Applied Materials, Inc. (AMAT) Bernstein's 39th Annual Strategic Decisions Conference 2023 (Transcript)

Applied Materials, Inc. (NASDAQ:AMAT) Bernstein's 39th Annual Strategic Decisions Conference 2023 June 1, 2023 1:30 PM ET

Company Participants

Gary Dickerson - President and Chief Executive Officer

Conference Call Participants

Stacy Rasgon - Bernstein

Stacy Rasgon

Thank you everyone for coming, oh, but you don't have a Safe Harbor statement or anything that I need to redo.

Gary Dickerson

I don't think so.

Stacy Rasgon

Okay, we're good.

Gary Dickerson

Alright. Awesome.

Stacy Rasgon

Sorry. Thank you for coming, everyone. I'm Stacy Rasgon, I cover the U.S. Semiconductor and Semiconductor Capital Equipment space here at Bernstein.

And it's my true honor to have our guests here today, Gary Dickerson, the President and CEO of Applied Materials. And I'm thrilled to have him here, because you may not know Gary was supposed to be here last year, and unfortunately, he got stuck circling New York in bad weather for several hours and had to get diverted to Boston, and he missed it. So he very kindly flew out a day early today, and so I'm thrilled to have him here.

I wanted to mention before we start, if you want to ask a question or have a question and ask on the inside curve of your program, there's a QR code that you can scan. That'll take you to our question-and-answer form, it’s called pigeonhole, and you can put your questions in there, and we'll leave time at the room -- leave room at the end for those.

So, like, semi cap's really been top of mind for many of my clients lately, especially as the strength that we've seen in the last couple of years now turns into the first kind of real down cycle we've had since 2019 for the industry at least, I should say. Even amid all that though, look, there are of course, near-term questions, memory spending trajectory, the impact of export controls, the sport and the surprising strength right now of trailing node build outs. I'm also giving people though increasingly looking at the longer term potential of the industries. They start to view it on much more and secular terms in addition to the purely cyclical, and I hope we get a lot of chance to talk about all of that today. So it gives me pleasure to welcome, Gary. Thank you so much for being here today.

Gary Dickerson

Oh, thank you, Stacy. There was another part to that story. Actually my flight had mechanical problems, so there was an initial delay of three hours before we took off, and I was circling South of New York waiting for this thunderstorms to clear, which never cleared before we ran out of fuel.

Stacy Rasgon

We had to go to Boston.

Gary Dickerson

So, anyway, that was very devastating.

Stacy Rasgon

I'm filled to have you here at today. That's -- thank you.

Gary Dickerson

Yes.

Question-and-Answer Session

Stacy Rasgon

I want to start out maybe -- I talked about the industry WFE like being down. And you're clearly seeing that in areas of [Technical Difficulty]. We know memory spending just broadly is horrendous right now. And it's hard to imagine it could get any worse, frankly, given where it is and leading edge has omission. But that trailing node piece is very strong. And it's actually -- I mean your results right now are diverging from the industry. So the industry say, your revenue is not really down.

Gary Dickerson

That's right.

Stacy Rasgon

Like they’re growing.

Gary Dickerson

Our last three quarters were the highest non-GAAP EPS in the history of the company.

Stacy Rasgon

So I mean how do we parse that? I get a lot of questions around the sustainability of that ICAPS, because you suggest that you think it can continue even in the next [Technical Difficulty] beyond. Talk a little bit like what's driving that? Where is the event coming from regionally, people worried about China? And just what can you tell us about that divergence between what you're seeing in, I guess, for the broader industry, like the trends we're seeing there?

Gary Dickerson

Yes. So if you look at overall wafer fab equipment, we formed our ICAPS group, IoT, communication, auto, power, sensors, a little over four years ago. So when we looked at the overall market, our review and we've communicated this is we think foundry logic will be sustainably two-thirds of the wafer fab equipment spending, memory about one-third going forward. And really balance between…

Stacy Rasgon

That makes us little different, by the way. It used to be 60-40, you used to talk, right?

Gary Dickerson

Or even 55, 45 what they ask. Yes, but I think memory -- foundry-logic, I think, has been bigger than memory -- in the last 21 years, except for three years and two of those years were when you had the 2D to 3D NAND conversion. But again, it is more weighted towards foundry-logic. And certainly, this year, you're going to see that more than two-thirds, and we think next year, foundry logic will remain strong. So we formed our ICAPS group a little over four years ago.

We brought great technologists from all across Applied Materials, just to focus on those segments. If you think about automotive and power electronics or compound semi and industrial automation and sensor technologies that are proliferating -- with edge computing, we saw those markets that we thought those would be very high CAGR market. Our share, if you look at Applied share, we're super strong in this race for leadership and high-performance logic, we're -- they're even stronger, but also very strong in this ICAPS market. DRAM, we're the largest process equipment company in DRAM. NAND is not quite as strong for us, in mid-teens. And packaging is another one where we have tremendous strength.

