Applied Materials, Inc. (NASDAQ:AMAT) Q4 2022 Earnings Call Transcript

We have more equipment to serve. The equipment becomes more intensive in terms of service needs. And over time, that grows the business. Now to your point, a portion of the business is transactional. We do see lower utilization this quarter and next quarter. What we would point to — what we have pointed to is, even in ’19, where there was lower utilization, we still grew the services business. And besides the headwind of China that I pointed out, we expect that to be the dynamic this year and going forward.

Gary Dickerson: Toshiya, this is Gary. I’ll add a little bit more color. So we do expect services to be up in ’23. The — as Brice mentioned, transactional will be down based on capacity utilization. But our profile, with a significant amount of our service and spares business being agreements, gives us stickiness going forward. And that is continuing to increase, the comprehensive agreements up 16% last year. The tenure of our agreements, the length of the agreements are up to 2.6 years. Renewal rates at 93%. So we’re — and it was an interesting thing through the — all of the chip shortage period of time. We were able to demonstrate value for customers with ramp services to accelerate chip output, managed part services so that people could — increase tool availability and output, managed services for yield and optimizing productivity.

So all of that helped us position our service business in a higher value for our customers. And again, that’s what gives us the ability to continue to grow into ’23. And then the longer-term model we’ve communicated is double-digit growth and we still have high confidence we’ll achieve that.

Operator: And our next question comes from the line of Harlan Sur with JPMorgan.

Harlan Sur : Another follow-up on AGS. So looking back on fiscal ’22, your Semi Systems operating margin declined about 200 basis points on strong revenue growth, obviously due to the inflationary cost pressures. But your AGS business sustained near record operating margins at 30%. So I guess how has the team been able to sustain the record or near-record AGS operating profitability in this inflationary environment? And more importantly, in a down year or potential down year next year, you guys talked last call, this call, sustainability of AGS from a revenue perspective. How should we think about the sustainability of operating margins for AGS?

Brice Hill : Yes. Harlan, it’s — thank you. So one thing I would call out is we did have lower gross margins and operating margins in Q4, and that’s largely due to looking at the specific inventory we had for China customers that will have to either reposition or move somewhere else or scrap. But to your point on operating profit, one of the plans the business has there is to improve the amount of repair that we do for products that we bring back to customers. And so that helps us lower the cost and cost of goods sold with customers. And that’s one of the ways that we improve our gross margins and the ultimate profit of that business. The other is just increased efficiency. As we demonstrate more and more capability with the customers, and we provide more services with the same spending profile, then that helps us maintain the profitability. Those are the two key drivers.

Operator: And our next question comes from the line of Joe Quatrochi with Wells Fargo.

Joe Quatrochi : I wanted to ask about the gross margin impact from the China restriction. Can you talk about what’s driving that 1 percentage point impact? And then how do we think about what you could potentially recapture in the mitigated scenario that you outlined?