - UBS

Harlan Sur - JP Morgan

Joe Quatrochi - Wells Fargo

Sidney Ho - Deutsche Bank

Quinn Bolton - Needham

Mehdi Hosseini - Susquehanna

Brian Chin - Stifel

Blayne Curtis - Barclays

Vijay Rakesh - Mizuho Group

Operator

Welcome to nan Applied Materials Earnings Conference Call. During nan presentation, each participants will beryllium successful a listen-only mode. Afterwards, you will beryllium invited to participate successful a question-and-answer session.

I would now for illustration to move nan convention complete to Michael Sullivan, Corporate Vice President. Please spell ahead, sir.

Michael Sullivan

Good day everyone and convey you for joining Applied’s first 4th of fiscal 2023 net call.

Joining maine are Gary Dickerson, our President and CEO, and Brice Hill, our Chief Financial Officer.

Before we begin, I’d for illustration to punctual you that today’s telephone contains forward-looking statements which are taxable to risks and uncertainties that could origin our existent results to differ. Information concerning nan risks and uncertainties is contained successful Applied’s astir caller Form 10-K filing pinch nan SEC.

Today’s telephone besides includes non-GAAP financial measures. Reconciliations to GAAP measures are recovered successful today’s net property merchandise and successful our quarterly net materials, which are disposable connected nan IR page of our website astatine appliedmaterials.com.

Before we begin, I person a almanac announcement. Later this month, Applied Materials is participating successful nan SPIE Advanced Lithography and Patterning Conference. For those who aren’t walking to San Jose for nan conference, we scheme to clasp a caller merchandise motorboat arena connected our IR Website connected Tuesday, February 28th astatine 9 americium Pacific Time. We dream you’ll subordinate us.

And pinch that introduction, I’d for illustration to move nan telephone complete to Gary Dickerson.

Gary Dickerson

Thank you, Mike.

Applied Materials executed good successful our first fiscal quarter, delivering results towards nan precocious extremity of our guidance range. We besides grew our backlog for nan ninth consecutive quarter. Going forward, we expect backlog to commencement declining arsenic we move done 2023. Overall, we are making bully advancement closing our supply-versus-demand gap. However, very recently, 1 of our awesome suppliers encountered a disruption that will effect our 2nd 4th shipments. Brice will supply much specifications astir this erstwhile he shares our guidance.

In my prepared remarks, I will screen 3 main topics: Our existent outlook for 2023; our longer-term maturation thesis for nan industry, and really Applied is positioned to turn faster than our markets overall; and finally, a little overview of nan investments we are making to productively standard nan institution and accelerate our customers’ roadmaps.

Let maine statesman pinch our near-term position connected nan market. In this situation of mixed macroeconomic signals, our customers are facing a assortment of request dynamics. Consumer-driven markets, including PCs and smartphones are intelligibly weaker, while inflection-driven markets stay much resilient, particularly high-performance computing and AI, automotive, business automation, and cleanable energy.

In position of wafer fab instrumentality investments, 2023 will beryllium a down twelvemonth for representation spending arsenic customers rebalance inventories and defer capacity additions successful some NAND and DRAM. We expect DRAM to prime up ahead of NAND, perchance opening to retrieve later this almanac year. We now spot leading-edge foundry-logic spending being somewhat down year-on-year. While near-term request headwinds are causing customers to trim capacity additions, they stay firmly committed to strategical investments successful precocious nodes to triumph nan conflict for next-generation exertion leadership.

Our position of ICAPS, chips for IoT, Communications, Auto, Power and Sensor applications, is incrementally much affirmative than it was past quarter, and we now spot spending being up year-on-year.

Leading ICAPS companies are investing successful some exertion and capacity to service increasing request crossed a wide scope of verticals. In addition, location is beardown authorities support astir nan world to build resilient, regionalized ICAPS supply.

Based connected what we are seeing successful our business and proceeding from our customers, we judge Applied Materials is good positioned to outperform nan marketplace successful 2023. The resilience successful our business is driven by respective contributing factors: First, our balanced marketplace vulnerability which allows america to execute good successful a assortment of spending operation environments. Second, our position pinch exertion leaders who stay focused connected investing successful their semipermanent strategies. We person beardown positions astatine each nan cardinal exertion inflections successful precocious foundry-logic, ICAPS, DRAM, and precocious packaging. Third, our grounds backlog, of which a important percent is made up of our astir differentiated products including metallic deposition that is uniquely enabling for captious next-generation wiring guidance improvements. And finally, our work business which is connected way to turn successful 2023, moreover aft nan effect of existent U.S. export power regulations. More than 60% of our work gross is generated from subscriptions successful nan shape of semipermanent agreements. These agreements person an mean tenure of 2.6 years and a precocious renewal complaint of much than 90%.

While we are cognizant of near-term volatility successful our markets and fresh to respond to some upside aliases downside, our semipermanent outlook remains highly positive. Semiconductors are nan instauration of nan integer system making them much strategically and economically important than ever before. Around nan world, governments are incentivizing nan manufacture to build location manufacturing capacity and accelerate investments successful strategical next-generation technologies. The semiconductor manufacture remains connected way to turn from astir $600 cardinal successful 2022 to a $1 trillion aliases much by nan extremity of this decade.

Technology complexity of chips is expanding importantly arsenic accepted 2D Moore’s Law scaling slows and nan manufacture transitions to a caller PPACt playbook to thrust improved performance, power, area-cost and time-to-market. In addition, arsenic 2D Moore’s Law decelerates, we are seeing mean dice sizes successful precocious foundry-logic grow. This drives nan request for further wafer capacity while besides accelerating nan modulation to chiplets and heterogeneous designs. Beyond precocious packaging, awesome exertion inflections successful transistor, wiring, and patterning are besides enabled by caller materials and materials engineering. These inflections summation nan size of Applied’s disposable market.