But ICAPS we saw that, we have very focused teams enabling those technology inflections. And we believe those markets will remain strong. Certainly, they're strong here in ‘23. We look going forward, we don't believe that the growth rates, you'll see the same growth rates that you've seen at least near-term, what you've seen over the last couple of years. But we think those markets are going to remain very healthy.

When you think about chips incentives. So there's about $400 billion we're tracking over the next several years, that's mix between leading edge and ICAPS. And you think about ICAPS. ICAPS really ties to very large vertical markets and really the foundation of competition in many of those different vertical markets. So automotive or again, industrial automation in some of those areas, the fastest-growing ICAPS markets this year are North America, Europe and Japan. So we see those markets continuing to grow at a healthy rate. China is the largest market, but not the fastest-growing market. And certainly, China is very, very focused on ICAPS. Again that ties to a number of different big verticals in China. And so again, we think that spending also will remain healthy.

Stacy Rasgon

So just the China piece is the biggest, but it's smaller than the other ones combined?

Gary Dickerson

It is. It is smaller than that. It's less than 50%. And it's not the fastest growing.

Stacy Rasgon

And the other ones are growing faster.

Gary Dickerson

Yes.

Stacy Rasgon

Okay. Got it. And then -- you've talked about it, again, even in the next year. I think what you said on the call was you think ICAPS is probably sustainable.

Gary Dickerson

We do.

Stacy Rasgon

I know leading edge right now is weaker, but you have gate-all-around and other things that are I'll talk about that in a minute where there's growth. And then like I said, memories, frankly, for you and most of your peers are so bad right now. It's hard to believe at least it could get worse, right? Is it not a positive setup? It sounds like reasonably at least for you, like a reasonably positive setup into next year, assuming these trends play out? I mean, is that kind of how you're viewing things? I ask you for forecast...

Gary Dickerson

No, no. But I think ICAPS, again, real strength there. And we have opportunity to grow even more in ICAPS. In leading-edge foundry logic, there's this race that's happening with all of those different leading-edge companies -- investing a significant amount for 3 nanometer, 2 nanometer, A14, A10, all of those different inflections. So if you look at -- and then of course, we talk -- look at AI and those we'll talk about -- those monster checks that fill up the heretical field. That drives leading edge, that drives demand for that capacity.

But -- and then for Applied, those kind of inflections are great because more and more is from materials-enabled inflections. So everybody has a smartphone here today. Your processor in your smartphone has 15 billion transistors, 60 miles of wiring. There are layers chip that are for Adams thick. 25 Materials combined more than 100 different ways. So it's all of this materials innovation and 1,700 steps. Applied has more of those steps than anyone else. And more and more, if you look at what Mark Louis talked about on energy-efficient computing road map, a lot of that's right in the sweet spot for Applied Materials.

If you look at DRAM. DRAM, you're moving to high-bandwidth memory, more and more and more. And so you're moving to logic-like processes in the periphery. That's -- those are all of our leadership positions. We've talked about in one of the master classes that Mike put on capacitor scaling, we have a very strong position there. Conductor etch, about 50% share of that market in DRAM. Packaging is even a stronger position for us. Again, we have very broad positions, very large share. That's about a $1 billion market that's also resilient. You're seeing healthy packaging investment even here in '23 into '24 and an opportunity to double going forward. So yes, I think the setup for us is great.

Stacy Rasgon

Got it. One last question on ICAPS, and I want to talk about some of these other drivers. So you talked about formats group four years ago, and it's clearly an area that you've been focusing on this is not new. What's different or special developing a tool for that space versus like the leading edge? Is it something that's hard to do? Or is it more around like building the customer relationship or materials inflection?

Gary Dickerson

For sure. For sure. If you're building compound semiconductor device, and we have many innovations when -- implant is a big part of that. You have implant -- when you're trying to put the dope into that type of a substrate, you go to over 500 degrees Centigrade to get -- to make that work or CMOS image sensor. There's so many innovations that are happening that are really, really, really critical innovations across that whole space. More than 20 major products have been introduced by Applied since we formed the ICAPS group four years ago. So definitely, there's a tremendous amount of innovation.

Stacy Rasgon

And I give it's not just 200-millimeter. There's 300-millimeter?

Gary Dickerson

Oh, absolutely. Absolutely, yes.

Stacy Rasgon

Got it. Got it. Have you ever talked about like that split them?

Gary Dickerson

I don't know that we’ve…

Unidentified Company Representative

50% of the AGs is 200, the rest is new.

Stacy Rasgon

Yes, I'm wondering that the split of ICAPS between 200 and 300?

Unidentified Company Representative

We can do that because we said ICAPS more than half of logic-founders.

Stacy Rasgon

Got it. Okay. So we work -- I work it out after. Thank you. Got it. I want to move a little bit to a leading edge now. And there's a number of inflection points that are coming down the path to take gate-all-around aside power is tower new tools that you developed, everyone is getting very excited about the sculpt tool that…

Gary Dickerson

Oh, that's a great one to.

