Atif Malik: Hi, thank you for taking my question. I have a question for Brice. Brice, you talked about China mix normalizing from 45% to 30%. Can you talk about the impact of the mix on the gross margin from the 47.3% you’re guiding through for the rest of the year?
Brice Hill: Thanks, Atif. Appreciate the question. So yes, our gross margin reported in Q1 was 47.9%. We think that we’ve modeled what it would be without the higher China mix, and our view is the underlying gross margin is approximately 46.7% at this point. So as we go through the course of the year, we expect that gross margin to come down from 47.9%, to a more normal amount. At the same time, where we are underneath that, the 46.7% will continue to improve slowly, if that makes sense. So, if you normalize Q1 immediately, you’d be at 46.7%. We expect that to improve through the course of the year. And then we’re not changing our goals. Our goal is 48% to 48.5% for 2025. That’s still where we’re targeting as we work on pricing improvements and continue to work on our cost road map.
Gary Dickerson: Yes. Atif, I would just add that we have made progress pretty much across all customers on pricing improvements. I think we’ve talked before about cost headwinds that we encountered in the supply chain. We’re making improvements there, and as Brice said, we’re committed to hit those goals.
Unidentified Analyst: Thank you.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Srini Pajjuri from Raymond James. Your question please.
Srini Pajjuri: Thank you. Hi guys. Gary, I have a question on your HBM comment. I think you said HBM accounted for about 5% of industry output. If you can clarify if that’s wafer output or if that bids, but my question is, as we look out to the next few years I think you’re forecasting about 50% growth for this business. So, it’s a little tricky to understand for us as to how much of DRAM WFE is going to HBM right now? And how do you see that evolving? I mean if the market grows 50%, should we expect I guess the equipment spending also to grow 50%? Or do you think it’s going to grow faster than that?
Brice Hill: Hi Srini, since I’ve seen a lot of the modeling, I’ll just share a couple of those data points. So on the first question, its wafer starts when we think about the 5%, its wafer starts. I think it is difficult to estimate the equipment purchases at this point because you probably understand that the DRAM business itself has been underloaded as most of the markets have. So I think what many of the customers are doing is shifting some of their capacity to HBM, to get this output. Gary highlighted in his prepared remarks that the dye sizes for the are larger than the non-HBM. So it certainly will help drive up utilization, which will eventually increase equipment orders going forward. And we do think the DRAM business, if you look at the past few years, the level of WFE for DRAM, we do think that – it’s been fairly strong, and it will continue to be strong is our expectation.
And then the last piece, of course, is customers are having to expand the HBM related apps of their DRAM process. Gary highlighted what that is for us, and that’s growing a lot faster than what you see on the general Equipment side. So my understanding of the DRAM is about 700 steps in a DRAM process and about 15 additional steps, possibly 20 to do the HBM level of that. So for sure, you’ll see customers growing the HBM packaging techniques and capabilities alongside the regular capacity. And then we’ll expect to see utilization increase as time goes on.
Srini Pajjuri: Thank you.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Toshiya Hari from Goldman Sachs. Your question please.
Toshiya Hari: Hi. Thank you so much for taking the question. I had a two-part question. The first one is on the conventional DRAM part of your business. And the second part is on the NAND business. So the bullishness in terms of HBM, we understand. I’m hoping to better understand what your customers are doing, what they’re telling you, Gary, in terms of their plans on the conventional DRAM side are things still very muted? And are they disciplined from a supply perspective? Or are you seeing a pickup in your conventional DRAM business, as well to the extent you have visibility there? And then I guess a similar question on the NAND side. It’s been a soft market for everyone. I guess there’s hope that at least node transitions or layer count increases will resume this year. Are you starting to see early signs of a pickup? Or are things pretty soft there? Thank you.
Brice Hill: Yes. Toshiya, its Brice. I’ll just make a couple of comments and maybe Gary will add to that. So, on the DRAM side, and this is true for DRAM and NAND, but I’ll start with DRAM. We do see utilization improving, and we also see improvements in prices, and we also see improvements in inventory positions. So we do think that’s consistent with the rising optimism on the DRAM side. The utilizations have been low enough that there’s a ways to go before they have to start thinking about adding capacity. So our view on the market is it’s mostly from a WFE perspective, the nodal upgrades and the HBM that we talked about. And it would be similar for NAND. We’re seeing improvements in inventory, seeing improvements in pricing. Utilization is starting to pick up. And our perspective would be the same as technology advances will be what drives the spending. And we do have signals that, as we suggested that the spending will pick up.
Gary Dickerson: Yes. Toshiya, relative to Applied in DRAM as I talked about earlier, we’ve gained more than 10 points of overall DRAM WFE share, over the last 10 years. And then if you look at the technologies for DRAM going forward, periphery moving to higher speed IO, enabled by our leadership logic products, capacitor scaling, we’re achieving patterning share gains. And I’ve talked about very strong position in advanced packaging, including high bandwidth memory; we’re really well positioned there to continue our outperformance in DRAM. And as Brice said or I said earlier also, we think that business is going to remain very healthy for us. NAND for Applied, we see the revenue up a fair percentage in 2024 versus 2023, but the total amount is still far below 2022. So that’s a little bit more color.