As we person been investing successful these inflections for aggregate years, we are now good positioned to seizure a larger stock of our disposable market. We person a heavy pipeline of solutions to alteration caller wiring innovations, Gate-All-Around transistors, backside powerfulness delivery, heterogeneous integration and hybrid bonding. Our wide portfolio of products enables america to connection customers accepted portion process instrumentality each nan measurement to integrated materials solutions, aliases IMS, that harvester aggregate process technologies pinch on-board metrology and precocious information analytics successful a azygous platform.

We are very assured astir nan maturation trajectory of nan manufacture and Applied’s outperformance wrong that environment. To support this growth, we are making strategical investments successful caller manufacturing, logistics and R&D infrastructure. The scale, velocity and location of these investments will beryllium limited connected receiving authorities support, immoderate of which we person already secured.

Beyond simply expanding capacity, we spot these infrastructure investments arsenic a catalyst to alteration nan measurement we collaborate pinch customers, suppliers and investigation partners. For example, successful nan coming months, we expect to break crushed connected our next-generation R&D halfway successful Silicon Valley. We judge this caller high-velocity level will summation invention and commercialization velocity while reducing nan wide costs of bringing caller manufacturing technologies to market.

As nan manufacture and Applied Materials scale, we request to do truthful productively and efficiently. This is simply a awesome strategical taxable for america and, crossed nan Company, we are focused connected driving up productivity and implementing caller ways to activity that are amended and faster.

Before I manus nan telephone complete to Brice, fto maine summarize.

While nan system and semiconductor manufacture are facing challenges successful 2023, we stay assured that Applied is good positioned to outperform our markets this year. Our resilience is underpinned by our ample backlog of differentiated products, increasing work business, and beardown positions pinch starring customers astatine cardinal exertion inflections. Our longer-term outlook remains highly affirmative arsenic secular trends create opportunities for Applied to outgrow nan semiconductor and wafer fab instrumentality markets by enabling nan PPACt roadmap pinch our differentiated portfolio of materials engineering solutions. In statement pinch this view, we are making strategical investments successful R&D and infrastructure, while driving improvements successful productivity and velocity crossed nan organization.

Now Brice, it’s complete to you.

Brice Hill

Thank you, Gary.

I’d for illustration to commencement by thanking our squad and our proviso concatenation partners for helping america present beardown gross successful a move environment. On today’s call, I’ll summarize our Q1 results and supply our guidance for Q2. Before going into nan adjacent term, I’d for illustration to talk nan broader discourse for nan manufacture and nan Company.

Over nan past fewer cycles, nan semiconductor manufacture has go importantly larger and much diverse. Applied’s gross and net person grown and go much resilient complete this period. In Semiconductor Systems, much than half our gross comes from activity businesses wherever our marketplace conception stock is adjacent aliases good supra 50%. The maturation of our services business has added different magnitude of stability. These factors fortify our assurance successful our expertise to invest, make precocious returns, and return superior to shareholders. Our business exemplary is very businesslike and generates charismatic returns. In fact, from fiscal 2013 done 2022, we person grown Applied’s free rate travel astatine a compound yearly complaint of 30% and accrued our return connected invested superior to complete 35%.

We person 3 superior allocation priorities. The first is backing early maturation and returns, and nan 2nd is maintaining a beardown equilibrium expanse truthful we tin money R&D done marketplace cycles. Accordingly, moreover though nan semiconductor marketplace is weaker this year, we are investing to standard nan Company to support our customers successful what we judge will beryllium a trillion-dollar semiconductor market. We are expanding our manufacturing and logistics capacity, and we are making important investments successful our R&D infrastructure to collaborate much intimately and productively pinch our customers and manufacture partners to thief lick their highest-value problems. Our 3rd superior allocation privilege is returning excess rate to shareholders. We person committed to return 80 to 100% of free rate flow, and existent returns for nan past 10 years person been 106%. We person repurchased 40% of shares outstanding astatine nan opening of this period.

As nan business has go larger and much diverse, we’ve besides accrued nan dividend. We’ve accrued our quarterly dividend per stock astatine a 14% CAGR complete nan past 17 years. In fact, operating income from our services business unsocial much than covers a increasing dividend.

Finally, I want our investors to cognize that we are progressively focused connected improving our productivity.

We accrued our full-time worker guidelines by astir 20% past twelvemonth and person restricted hiring to captious positions and slowed our spending growth. R&D is our largest expense, and we are making portfolio decisions to guarantee we make nan highest imaginable returns from our investments. We besides spot opportunities to make our manufacturing much predictable and efficient, and person formed caller teams to thrust our operational goals.

Moving now to our Q1 financials, we delivered nett income of astir $6.74 cardinal and non-GAAP EPS of $2.03. These results were successful nan precocious extremity of our guidance scope and astir identical to past quarter’s grounds results. Non-GAAP gross separator accrued 80 ground points sequentially to 46.8%, chiefly driven by improved manufacturing and logistics costs on pinch pricing adjustments. Non-GAAP OpEx was astir $1.17 billion, pinch astir two-thirds of nan sequential summation from R&D.

Turning to nan segments, Semi Systems gross grew by 13% year-over-year to $5.16 billion. Strength successful ICAPS much than offset reductions successful representation and precocious foundry-logic. Segment non-GAAP operating separator was 37.3%.

AGS gross grew astir 4% year-over-year successful Q1 to astir $1.37 billion. AGS absorbed a afloat 4th of gross effect from U.S. waste and acquisition regulations and performed amended than nan midpoint of our expectations. Segment non-GAAP operating separator was 28%.

In Display, gross declined to $167 million, and conception non-GAAP operating separator was 4.8%.