Stacy Rasgon

Let's talk about gate-all-around first. So I think was it $1 billion of incremental.

Gary Dickerson

Incremental, yes.

Stacy Rasgon

100,000 wafer starts per month.

Gary Dickerson

That's right. Great memory.

Stacy Rasgon

Okay. What's driving that inflection? What types of processes are driving that upside...

Gary Dickerson

Yes. So there's -- we have -- in terms of process equipment, close to 50% share in Finfet. And we've said we'll gain 5 points of total spending 4 points that transistor module and gate-all-around. So there are new materials. And again, you've got 1,700 steps. So there are many steps involved in creating those different structures. So there's materials, there's integrated materials also where we have a material that we're creating and then combine that with interface engineering selective removal type of a process. So some of them are combination under vacuum because again, when you go to four atoms thick, if you go to air, you oxidize and you damage the electrical property. There are double...

Stacy Rasgon

More than four atoms that you grow.

Gary Dickerson

Yes. But you have double-digit numbers of selective removal steps. We have the majority of those steps with all those leading companies. You have material modification, many thermal processes, you're modifying the structure, the material structure, that's a multibillion-dollar business for us. You have e-beam, e-beam, we pretty much doubled our PDC business from 2000, close to doubling 2000 to 2022, we're the leader in e-beam with 50% share. We have innovative new cold field emission electron optics. And that technology is really important when you're trying to optimize all of these structures, being able to see that high resolution enables you to build those structures better. And it has a lot to do with R&D velocity. So again, we have broad exposure across that whole module. And again, that's why we have such strength.

Stacy Rasgon

How far out are you looking when you're looking to develop stuff? I mean, is it -- are you looking out 10 years, like more like what is it?

Gary Dickerson

I'd say through the end of the decade. So we're out pretty much 4 technology nodes. So that's -- and again, I think the -- one of the other things we did, ICAPS was four years ago, five years ago, we built this integrated material solutions team. And -- so when you're starting to get all of this complexity, co-optimizing all of those processes together become more and more important. So we have world-class integration capability. And so we're really working together with customers. When they're developing those four technology nodes out or the transistors, the wiring for capacitors, for any of those kinds of things.

And I would say that's a big shift in applies in the last five years. We're in with those integration teams. We're so deep, and we can see what they're developing many years in the future. And that's also -- we can talk maybe about Epic later.

Stacy Rasgon

I was going to -- I was on my list here, but that might be a good segue into the Epic Center. So this is not just -- it's not like the -- you have the maiden Center for a while. So this is much more.

Gary Dickerson

It's much bigger, 4x bigger, but you think about the innovation process and really our focus is innovating the way we innovate. And so today, and we have the Maydan Technology Center. So we have applied all of these innovations that enable those -- all of those apps and all of those new device inflections. We also have the most full-flow packaging lab in Singapore, so you can develop new packaging structures. You're developing the new chip structures in that Maydan Technology Center. So customers have been coming to the Maydan Technology Center in Silicon Valley. This concept, and we have -- when we had the event, we had all the innovators from across the industry. We had the R&D leader from TSMC and the person driving five nodes in four years from Intel and Samsung, the President and Chief Technology Officer, Micra and Kalcia, all of them. All of them there. ICAPS' customers. We had leading EDA companies, leading fabless companies. We had the top universities. So this platform, again, there's a great opportunity for accelerating time to innovation, innovation success, right? Placing R&D teams, they're in our labs because the first place they're going to have access to those innovative technologies is in our lab.

And so really getting first access or early access can take a process that is kind of slow in serial and move some of those steps in parallel and just incredible enthusiasm, Stacy, on that. And then for a customer, if you can shorten your time to a node, the R&D efficiency is massive besides being in a better competitive position. So the economics of this for Applied and for the customers is tremendous.

Stacy Rasgon

So does it work from the customers -- but is they have like dedicated private space within the facility?

Gary Dickerson

Dedicated private space, they'll have dedicated teams there. So we'll have that with customers. And the universities, the superpower of the United States is our university system. Many of the technical leaders in the industry even if they were born outside the United States, they were educated in the United States. There's a lot of opportunities for us to take that superpower and amplify it. So customers are super excited about that.

Stacy Rasgon

Got it. How does this get monetized? Has that been decided yet? I mean are they paying you to work there? Or is there a technology sharing? I don't know.

Gary Dickerson

Well, I think the economics are strong. Certainly for the customers, the R&D efficiency and even Saturday I had lunch with one of our top customers. Tremendous opportunity. If you -- like the old way you're running evaluation wafers, then you have people flying back and forth. And then finally, you decide to put a tool on site. That takes a lot of time. If you have that co-optimization happening, again, there's a lot of opportunity for optimization, powerful economics for our customers. Powerful for Applied, because we're designed in and we're deeper, deeper connected in that ecosystem that anybody from an overall breadth standpoint and integration standpoint, but this takes it to a whole new level.