Toshiya Hari: Thank you so much.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Harlan Sur from JPMorgan. Your question please.
Harlan Sur: Hi. Good afternoon. Thanks for taking y question. One of your peers alluded to this on their last earnings call and talked about a push-out on advanced foundry-logic programs, due to potentially persistent delays in chip sack funding. I mean I think the industry thought that after Congress and the President signed off on the CHIPS Bill, I think it was like 18 months ago that grant funding would be appropriated at least in 2023, but here we are in February 2024 and still no grant disbursements. Obviously, all fab programs will launch at some point, right, but maybe some near-term movements on timing due to the absence of this grant funding. Is that what’s driving some of the leading-edge foundry-logic program delays that you guys talked about in your opening remarks?
Brice Hill: Okay, Harlan, I’ll make a comment there. I do think those schedule changes that have been in the news, we’re up-to-date on those. So our outlook is consistent with any of those discussions and schedule changes that you’re talking about. On the CHIPS Act, we’ve recently seen news reports about the government beginning to accelerate that process. We’re in the process ourselves of preparing our application on the R&D side and expecting that to open soon. So I think the answer to your question is, yes, it is affecting schedules, but we don’t expect it will change the ultimate destination of those projects.
Harlan Sur: Great. Thank you.
Brice Hill: Yes.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Joe Quatrochi from Wells Fargo. Your question please.
Joe Quatrochi: Yes. Thanks for taking the question. I was wondering if you could help us quantify how much your ICAPS business grew in calendar 2023. And then as we think about the foundry-logic business for 2024, do you think the recovery in leading-edge can offset the decline in ICAPS?
Brice Hill: Okay, Joe thanks. So I think what we’ve highlighted publicly on ICAPS is that grew approximately 40% in 2022, and it grew faster than that in 2023. And so we wouldn’t change that and be more specific. But to your point, it’s been the strongest market for us. It’s now the largest market for Applied. Gary highlighted that there’s innovations across that market. It’s very important to us from an investment perspective. And so you’ll see us continue to focus on serving that market and the growth. And then the second part was the linearity across the quarters. We’re not giving guidance across the quarters. But since we did highlight that we expect some digestion in ICAPS, and we highlighted we expect leading edge to accelerate. We’ll leave it to you to kind of think about what – which is the stronger force and how the next few quarters go forward. But that is the right shape of those two end markets.
Gary Dickerson: Yes, Joe, just let me add. I think our perspective hasn’t changed at all, relative to how we see the market. So we still see semiconductors at $1 trillion by 2030. And if you look at – there’s some powerful drivers in the digital transformation of every industry. AI, certainly, there’s a lot of focus there. And AI server has 8 times more foundry-logic content and eight times more DRAM compute memory content. So as Brice said earlier, and I think as you’ve heard from others, I think there’s a pretty positive perspective on 2025. And I think longer term we have a very positive perspective relative to semiconductor growth, equipment growing as faster, faster and Applied outgrowing the equipment market continuing to outgrow, as we have for the last five years.
So I think quarter-to-quarter or half-to-half, frankly, we don’t focus as much on that, as we do this secular growth that we see in this industry and the great opportunities Applied has, as I’ve talked about, relative to the major inflections. So anyway, that’s the way we think about it.
Joe Quatrochi: Got it. Thank you.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Timothy Arcuri from UBS. Your question please.
Timothy Arcuri: Thanks. I had a clarification and a question. So the clarification, Brice, is the 2023 WFE baseline, would you agree with something like $86 billion to $87 billion? So if you can clarify what your baseline is when you say that you gain share? And then my question is on China WFE. So if I use your numbers, it implies WFE from China is roughly $30 billion in 2023, maybe a little bit less. I know the customers are not stockpiling tools per se, but we know that SMIC and some of the other public companies, they have revenue to support what they spend. But that seems like only about half of that amount. So I guess the question is, would you disagree with the idea that maybe half of what’s coming from China is companies just kind of getting off the ground and trying to displace what’s being imported from the U.S. or Europe.
And I guess, Gary, the real crux of the question is that the China stuff is not really a free lunch. It’s sort of duplicative with spending happening elsewhere. So how do you handicap that when you plan your business going forward? Thanks.
Brice Hill: Okay, Tim. Thank you. So, on the 2023 WFE, we’ve been careful not to engage in the discussion about that. We just shared what our view of Applied’s performance in our view of that market. And for us, 2023 was a strong year. We talked about ICAPS strength. We talked about DRAM strength, Packaging strength, et cetera. And so we’ll just have to wait and see what the third parties say about the size of the market. For us, we saw a strong market. On the China WFE we agree. We don’t see stockpiling. There are a number of new customers. So I don’t know if it’s exactly the partition that you described, in terms of leading and public companies versus not. But, we do think there are a large number of projects that are under investment, where we see over the next four years, added wafer start capacity, planned wafer start capacity that market will be a strong market for us across the planning horizon.