Turning to our rate flows, we generated $2.27 cardinal successful operating rate travel during nan quarter, which was 34% of revenue. We returned $470 cardinal to shareholders including $220 cardinal successful dividends and $250 cardinal successful buybacks.

Now, I’ll stock our guidance for Q2.

We expect gross to beryllium astir $6.4 billion, positive aliases minus $400 million, aliases up complete 2% year-over-year. We expect non-GAAP EPS of $1.84 positive aliases minus $0.18. This guidance includes a antagonistic estimated accommodation of $250 cardinal related to a cybersecurity arena that was precocious announced by 1 of our suppliers. Based connected our existent appraisal of nan situation, we expect to retrieve each of this revenue, and nan mostly of it successful Q3. We expect Semi Systems gross to beryllium astir $4.84 billion, which is up complete 8% year-over-year. We expect AGS gross to beryllium astir $1.34 billion, which is down astir 3% year-over-year including nan antagonistic effect of caller U.S. waste and acquisition regulations. Display gross should beryllium astir $160 million.

We expect Applied’s non-GAAP gross separator to beryllium astir 46.5% which is little quarter-over-quarter chiefly driven by little volumes and higher near-term proviso concatenation logistics costs, and we expect non-GAAP operating expenses to beryllium astir $1.16 billion. We are modeling a taxation complaint of 12.5% and a weighted mean stock count of 850 million.

I’ll adjacent my remarks coming by saying convey you to our semipermanent investors for your support. We are investing for nan early pinch confidence. Our products and services are being directed to a semiconductor manufacture that is increasing successful size and strategical value to nan world economy. Our business exemplary is highly efficient, pinch debased superior strength and a precocious return connected invested capital, driven chiefly by R&D spending deployed successful adjacent collaboration pinch our customers. Our business has go little volatile and much resilient arsenic semiconductor request has broadened to much markets. Equipment superior strength has recovered and our services business has grown larger and much subscription-based.

In fact, complete nan past 5 fiscal years, we’ve accrued non-GAAP nett income by 87%, generated $18.7 cardinal successful free rate flow, and returned 118% of free rate travel to investors. Looking forward, we judge nan increasing complexity of nan semiconductor roadmap and our expertise to present nan innovations required by our customers will alteration america to turn faster than nan industry. We scheme to grow our world R&D and manufacturing infrastructure, including nan plans Gary previewed. Finally, we will attraction connected expanding our productivity and maintaining our businesslike spending model.

Now Mike, let’s please statesman nan Q&A.

Michael Sullivan

Thanks, Brice. To thief america scope arsenic galore group arsenic we can, please inquire conscionable 1 mobility connected today’s call. If you person different question, please requeue and we’ll do our champion to travel backmost to you later successful nan session. Operator, let’s please begin.

Question-and-Answer Session

Operator

[Operator Instructions] And our first mobility coming from nan statement of C.J. Muse pinch Evercore ISI.

C.J. Muse

I conjecture I was hoping to get a small much colour connected nan backlog broadside of things. To what grade do you deliberation dollar-wise that will benignant of lend to you present successful almanac ‘23? And arsenic portion of that, I guess, really are you reasoning astir benignant of first half versus 2nd half, whether connected a fiscal aliases almanac twelvemonth basis, benignant of silicon trends arsenic that backlog unwinds? Thanks truthful much.

Brice Hill

Okay. Great. Hi C.J. And acknowledgment for nan question. So connected our backlog, conscionable taking a measurement back, we did spot a batch of activity pinch activity successful orders during nan quarter. As we’ve described before, we spell done our orders each quarter, activity pinch nan customers to update them. And location was a batch of movement. We do spot nan weakness successful nan marketplace that everybody other sees successful nan starring edge, logic and successful memory. But arsenic Gary pointed out, we did person beardown bookings successful nan 4th and our backlog really grew. We deliberation that much than half of that backlog would beryllium executed this year. And arsenic Gary besides pointed out, we expect that we’ll statesman to activity that down toward a much normal level arsenic we commencement to amended proviso concatenation and beryllium capable to vessel nan request that we’re still shipping from past year, really, we’re still moving successful immoderate of our business units to screen nan request that we had past year. So, it has been a small spot of a buffer, nan beardown backlog against nan weakness successful nan marketplace for us, and we deliberation it’s going to return nan remainder of nan year, astir apt 1 to 4 quarters, depending connected nan business unit, we’re reasoning astir to activity done to normalize nan lead times and retrieve nan backlog that we request to vessel against.

Gary Dickerson

Yes. C.J., 1 different point I would adhd is that nan largest portion of our backlog is pinch our activity products, particularly MDP and implants. So again, that gives america spot arsenic we spell forward.

Brice Hill

Yes. And C.J., we’re not giving nan guidance for nan 2nd half, but we’ll conscionable opportunity that arsenic I highlighted, much than half of that backlog is successful nan year, truthful it’s decidedly helping nan year. It is buffering america Q1, Q2. And it does springiness america assurance that we had beardown bookings successful nan quarter. And we’ll astir apt talk much astir this, but we’ll item that nan ICAPS markets are very strong. In fact, request has been accelerating successful those markets.

Operator

And our adjacent mobility coming from nan statement of Stacy Rasgon pinch Bernstein.

Stacy Rasgon

I really wanted to excavation a small spot into that beardown ICAPS demand. Is it coming from -- I mean, is it focused successful areas for illustration China wherever astatine this constituent aft nan restrictions they’re going to beryllium forced to return a overmuch harder look astatine their efforts successful trailing node versus a starring node? And I guess, arsenic an add-on to that, are you concerned astatine each astir nan spot successful ICAPS? Is location immoderate interest astir overbuild, I guess, arsenic we spell done nan year, arsenic that gets built out?