And what we've said on the economics, we're still committed to the 16% OpEx percentage of revenue. And we will -- this will be, I believe, very economically efficient. We haven't disclosed all of the aspects of how all that comes together. But the bottom line is that we're still committed to the 16%.

Stacy Rasgon

Again, and then the CapEx, it was $4 billion by 2030, right? And that was a gross number, so...

Gary Dickerson

Yes, that would be any incentives from government or customer investments or any of those things.

Stacy Rasgon

And I guess it's fair to say, I mean, this does not seem to be something that anybody else could do. On your scale and they don't have your breadth of...

Gary Dickerson

That's exactly right. I think that, that scale and breadth is a big deal because when you think about -- let's say we have any point in time, 40 innovations that we're driving across the industry. The first place you're going to have access to them is in our labs. So that breadth is going to be a very big deal. And we do have partners. It's like on the hybrid bonding, we have partnership with [Technical Difficulty] which is a big inflection in packaging. So it won't only be Applied tools in that innovation center. So you have to have that complete innovation flow.

And typically, what customers do and what we do, you have short loops. So you have -- if I'm building a gate-all-around, if I'm building a 3D DRAM or any of these different types of structures, I have these -- maybe 20 steps or some number of steps, the first place I look at electric results is on those test figures. That's where I get a down select the innovations. And once I see that, then most of the time, what happens is as customers want those tools way before they're high-volume ready. They want them in their labs and they want to be developing as fast as possible.

Stacy Rasgon

So now they can do that here.

Gary Dickerson

They can do that here and saves time, again. And it's also, again, more capital efficient.

Stacy Rasgon

Yes. No, I like it. I want to ask about a couple of these innovations that you talked about. And maybe we start with hybrid bonding and then I want to talk a little bit about Sculpt. So hybrid bonding. So just for the audience, like and backside power, what is that? And what are you doing? And what -- I know you have the partnership with Besi, what are the contributions that each of you bring into that partnership?

Gary Dickerson

So I mentioned these platforms. Again, the one integrated platform with seven ALD PVD, CVD, CMP, all of those things. That's a multibillion-dollar business for us. So we're good at integrating these technologies together. So in the case with Besi, we're taking for die-to-wafer or die-to-die bonding for chiplets, we're taking their bonder, combined with all of those adjacent steps on the surface preparation and all of those different kinds of things, putting that into a front-end platform with -- as you have tighter densities particles become a -- we'll have metrology and inspection integrated into that platform. So this is a big deal.

Our leading customers are the first ones pulling the hardest. Some of them already have that integrated platform. And by the way, even before they had the platform, they went to Singapore in our integrated packaging lab, same thing like this innovation center in Silicon Valley, they went there to have start their development even before they had the tools. So this is a really great innovation for heterogeneous integration and chiplets.

Stacy Rasgon

Got it. Got it. How does it play into the whole backside power? Or -- so Intel is moving toward backside power and the rest of the will be moving there?

Gary Dickerson

So backside power is where you take the power lines, you have power and signal lines, you take the power lines from the front of the wafer and you put them on the back of the wafer. so that opens up to about 30% chip area. And companies like Jensen, -- everything he can into that area once you open up some area there. But

Stacy Rasgon

It's transistors there.

Gary Dickerson

Yes. So it's 3% areas savings with no shrink. So it's incredible innovation. And then also, you can enable better power and performance. Now for Applied, our share of wiring, whether it's in the current interconnect schemes on the front of the wafer, in packaging or in backside power is extremely high. So for the customers, this is a very important innovation for them in their road map, but also for us, again, we're right in the sweet spot with all of the technologies enabling that backside power.

Stacy Rasgon

Got it. Got it. Let's talk about Sculpta. I thought this was -- I've been told it's not an etch precisely, but it looks like a slanted etch sort of -- and you're sort of using it to stretch out features we are to avoid certain EUV lithography steps, double patterning lithography, which is very expensive. So I got a lot of calls that day, people wondering is this the end of EUV? Does this Killen -- my view is [indiscernible] But like why do we need this? Like what is it doing? And what problem is it trying to solve?

Gary Dickerson

Well, I think -- so basically, what we're doing is again, from a directional perspective, you take a feature and you remove material in one direction. So you can certainly work with multiple EUV steps to create very tightly packed features. In this case, what you do is you take those features, and you start removing material in either direction to bring them closer together with higher density.

Stacy Rasgon

They're going to stretch them out.

Gary Dickerson

Yes. So one of the things they talk about is that chip-to-chip spacing. So with this technology, you can accomplish that same thing without having to go through the multiple EUV steps. So the economics are powerful, and you can also have very high precision in how closely I can pack that space. So for Applied, again, we're using technology actually was originally developed when I was CEO of Varian. So this is a technology we developed a while ago. But yes, it's -- that's really what we're doing there. So the economics are powerful. And then also from a performance standpoint, you can get that spacing very, very precise.

