Chips Act to Help Speed Expansion of ‘Strategic Capacity’: Applied CEO

The actions Applied Materials has been taking to mitigate supply chain challenges “are beginning to have an impact, and we expect steady incremental improvements from here,” said CEO Gary Dickerson on an earnings call Thursday for fiscal Q3 ended July 31. The company supplies wafer fab production tools to chipmakers, and so is a bellwether of semiconductor industry conditions.

Despite all the “hard work” to minimize the headwinds, “global supply chains remain stretched,” said Dickerson. “Demand for Applied’s products is still higher than our ability to fulfill it, and our backlog continues to grow,” he said. Due to the “large gaps” that remain between demand and supply, plus equipment companies “shipping partially finished systems and merging components in the field,” overall 2022 wafer fab equipment spending “is difficult to quantify with precision,” he said.

Applied expects its wafer fab equipment revenue will be up about 15% year over year in its fiscal 12 months ending Oct. 31, said Dickerson. Among the factors “shaping” Applied’s view of the market, memory spending in 2023 is expected to be lower than in 2022, “as macro uncertainty and weakness in consumer electronics and PCs causes these customers to defer some capacity additions,” he said. The “leading-edge” foundry and logic industry “looks strong, with customers battling for leadership and racing to be first to implement major technology inflections,” he said.

Amid the “softness” in “consumer-centric markets” being affected by macroeconomic factors, automotive and industrial demand “continues to be solid, because those investments are driven by large inflections, such as electric vehicles,” said Dickerson. “In these areas, chipmakers are securing long-term capacity agreements that underpin their capital-spending plans.”

Though it’s too early to forecast 2023, “we believe our business will be more resilient than in the past if there is a demand pullback in certain areas of the market,” said Dickerson. “We expect Applied to remain supply-constrained for the next several quarters.” Applied is working through its “very substantial backlog of orders, which provides a buffer to in-year demand fluctuations,” he said. Customers also “are providing us with longer-term visibility and commitments in response to their own customers’ actions to lock in the strategic capacity they need,” he said.

Despite Applied’s confidence in its ability to perform well under “a range of market scenarios,” senior management is “mindful of the current macroeconomic trends,” said Dickerson. “As a result, we are slowing down hiring, while ensuring we fully fund the R&D programs and strategic operational capabilities that support our long-term growth.”

The “regionalization” of supply chains is “something new” for the semiconductor industry, said Dickerson. “We expect this will provide a small positive tailwind for overall wafer fab equipment spending starting in late 2023,” he said. “Because of the time-bound nature of government incentives in the U.S., Europe and Asia, we see a higher degree of certainty for these investments.”

Dickerson was at the White House earlier this month for President Joe Biden’s signing of the Chips and Science Act (see 2208090062), where he met with government officials “and leaders from across the semiconductor and automotive ecosystems,” he said. “I am happy to see the critical role that semiconductors play in the economy being recognized and acted upon.”

The need to build more resilient and flexible supply chains “remains a key theme for these leaders,” and the Chips Act “will enable many companies to accelerate their investments in strategic capacity,” said Dickerson. “I am also excited about the potential to create a new high-velocity innovation platform” in the U.S. to speed “the development and commercialization of next-generation technologies,” he said.