Brice Hill

Hi Stacy. Thanks for nan question. First of all, it’s broad-based, I guess, would beryllium my first reply connected nan ICAPS. We had important maturation past twelvemonth that we highlighted erstwhile we did our year-end call, and it’s really accelerating into this year. So I’ll travel backmost to whether that’s a interest aliases not.

China is nan largest region and nan largest azygous state driving ICAPS. So, it is simply a attraction area. We’re really not concerned that it’s going to beryllium affected by waste and acquisition regulations. So, that’s not connected nan radar surface astatine this point. As we deliberation astir ICAPS and we deliberation astir that broad-based strength, you’re astir apt alert aliases surely alert that galore of nan companies that we cognize are starring ICAPS manufacturers person announced that they’re adding capacity, and nan superior strength for those companies is increasing. And I deliberation it conscionable is simply a reflection of there’s small utilized factories and utilized instrumentality disposable successful nan market. And so, arsenic companies request to adhd capacity to service this market, they’re having to make nan caller investments. We do deliberation it’s sustainable. We do deliberation it’s being driven by, successful immoderate cases, are being supported successful immoderate cases by authorities incentives. But we’re not concerned that companies will put superior successful spot that they don’t scheme to use. We don’t deliberation nan incentives are capable to person personification instal instrumentality and not usage it conscionable successful nan hopes of utilizing it. So, we’re besides reasonably assured successful nan underlying demand, things for illustration electrification, electrical vehicles, sustainable power. All these types of markets we deliberation are sustainable. So we conscionable -- we’re seeing an acceleration successful that area for our business, and we deliberation it will continue.

Gary Dickerson

Stacy, nan 1 point I would adhd excessively is if you remember, respective years ago, you had a batch of utilized instrumentality arsenic nan foundry business exemplary was emerging. So that really depressed superior strength for a number of years. And of course, that’s not happening now. So superior strength is up, and our position location is very good.

Operator

And our adjacent mobility coming from nan statement of Vivek Arya pinch Bank of America.

Vivek Arya

I’m curious, does your Q2 outlook benignant of bespeak nan trough of representation demand, aliases you deliberation location is simply a batch much representation weakness that you could spot successful nan 2nd half? Because it’s conscionable that erstwhile I look astatine your outlook, right, it seems to beryllium very different than what we person seen from your different U.S. peers who are down 20%, 30% sequentially successful their almanac Q1. And I don’t cognize if it’s conscionable nan ICAPS spot that explains that delta. So, I’m conscionable puzzled arsenic to what explains that outperformance. Is it ICAPS, is it thing else? Or person you not yet seen nan trough of representation weakness and that is still to travel that possibly they saw it earlier, and you could spot much of it successful nan backmost half? Thank you.

Brice Hill

Thanks for nan question, Vivek. We’re reasonably assured that we’re existent pinch our representation customers connected their orders. We’ve decidedly seen -- arsenic I highlighted successful our booking activity, we decidedly person seen important cancellations and pushouts from representation customers. We deliberation we’re current. Mathematically, you’re precisely right. The acceleration successful ICAPS has much than offset nan weakness we’re seeing location and immoderate slowdown we saw successful leading-edge logic. So, that’s true. And then, we’ve looked astatine nan starring indicators connected nan representation side. We’re still seeing pricing declines. We’re still seeing inventory increases. So, we don’t deliberation it’s turning yet, astatine slightest from our perspective, but we’re assured we’re existent pinch nan customers, Vivek.

Operator

Thank you. And our adjacent mobility coming from nan statement of Krish Sankar pinch Cowen.

Krish Sankar

Brice, possibly conscionable 1 for you. I announcement you did not quantify WFE for this year, and I understand you’re astir apt amended than nan manufacture because of nan ICAPS strength. But it seems for illustration nan scope is anyplace from 70 to 75 and immoderate group talk astir $80 cardinal successful WFE this year. But conscionable hypothetically speaking, if WFE is down 20 aliases truthful much percent since you’re going to outperform, is it adjacent to presume your gross maturation to beryllium down much for illustration debased to mid-teens? And benignant of really to deliberation astir nan net powerfulness successful that script fixed that you’re trying to beryllium disciplined connected OpEx? Thanks.

Brice Hill

Okay. Thanks Krish. So yes, we didn’t supply a WFE because we’re really conscionable trying to attraction connected sharing what we’re seeing, each nan signals that we’re getting successful nan marketplace because we’re a small spot abstracted from it. As you pointed out, we’ve sewage nan spot and acceleration successful ICAPS that whitethorn make america a small spot different. We’re besides still shipping orders we had from ‘22. So for us, we’re catching up to demand, particularly successful immoderate of nan cardinal differentiated business units that existed earlier nan year. So, it’s not a cleanable match, and it’s difficult for america to estimate.

Switching to OpEx. As we talked astir successful our past call, because we were proviso constrained, our OpEx growth, that was our plan, was a small spot up of our gross growth. So, we person implemented headcount targets. We’ve moved to strategical hiring only, and we do person initiatives focused connected improving our productivity connected spending. So we’re conscious of that. Of course, it’s a balancing act, Krish, done this twelvemonth because we deliberation nan manufacture is growing. We’re assured successful nan guidance we request to proceed investing successful R&D. So that’s our superior extremity is to present those programs to customers. We person flexibility, if nan situation deteriorates for us, past we’ll make much due changes to spending. But correct now, we’re comfortable pinch nan trajectory.

Operator

Next mobility coming from nan statement of Atif Malik pinch Citi.

Atif Malik

Hi. Thank you for taking my question. Nice occupation successful nan execution. So, Brice, it does sound for illustration ICAPS is nan driver for your outperformance astatine slightest successful nan adjacent word versus nan peers. And historically, successful your Master Classes, you person talked astir ICAPS being astir 25% of your silicon portfolio. And I’m funny wherever do you deliberation you’re moving this business astatine correct now? And if you could remark connected wrong ICAPS is car aliases silicon carbide nan strongest area for you? Thank you.