Stacy Rasgon

Got it. And you gave some numbers for opportunity, I think, on this. And that was -- it was avoided -- that will also avoid some other action gap steps, right? If you're using double patterning, you use more etch and dep, but -- what was the economics of this for you?

Gary Dickerson

I think it's $250 million per layer basically. So…

Stacy Rasgon

100,000 -- is that 100,000 wafer starts normalized

Gary Dickerson

Yes. So I think, again, very, very, very powerful economics. And this technology is a new technology in the industry, this directional removal of materials. So we have these initial applications around pattern shaping. But there's a lot of different potential applications with this kind of -- this is a new tool in the toolkit. That's...

Stacy Rasgon

Okay. Is it all logic? Or is it logic and memory or...

Gary Dickerson

No, it can be utilized across multiple customers. It is being utilized across multiple customers.

Stacy Rasgon

Got it. Anything else exciting you want to tell us about today in terms of what you're working on?

Gary Dickerson

There's so many things. I would just say this whole area of materials-enabled scaling, Stacy. When you think about all of these inflections in every one of these different device road maps going forward, more and more is going to come from materials innovation. And this is a -- this is why we formed this IMS group five years ago, if you asked me what are I most excited about?

That's what I'm most excited about because it's very clear and even TSMC, when they talk about energy-efficient computing, they talk about all those materials inflections. They talk about design technology co-optimization, which is basically, how do I drive scaling through all of these materials innovations. So we're the broadest with this innovation center that we're going to be in place, that's going to put us even a stronger position. And the ability to co-optimize or integrate under vacuum that pull is stronger because those layers are so thin.

Stacy Rasgon

I want to ask you a higher-level question. So I'm going to go back to WFE. I think first, just at a high level, like, so I think a few years ago, we were all talking about a potential sort of $50 billion kind of normalized industry WFE. And I mean, look, now -- near-term worries aside, we did 90 or 95 last year. It might have been 100 without the supply constraints last year maybe. This year is a downturn. Okay.

We probably still do 70, 75, even in a downturn. And the capital intensity people always look at like WFE divided by revenue, it is going up. And -- so I guess a couple of things. Can you just talk about just the drivers of that increased capital intensity number one. And then number two, is there a limit to how high because ultimately, somebody has to pay for this. In a perfect world that somebody is going to be the end customer. But like what are your thoughts on that? Like how much higher can capital intensity go given the drivers that we know are actually starting to take up today?

Gary Dickerson

Yes. I think capital intensity 15%, 16%, somewhere in that ZIP code. So if you look at kind of what's happened in the industry, you have these areas of computing. So you had PCs and there you're waiting for the operating system upgrade and so you have the volatility there. Then you went to mobile social media. Everybody in this room has that device with them. And so it's more pervasive computing. Then you go to AI and the technology transformation of every industry, so that's going to be -- and every era is at least a 10 jump relative to pervasiveness of computing. So we see that happening for sure.

And then again, if you look at energy-efficient computing. So if we don't drive innovation in the industry, obviously, the cost doesn't work. You're going to potentially consume 15% of the world's power when you have $0.5 trillion or $1 trillion hedge connected devices and the data centers. So these are really powerful. I think the economic the economics at the foundation of competition, semiconductors driving the biggest inflection of our lifetime is going to happen. Pervasiveness of content is going to increase. And then you look at how you get there. It's hard. It's hard to drive the innovation.

The 2D -- lost scaling really ended several years ago. So now you have to -- and the great thing about the industry is, you always find some new ways to innovate. So that's one thing. So I think you're going to see that in the leading edge continue. The other thing you saw in ICAPS, if you go back more than a decade ago, you had the move to foundry. So you had lots of used equipment that was out there in the marketplace. And so capital intensity there was in the single digits or even mid-single digits. So no more used equipment, your 200 to 300 transition, which gave you 2.3 times the number of chips wafer, not going to happen going forward?

Stacy Rasgon

No 450.

Gary Dickerson

No 450. I haven't heard that -- nobody's talked about that in many, many years. So I think that that's going to keep the capital intensity in a very healthy range.

Stacy Rasgon

Do you think it could go up from that 15 to 16. Is it plausible? I was wonder like everybody talked about $1 trillion in semis by 2030 or 2035 or whenever. Is it plausible we could have a $1 trillion industry to 20% capital intended to have a $200 billion -- it was 20% more than 20% back in as, right?

Gary Dickerson

Yes. I think capital intensity will eat where it's at in that ZIP code. I think that's the right ZIP code of where it will be. And I think more and more will move to materials-enabled innovations. If you think about what's happening in ICAPS, it's all materials innovations. If you think about high-performance logic, this road map for energy-efficient computing with design technology co-optimization, if you think about packaging with chiplets and heterogeneous integration, all of that stuff, 3D DRAM sometime in the future. Those are all enabled by materials. So I think the capital intensity can remain healthy for sure, and more could be moving to the sweet spot for Applied.

Stacy Rasgon

Got it. Let's talk about one of those like big demand drivers. So like every company has got to be an AI company now. Tell me the AMAT to AI story.