Brice Hill

Okay. Thanks, Atif. Yes. I deliberation that we’ve characterized foundry logic arsenic two-thirds of nan business past year. Memory is simply a small slower this year, truthful that operation is changing a small bit. And we characterized our lagging separator aliases nan ICAPS information arsenic astir 50-50 pinch starring edge. So that’s nan measurement we qualify it. And that’s each reasoning of it from a TAM perspective. What we are seeing astatine nan institution level is that nan ICAPS marketplace is accelerating and increasing astatine a very precocious complaint for nan Company this year. And we deliberation portion of that is driven by authorities incentives and portion of that is driven by nan higher strength and portion of that is driven by nan spot successful nan extremity markets that I highlighted. And maybe, Gary, connected nan silicon carbide, you could make a comment.

Gary Dickerson

Yes. Let maine conscionable springiness a small spot much color. So, ICAPS comparative to marketplace stock is akin for america pinch starring foundry logic. So, we’ve grown stock successful ICAPS a important magnitude complete nan past fewer years. It’s besides accretive to our wide gross margins.

Four years ago, I deliberation we’ve talked astir this, we formed nan ICAPS IoT, communication, car power, sensors, statement because we could spot these markets were going to turn astatine a important pace. So we pulled together a really beardown team. We person nan broadest exposure. If you look astatine each of nan technologies, whether it’s successful -- again, immoderate of those different segments wrong ICAPS, we person important strength. So again, that’s thing that we saw respective years agone and made investments. So, we person galore ICAPS circumstantial products. Implant is 1 area if we look at. There’s galore areas wherever we person spot and wide vulnerability successful ICAPS. But successful that peculiar area, we’ve introduced 10 caller products focused connected ICAPS successful nan past 5 years. That is nan largest conception of our implant business. And conscionable successful that 1 area, again, we’ve been very proviso constrained, we expect that we tin double our ICAPS gross successful ‘23 versus ‘22. So again, conscionable really crossed nan committee we person very, very beardown positions. And pulling that statement together 4 years ago, really put america successful a bully position for what we’re seeing today.

Operator

And our adjacent mobility coming from nan statement of Toshiya Hari pinch Goldman Sachs.

Toshiya Hari

I had 1 speedy explanation and past a question. Gary, you conscionable mentioned that you expect your ICAPS gross to double successful ‘23 versus ‘22. Was that wide ICAPS, aliases was that conscionable implant? That’s my explanation question. And past my question, Gary, successful your prepared remarks, you talked astir your DRAM business perchance recovering by nan extremity of nan year, which to maine is simply a small surprising, conscionable fixed really anemic nan trends are successful that marketplace coming and nan inventory situation. Can you benignant of stock what informs that position successful DRAM? And what are your thoughts connected NAND arsenic well? Thank you .

Gary Dickerson

Okay. Let maine screen nan -- first mobility is connected nan doubling of ICAPS. That’s specifically implant successful ‘23 versus ‘22. And portion of was conscionable nan proviso concatenation challenges that we had successful ‘22 that constricted our output. So, that’s what’s happening location successful -- pinch ICAP. And Brice, do you want to screen nan DRAM NAND question?

Brice Hill

I deliberation successful nan DRAM and NAND, we person seen nan weakening successful memory. We do expect that adjacent twelvemonth will amended connected nan representation perspective. I don’t think, Toshiya, we’re going to springiness an nonstop infinitesimal erstwhile nan marketplace will turn. I mentioned earlier, we benignant of person 3 signals that we tin look astatine internally. We tin look astatine utilization for some NAND and DRAM. And we spot utilization little this 4th and each of our customers are forecasting utilization to beryllium moreover little adjacent quarter. We’ve looked astatine nan pricing of memory, and it looks for illustration it’s either declining aliases declining -- aliases somewhat flattening. And past we’ve looked astatine inventories and it looks for illustration inventories are still growing. So I don’t deliberation astatine this constituent that we tin say, telephone nan constituent successful clip wherever representation starts to grow. But we do expect adjacent twelvemonth that representation will amended and companies will statesman to put again. And it’s conscionable difficult to telephone that moment.

Operator

And our adjacent mobility coming from nan statement of Timothy Arcuri from UBS.

Timothy Arcuri

Brice, I had a mobility connected backlog. It seems for illustration backlog is benignant of skewing your numbers a spot higher than your peers, fixed really agelong your lead times began aliases sewage to during nan upturn. So, I’m wondering if you tin springiness america possibly a fewer much breadcrumbs connected nan backlog. I deliberation you said past quarter, SSG backlog was $12.7 billion. So I conscionable want to beryllium clear that nan SSG backlog went up from that number. And if so, that’s benignant of for illustration 2.5 quarters of backlog for SSG. And erstwhile I deliberation of a normal, you ever utilized to tally much for illustration a quarter-and-a-half worthy of SSG backlog. So, is it correct to reason aft each that that you possibly person a quarter’s worthy of excess backlog correct now arsenic it relates to SSG?

Brice Hill

Yes. I deliberation -- thanks, Tim, for nan question. So colour connected it, I would opportunity we did spot weakness successful starring logic and representation arsenic we described. So, a batch of nan spot that we’re seeing comes backmost to this acceleration connected nan ICAPS side. So from a operation perspective, I deliberation that’s wherever a batch of spot successful nan orders is coming from. And Gary highlighted nan maturation of implant. So surely not -- nan maturation of full ICAPS is not 100%, but it is very meaningful to america for nan year, obviously, capable successful Q1 to offset weakness successful representation and starring logic. So, that gives you immoderate of nan perspective. Most of this is successful nan semi business. Some of it’s successful 200-millimeter, which comes successful nan AGS space. And what I would opportunity is, yes, it does necktie backmost to nan agelong lead times successful nan areas of nan business that are highly differentiated equipment, wherever we’re still moving disconnected that backlog. And we deliberation it will return america -- I conjecture what I would opportunity is -- past quarter, we highlighted that a normal backlog would astir apt beryllium successful nan $12 cardinal aliases $13 cardinal range. We expect to activity backmost successful that guidance arsenic proviso improves, and we tin commencement catching up to nan request we had from past year.

Timothy Arcuri

So I guess, Brice, conscionable to confirm, truthful nan SSG backlog did spell up from $12.7 billion?

Brice Hill

I’m looking astatine nan data, Tim, to spot if I tin spot this. Can you spot it? Yes, sir.

Timothy Arcuri

Got it. Okay.

Gary Dickerson

Yes, possibly 1 point I would adhd that conscionable benignant of gets backmost to a batch of nan questions. We do person spot successful galore of these cardinal exertion inflections. We talked successful nan Master Classes astir inflections gross each around, wiring, representation pinch capacitor statement aliases caller materials, PDC strength. We had that Master Class successful December. So that’s different thing. When you look astatine nan creation of nan backlog, conscionable again, wiring alone, we person 1 inflection that enables a 50% simplification successful resistance. The dollar per wafer goes up astir 3x from 7 to 3-nanometer. So, those areas are besides helping america successful comparative performance.

Operator

And our adjacent mobility coming from nan statement of Harlan Sur pinch JP Morgan.

Harlan Sur

Given nan unprecedented benignant of excess inventory business successful nan representation space, your representation customers are being very disciplined, right? They’re taking drastic actions to rein successful supply, moreover going truthful acold arsenic to push retired their exertion migration roadworthy maps. Typically successful downturns, we wouldn’t spot your customers pulling backmost connected tech migrations, capacity add, yes, but not tech migration. So, is nan tech migration pullback successful nan associated higher superior strength a large contributor to nan WFE pullback this twelvemonth successful memory? And conscionable arsenic importantly, does this mean nan imaginable for a sharper spending betterment arsenic representation fundamentals commencement to normalize because each of your representation customers are going to effort to aggressively get realigned connected their tech migration roadworthy maps.

Brice Hill

Yes. Thanks for nan question, Harlan. I’ll start, and Gary will astir apt want to adhd thing here. I don’t deliberation that nan inventory business successful nan existent marketplace is guiding their exertion modulation choices. I deliberation that will beryllium driven by their opportunity to return activity positions and amended nan costs of nan bits and amended nan merchandise performance, et cetera. So, what does hap is they whitethorn person much instrumentality that they tin reuse into their roadworthy representation depending connected what request is. So, they’ll make changes and little their instrumentality buys based connected that. So, I deliberation -- I’m not alert of companies for -- that are connecting nan exertion ramp determination pinch nan existent inventory business and business situation.

Gary Dickerson

Yes. Harlan, I would opportunity that your position of representation strengthening, we said DRAM perchance by nan extremity of nan almanac twelvemonth and representation strengthening into ‘24, we would stock that perspective. What I would opportunity is that we are -- we besides judge that foundry logic will stay beardown going forward. It was successful this benignant of two-thirds, one-third operation betwixt foundry logic and memory. And particularly pinch authorities incentives, you spot a batch of authorities incentives surely successful nan U.S., successful Europe, Japan, a number of different areas, perchance successful India. That could adhd a fewer cardinal dollars per twelvemonth successful further investment. And again, nan floor plan of higher foundry logic versus memory, we deliberation that’s going to prolong for a number of years going into nan future.

Operator

And our adjacent mobility coming from nan statement of Joe Quatrochi pinch Wells Fargo.

Joe Quatrochi

I wanted to inquire astir nan backlog fulfillment benignant of moving that backmost down to much normalized levels aliases astatine slightest 50% of that benignant of wherever you’re astatine today. How do we deliberation astir that from your expertise to summation accumulation proviso versus your orders possibly slowing from your customers. I guess, really do we divided that retired successful position of knowing what’s driving backlog there?

Brice Hill

It was a small difficult to perceive nan 2nd portion of that question. But fto maine commencement pinch moving down nan backlog, Joe. Thanks for nan question, Joe. So I conjecture nan measurement we’re reasoning astir it, it’s difficult to estimate nan bid travel coming successful and estimate nan nonstop backlog number. But we’ve sewage respective business units that are still shipping against request really that we received past year. And it has been proviso constrained. It’s -- we’re down 1 to 4 quarters depending connected nan business portion that we deliberation of. So we deliberation arsenic proviso has improved, we’ll statesman to vessel backmost against past year’s orders and retrieve to a normal position. And nan quickest business unit, we’ll astir apt do that successful nan adjacent quarter. Then we do person 1 aliases 2 business units that will return into adjacent twelvemonth to beryllium capable to retrieve that. I don’t cognize -- spell up and -- Joe, tin you opportunity nan 2nd portion of your question, again. There was immoderate statement sound benignant of blocked it.

Joe Quatrochi

Yes. I apologize. The 2nd portion is conscionable trying to understand nan different portion of speech from proviso is -- are you predicating connected orders being resilient to return that agelong to get backmost down to a much normalized level, aliases are you expecting orders to possibly slow?

Brice Hill

I deliberation we’re not really -- I conjecture I would opportunity we’re not really expecting orders to slow. Like I said, we’re existent successful nan environment. And so, arsenic we deliberation towards adjacent year, we expect ‘24 to beryllium a amended twelvemonth crossed nan full industry, memory, starring logic, et cetera. So astatine immoderate point, we expect location to beryllium stableness successful nan market. We saw beardown orders this period. I can’t foretell if it will beryllium beardown each cycle. But arsenic we caput towards ‘24, we deliberation there’ll beryllium firmer footing.