Gary Dickerson

You're talking about from a standpoint of how we're implementing AI? Or are you talking about...

Stacy Rasgon

Well, both actually because you are, right? So we haven't even talked about the services and the services business yet. But -- so I guess number one, just on the equipment side, talk a little bit about where you see AI driving equipment. One of the big questions I get is, obviously, Jensen's out there trying to make chips as big as the radical -- as many of them as you can make. And like what does it actually mean for leading agent? Because like right now, the unit -- it's not a lot of wafers, right?

Gary Dickerson

There's not a lot of wafers today. So I think that when I talk to the CEOs from our customers, I actually ask them the same question, what do you guys and about it? They see it as incremental. The -- as you said, those GPUs, I talked about 15 billion transistors in a smartphone process, where you have almost 100 billion in GPU. So those are big chips. They're really always driving the leading edge. So big chips are good for wafer fab equipment. And then also, all of that innovation that's also good for wafer fab equipment. So I would say near term, there's some incremental demand. I think you have to think out more beyond the next year on what is the impact. And certainly, again, I think I've talked to CEOs that think some of that technology will become more pervasive across many different kinds of devices.

And there -- it's still early, I think, for people trying to size how big those inflections. I do think it will be meaningful going forward. And certainly, that's going to be at the foundation of competition for many devices in many industries. So I don't know if the exact size, but certainly positive super positive for us.

Stacy Rasgon

Got it. Maybe that's a good segue like let's talk about how you're using AI yourself. And maybe it's a good segue into your services broadly...

Gary Dickerson

Yes, yes. So services for us is growing this year. So if you look at our services business, about 85% is service and spares, 15% roughly is 200-millimeter equipment for ICAPS. And that 85% in service and spares, over 60% is long-term agreements. So that gives us resilience in really any kind of a market. And the length of those agreements are about 2.6 years. Renewal rates are above 90%. And you think about complexity in these tools. As that complexity increases, it's a great thing for us for our service business because the first thing you got to do is you've got to qualify those tools in R&D. So you have opportunities there. Qualify a tool and a chamber, I have to ramp all of those chambers into high-volume manufacturing. So people talk about a golden chamber making them all Golden.

So that is hundreds of thousands, maybe up to 1 million pairs of chambers every year that you're ramping. And again, that's where a lot of the sensors and metrology and also just the -- of chambers. So I have an EPA tool, I want to ramp 20 into high-volume manufacturing or CVD chambers. I want to ramp a platform of five CVD chambers, all of those chambers into high-volume manufacturing.

So all of those, when I run a wafer I want them all to come out with high yield. So they all need to be matched. They all need to produce the same electrical performance regardless of which tool or which chamber they're running through. So that's where there's enormous opportunities for us, and we're developing new metrology capabilities.

That's also great for our e-beam business. We have 1,000s of -- and chambers that are connected remotely. So when you think about all of that technology that we're building into our systems, there's enormous opportunities. So our service business it's growing this year. And we've said that it's a little over $1.4 billion. And we said that longer term, we're on track to grow low double-digit rates. So that becomes meaningful. You're getting close to $6 billion run rate. So if you're growing in double-digits, that's going to add some stable strong growth.

Stacy Rasgon

Because that's a function of the installed base growth as well as like just the services content tool

Gary Dickerson

Services content, revenue per tool. And again, certainly, having those long-term agreements puts us in deeper relationships with our customers. So again, that's a strategy also. If you look back maybe 10 years ago, that number of agreements -- the percentage of agreements would be maybe 30%, something like that. So we've grown that percentage of agreements, a significant amount. But that's been, again, another conscious strategy that we've been driving inside Applied.

Stacy Rasgon

Got it. And where does AI play into all of this? You've talked a little bit about like what you've done in the services business, I think in the past, you've also talked about things you've been doing on the metrology side and some new products…

Gary Dickerson

Oh, absolutely. So again, we're the leader in e-beam technology. So when you're developing these new processes, e-beam is a very crucial technology. So -- and when you're trying to optimize any of these tools, there's maybe 100 different knobs you're trying to optimize. So what we're able to do is come up with new imaging technologies, so we can look at residual germanium for gate-all-around or the width of a nanosheet or into a super high aspect ratio structure without cutting the wafer and doing that, you can do it orders of magnitude faster.

So that fingerprinting and then being able to look in that multiparameter space is where AI can come in to help you dial in, you want the biggest window because that gives you the highest yield possible. So we're using AI in a number of different areas within Applied, in R&D and also in our service business. And opportunity to one of the things we're looking at is also driving productivity in the company. So we have an opportunity to double Applied going forward. So we're looking at…

Stacy Rasgon

Double what?

Gary Dickerson

Double revenue, double profit, all of those things. So we're looking at revenue per headcount or dollar per task. When we're doing that matching of change, what are we doing today? There's huge opportunity, Stacy, through technology to do those tasks much more effectively and much more productively. So again, those are things that we're driving really huge focus in Applied.

Stacy Rasgon

Got it. Sounds exciting.

Gary Dickerson

It's fine. Yes. It’s fine

Stacy Rasgon

I want to ask about something maybe the less China. Okay. China is exciting, I guess. Talk about the impact of the export controls. I know you had some lost revenue. Maybe you revised that a little bit more recently, most of the companies have been based taking like a call like a more careful read of the regulations out there. Just what is the impact of that been for you?

Gary Dickerson

So we communicated that the range was in $1.5 billion to $2.5 billion. And then we've received more clarification on some of those regulations. So we're tracking more towards the low end of that range right now. There's about $1.5 billion to $2.5 billion tracking towards the low end.

Stacy Rasgon

Okay. Yes. Got it. I was trying to get more and more decoupled. So clearly, like we've -- the U.S. has probably stimied their ability to really build a leading edge ecosystem in [Indiscernible]. So they're going to have to double and triple down probably on trailing node on ICAPS. And right now, that's clearly been a positive for you, and you've got strength from China. There are some local Chinese companies that do build tools, and they are much more on the lagging edge, because of the technology?

Is that something that we do need to think about over the long term as China has to double and redouble their efforts in this -- those kinds of players is the growth of a homegrown ecosystem at risk?

Gary Dickerson

I think that, again, if you look at 1,700 steps in building these chips and the interaction between all of the optimization of those combined steps, you can make progress on non-critical types of applications. But more and more, the complexity is increasing. So the optimization across that whole flow, I think, is more important than ever. And I think for Applied that's a very strong market. We have the strongest position across that entire flow. And working with leading-edge customers, whether it's leading edge customers in the edge computing ICAPS or high performance, is really, really, really important. So always what's happening is we're innovating.

What's competitive today is not competitive three and five years from now. Across that whole space, not just critical also and noncritical. There's tremendous innovation that's happening, integration into these platforms that's happening. So being able to shoot in the head of the duck is really important. We know where the duck is going. And again, we have such deep relationships with our customers. And you're co-innovating constantly. If you don't have access to those leading-edge customers, it's almost like trying to shoot at the head of the duck in the dark.

Stacy Rasgon

Does that help you in your ICAPS business that to work with the leading-edge customers?

Gary Dickerson

Oh, for sure.

Stacy Rasgon

So you pull down like innovations, I guess...

Gary Dickerson

Oh, for sure. It's all co-optimization. We're innovating on structures. We're -- the way the industry works. I mean you're going forward at an incredibly high innovation pace. And constantly, constantly, the companies that win are the companies that collaborate the best and the fastest. That happens in ICAPS the same way. So I think that for us, in those -- that's an enormous advantage. I think it's even more important going forward.

Stacy Rasgon

Got it. Gary, we're down about eight minutes. We've got a few questions from the audience lightning round.

Gary Dickerson

Okay. Let's go.

Stacy Rasgon

All right. Some of these are a little near term too, but you're seeing some order push-outs and cancellations for leading-edge foundry logic. Has the surgeon generative ICAPS those orders to reaccelerate or those order pushouts to decelerate?

Gary Dickerson

What's the question, again Stacy.

Stacy Rasgon

Let me ask you that. You said you're seeing some order push-outs in insulations for leading-edge foundry logic. But we've got a surge of demand for Geneva. Is it causing any of those orders to reaccelerate or the order pushouts to decelerate?

Gary Dickerson

Yes. What I would say is the magnitude of those changes are really either way not significant changes, Stacy. And what I would say on the leading edge, again, the main thing is you have this leadership between these different companies. When you're building capacity, I was with one of the largest customers -- he said they're thinking about what's going to happen 18 months out. And certainly, if you look at 3-nanometer, that's going to be a big node, a lot of demand. Next year, you'll start seeing more meaningful spending on the gate-all-around.

Stacy Rasgon

Starts.

Gary Dickerson

'24, yes. So you'll start seeing more of that spending coming in. I think for us, we look at the -- we haven't given specific -- given specific numbers, but we believe that that's going to remain healthy. The leading edge spending will remain healthy.

Stacy Rasgon

Okay. Got it. Are we getting a limited for Adams wide?

Gary Dickerson

I think there's so much opportunity for innovation. It's amazing. It's really amazing. I think there's a clear path through the end of the decade. Again, we're working for technology nodes out. And yes. I think very, very, very path on how we're going to innovate going forward.

Stacy Rasgon

Okay. I've got a question on...

Gary Dickerson

I don't know about two decades out. But at least we're pretty far out there and have high confidence.

Stacy Rasgon

I'd love to know, by the way, like all the stuff you're working on, how much of it actually finds its way to a product? How much of an event will get scrapped because it didn’t workout?

Gary Dickerson

Well, it's an interesting thing. So one of the things that we're focused on in the innovation center is working with universities. So this is another big opportunity. So a lot of times, they have old reactors or old tools. They don't have the whole innovation flow. So we're going to work on innovation networks with those universities on those verticals. And we worked with one university.