Operator

Our adjacent mobility coming from nan statement of Sidney Ho pinch Deutsche Bank.

Sidney Ho

You guys talk astir leading-edge foundry and logic spending down somewhat this year. I was conscionable hoping that you tin double-click connected that a small bit. Based connected your business, really do you spot nan ramp of 3-nanometer production, say, by nan extremity of this twelvemonth arsenic compared to possibly years past for starring edge? And also, really does that comparison to your expectations possibly 3 to 6 months ago? And possibly you tin talk astir transit extracurricular of 3 nanometers, that would beryllium great. Thanks.

Brice Hill

Okay. I’ll commencement connected that one, connected nan leading-edge. So I deliberation it’s beautiful straightforward. The largest leading-edge customers are moving astatine little utilization astatine this point. And so, they’re resizing their superior buys arsenic they look astatine nan utilization level that they are now. So, we’ve seen pushouts aliases cancellations of immoderate devices related to those customers. And I deliberation it’s beautiful straightforward. They person little utilization and they person nan expertise to reuse immoderate of that instrumentality into their adjacent ramp. And then, I don’t deliberation we typically remark connected nan timing of nan different nodes. But Gary, do you want to make a remark astir 3-nanometer?

Gary Dickerson

Yes. What I would opportunity is that from what we’re proceeding from customers, nan request for 3-nanometer is very strong. And that looks for illustration that’s going to beryllium a very large finance for our customers. And again, for us, nan positions there, we’ve covered that successful a batch of nan Master Classes, we expect our stock of gate-all-around to emergence versus FinFET, astir 5 points. And we person nan mostly of nan spending successful that inflection. I’ve talked astir those wiring inflections wherever nan dollar per wafer goes up importantly from 1 exertion node to nan next. And again, we’ve covered those successful nan Master Classes. So, our position astatine 3-nanometer is very strong. Our position gets stronger moreover successful 2-nanometer arsenic customers are driving improvements successful powerfulness and performance. So, our position location is very good. And again, what we’re proceeding from customers is important request for 3-nanometer and past nan timing, we’ll fto them remark connected nan timing.

Operator

And our adjacent mobility coming from nan statement of Quinn Bolton from Needham.

Quinn Bolton

Just hoping you could thief reconcile thing for me. Obviously, it sounds for illustration nan ICAPS business is very beardown successful 2023. You said China is nan biggest portion of ICAPS. But erstwhile I look astatine your China revenue, it looks for illustration it’s down 40% complete nan past twelvemonth from astir $2 cardinal to $1.15 billion. So conscionable trying to reconcile that nan slower gait of gross successful China versus nan ICAPS spot you’re seeing. I guess, is that ICAPS spot really coming from non-China regions, aliases do you expect a bully betterment successful China arsenic you travel done 2023? Thank you.

Brice Hill

Yes. Thanks, Quinn. The spot successful ICAPS is broad-based. So, it is increasing worldwide, but China is nan largest country, and astir of nan request that we spot successful China is really ICAPS-related because nan representation investments and starring logic investments are fundamentally zero aliases adjacent to zero. That’s wherever astir of that finance is.

Gary Dickerson

Yes. I would opportunity that comparative to ICAPS floor plan successful ‘23, China is remaining astatine a akin level. But location is growth, important maturation successful nan different regions. So, I deliberation your presumption is beautiful adjacent to what we see.

Operator

And our adjacent mobility coming from nan statement of Mehdi Hosseini pinch Susquehanna.

Mehdi Hosseini

I person 1 explanation and 1 follow-up. The $250 cardinal that is pushed retired to nan July quarter, could that perchance thief pinch a alternatively unchangeable SSG gross trend? I’m conscionable trying to get a consciousness for really nan $250 cardinal pushout could effect SSG 2 quarters out. And then, would you beryllium capable to thief maine understand really large is ion implant wrong ICAPS?

Brice Hill

Yes. Thanks, Mehdi. I’ll return nan -- I’ll return nan $250 million. So, we do expect -- nary of that request is perishable. So yes, successful your model, I would return that $250 cardinal and adhd it to immoderate you’re modeling for Q3. We don’t cognize if we’ll get precisely each successful Q3, but we deliberation we’ll get it astir successful Q3 based connected our existent assumptions. And then, to nan grade that there’s weakness successful nan 2nd half, if location is, past it would offset that to a degree, conscionable for illustration you’re describing.

Gary Dickerson

Yes. Mehdi, comparative to ion implant [Technical Difficulty]

Mehdi Hosseini

Yes, I’m conscionable trying to understand really large is ion implant wrong ICAPS.

Gary Dickerson

[Technical Difficulty] Sorry. Sorry, I didn’t push nan button. So, comparative to implant ICAPS, we haven’t quantified nan magnitude -- nan size of that business. But it is nan largest conception wrong implant, Mehdi. And we -- and arsenic I said earlier, that we judge that we tin double that, astir double that implant ICAPS gross from ‘22 to ‘23. We’re nan leader successful that segment, and it is significant. But we person really wide vulnerability crossed aggregate products wrong ICAPS. As you know, it’s not really shrink-driven, it’s much materials and structures-driven market. We’re nan leader successful that market, and we expect that will stay beardown successful ‘23 and going forward.

Operator

And our adjacent mobility coming from nan statement of Brian Chin pinch Stifel.

Brian Chin

Maybe conscionable successful position of nan backlog discussion, I conjecture it sounds for illustration -- is location a disproportionate magnitude of nan backlog that is geared towards ICAPS, and that’s really moreover nett of pushouts aliases cancellations that whitethorn beryllium happening successful memory, for example? This is really I guess, nan main logic why your gross is arsenic resilient successful position of near-term shipments, benignant of nan nett merchandise is conscionable beneficial. Is that nan correct measurement of reasoning astir it generally?