So getting back to your question, we had 10 innovations and working very, very closely with them, four of them in a four-year period of time, made it into chips. So -- yes, and that's all the way from kind of fundamental research and concept too, which is the ultimate thing is it doesn't get into a chip or not. So I think it's a reasonable success, right? And then once you go past that initial concept, the success rate goes up a fair amount. But the time to innovation is also absolutely crucial.

Stacy Rasgon

Got it. Customers have increased the duration assumptions for your tools. Is this more of an opportunity for your services business than it is a headwind for your tools business?

Gary Dickerson

So duration -- I'm sorry.

Stacy Rasgon

Is they're using them longer. So I think the question is, is it a tailwind, because you have to service them, so that's good? Or is it a negative because they're using them longer so they bought...

Gary Dickerson

So what happens is that every customer -- they're constantly ramping new technology nodes. They're constantly ramping new technologies. So all of that complexity that you see is increasing, whether they're new tools or existing tools and that creates opportunities. Again, all of that -- again, that's baked into our low double-digit growth for service. Anything I think there's more opportunity for us. Again, some of the technologies that we're developing, I think, can enable us to create more value for customers and drive better outcomes at a faster pace.

Stacy Rasgon

So we had really strong memory spending last companies. We had $40 billion in WFE in ‘21 and ‘22, and we might do $20 billion this year, maybe. Presumably, you can't stay here forever. It's got to grow. Does it get back to $40 billion is like any time soon?

Gary Dickerson

Well, first of all, I don't know if I would agree with $40 billion, but let's don't...

Stacy Rasgon

Is the Gartner. I know you guys -- I don't think you guys use anywhere like I think it's a little bit less SP-10 It's a lot, and now it's a lot less. And like does it ever get back to a lot.

Gary Dickerson

Yes. So I think the -- what I would say is longer term, we think two-thirds foundry-logic, one-third memory. And that's different than the way it was before. It was not weighted as much to foundry-logic. So we think that's the kind of normalized run rate. I think it's -- when -- I think the question, Stacy, is when does it recover and the magnitude of the recovery? I think those are fair questions. And at least talking to customers, I think they're more optimistic on DRAM recovering before NAND recovers. But I do think those are fair questions. When and what is the magnitude? Is it going to be a little bit or...

Stacy Rasgon

Do you have an answer?

Gary Dickerson

I do, but I can't say.

Stacy Rasgon

Got it. Update on competition you're seeing in the epitaxi in ALD markets.

Gary Dickerson

Yes.

Stacy Rasgon

That's the question.

Gary Dickerson

Okay. No, I think -- look, as I mentioned, in gate-all-around, we have high confidence. We have about half of that flow. We can see that very, very, very clearly. We're on track for what we've discussed before, $1 billion incremental opportunity for Applied. Most of those critical steps are with Applied. Most of the critical steps in deposition. And as I said, the majority of the steps in selective removal. I know a lot of people will talk about share gains, but we have high confidence, Stacy, in our position and continuing to grow going forward.

Stacy Rasgon

Got it. With expensive high-end chips leading sales and growth in semis, could this pressure or lower the CapEx percent of WFE in coming years for non-litho? I guess that what that means as well, these chips cost so much, it drives a lot of growth, but you don't need as much CapEx to drive that revenue, I guess.

Gary Dickerson

Well, I think on the -- I believe -- and again, you can look at what customers are talking about publicly. I think the percentage of spending with materials-enabled technologies are going to increase. So if you look at the road maps, a lot of the innovations around the new materials, the new structures are in the sweet spot for Applied. So I think the semis, the growth rates are going to be solid going forward. Capital intensity is going to go up. So the equipment will grow a little bit faster. And I think Applied is in a real sweet spot relative to materials-enabled scaling.

Stacy Rasgon

So just sort of like the preview of my last question, which is always -- you got a room for of folks here, we've got a minute or two of, why should they buy your stock? And I know you didn't say PTAC like this whole

Gary Dickerson

Performance power area cost and time which is the speed of innovation. But...

Stacy Rasgon

Why should they buy your stock?

Gary Dickerson

Yes. I think we're in a great position. I think semiconductors are the engine that will power the biggest transformation of our lifetimes. And the innovation is -- capital intensity is going to be high and the materials-enabled scaling with Applied puts us in a super position. And the other thing -- so I think that part of it, whether it's in leading edge foundry logic, ICAPS. DRAM, we said were very strong.

Packaging is another big area that we have strength. So very strong. And I think our breadth and our ability to co-optimize is even going to be more important in the future. And then I'd say the other thing is our services business, as we've talked about, double-digit compound annual growth rate, high percentage of agreements, tremendous opportunities with technology innovations to drive that even faster.

Stacy Rasgon

Got it. Gary, I can keep this going for hours, but I think with that, we'll call it a day. So thank you so much.

Gary Dickerson

Thank you so much.