Brice Hill

Yes. Brian, acknowledgment for nan question. I do deliberation it’s fair. I didn’t parse backlog successful precisely nan measurement that you described. But to your point, we’re seeing important spot accelerating request from our ICAPS customers that’s filling successful blanks that we get connected nan representation aliases starring logic side. And truthful to nan grade that that -- our backlog represents nan orders that we’re shipping, I deliberation it’s adjacent to opportunity that there’s a important magnitude of ICAPS strengths crossed that backlog. So, I deliberation that move is fair.

And conscionable going backmost to those extremity markets, we do deliberation it’s sustainable. We don’t deliberation nan spot is thing different aliases driven by immoderate different activity. We don’t deliberation companies are putting successful capacity that they won’t use. This is conscionable maturation that, arsenic Gary said, that we’ve seen coming for a while and it’s starting to build out, and you mightiness person seen immoderate of nan large -- larger companies successful nan ICAPS abstraction talking astir these investments. So I deliberation you’ll spot it beautiful overmuch crossed nan globe.

Brian Chin

Great. And I ideate immoderate of those cylinders aren’t moreover firing astatine nan moment, too. So that’s astir apt not bad arsenic well. Thanks.

Michael Sullivan

Thank you. And operator, we person clip for 2 much questions, please.

Operator

Our adjacent mobility coming from nan statement of Blayne Curtis pinch Barclays.

Blayne Curtis

Just funny nan connection connected wide foundry logic. So clearly, ICAPS is up. I’m conscionable trying to understand if you could conscionable talk astir what’s benignant of nan trends person been successful starring edge. And I deliberation immoderate has benignant of talked astir it being benignant of somewhat down for nan twelvemonth arsenic a market. Just benignant of funny what you’re seeing. You talked astir it getting a spot weaker connected starring edge. Can you conscionable explain really overmuch it has? And conscionable locomotion america done benignant of past mates of months successful leading-edge foundry.

Brice Hill

Yes. Blayne, I deliberation somewhat weaker, we won’t springiness an nonstop number. We whitethorn not spot nan nonstop number either. But, erstwhile we look -- erstwhile we deliberation astir nan large customers successful foundry logic, that everybody knows, they person had reductions successful our superior plans. When we look astatine starring foundry logic, erstwhile we look astatine utilization, it is debased astatine this play of time. So their customers, our customers’ customers are moving done inventories astatine this constituent successful time. But erstwhile you commencement to move nan page, nan starring logic is going to put successful nan adjacent nodes and put that capacity successful place. They whitethorn person a small spot much instrumentality disposable for reuse but they’re going to make those investments. And we expect that and we spot that coming through. And so, we’ll -- erstwhile we get past this year, we’ll expect to spot place successful foundry logic again. Gary, do you want to adhd thing to that one? Okay. We’re good. Thanks for nan question, Blayne.

Operator

And our adjacent mobility coming from nan statement of Vijay Rakesh pinch Mizuho Group.

Vijay Rakesh

Yes. Hi, Gary connected Brice. Going backmost connected nan backlog again, I deliberation you mentioned your backlog is current. Does that connote that nan representation vulnerability aliases representation wrong that is reasonably mini fixed each nan cancellations? And past a follow-up.

Brice Hill

Hi Vijay. I don’t cognize if -- first of all, it’s current. We’ve decidedly gone done and made changes to nan backlog based connected our existent customer situations. Whether we person much vulnerability aliases not, it depends connected really things go. The macroeconomic factors are besides important if there’s -- immoderate group deliberation location will beryllium a recession, immoderate group don’t. So it really depends connected wherever nan system goes for nan 2nd half. But each we tin opportunity is we’re current. We don’t deliberation we’re missing signals successful nan market, and we don’t deliberation there’s impending changes. It will conscionable dangle connected which measurement nan underlying request goes.

Vijay Rakesh

Got it. And past connected nan China side, it is down 14% sequentially, and it looks for illustration astir apt nan 3rd 4th was still going down. Is it adjacent to presume that it’s reasonably adjacent to a trough location connected nan China walk side, fixed immoderate of nan ICAPS commentary that you had retired of China?

Brice Hill

We won’t telephone it nonstop trough, but I deliberation it’s a adjacent thought because we expect complete clip show will grow. We expect our services business will grow. And certainly, China is mostly an ICAPS businesses astatine this point, and we’re expecting beardown maturation there. So, I won’t telephone a trough, but if you ask, are nan effects of nan waste and acquisition rules, person we absorbed those effects, I deliberation nan reply is yes.

Michael Sullivan

Okay. Thanks Vijay for your question. And now, Brice, would you for illustration to springiness america your closing thoughts today?

Brice Hill

Thanks, Mike. Absolutely. So today, we emphasized that our backlog of enabling products, our ICAPS maturation and our spot successful services are helping america to beryllium resilient successful this market. We’re assured successful nan semipermanent maturation of nan semiconductor manufacture and committed to building nan exertion and capacity to support our customers. Thank you each for attending this call. We look guardant to seeing galore of you astatine our offices this quarter, and I look guardant to attending nan Morgan Stanley convention successful a fewer weeks. Mike, convey you, and please adjacent today’s call.

Michael Sullivan

Great. Thanks, Brice. And I’d for illustration to adhd my ain closing message, which is please do subordinate america connected February 28th for our Patterning Product Launch webcast. You tin find a registration nexus connected nan Events page of our IR website, wherever we’ll besides station a replay of today’s telephone by 5 o’clock Pacific Time today. So, convey you for joining america this day and for your continued liking successful Applied Materials.

Operator

Ladies and gentlemen, that does reason our convention for today. Thank you for your participation. You whitethorn now disconnect.