Applied Materials, Inc. (NASDAQ: AMAT) Q3 2022 Earnings Conference Call dated Aug. 18, 2022
Corporate Participants:
Michael Sullivan — Corporate Vice President, Investor Relations and Marketing Communications
Gary E. Dickerson — President and Chief Executive Officer
Brice Hill — Senior Vice President and Chief Financial Officer
Analysts:
C.J. Muse — Evercore ISI — Analyst
Mark Lipacis — Jefferies — Analyst
Vivek Arya — Bank of America — Analyst
Stacy Rasgon — Bernstein — Analyst
Atif Malik — Citigroup — Analyst
Krish Sankar — Cowen — Analyst
Toshiya Hari — Goldman Sachs — Analyst
Harlan Sur — JPMorgan — Analyst
Joe Quatrochi — Wells Fargo — Analyst
Timothy Arcuri — UBS — Analyst
Joseph Moore — Morgan Stanley — Analyst
Sidney Ho — Deutsche Bank — Analyst
Quinn Bolton — Needham & Company — Analyst
Patrick Ho — Stifel — Analyst
Mehdi Hosseini — Susquehanna Financial Group — Analyst
Presentation:
Operator
Welcome to the Applied Materials Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session.
I will now turn the conference over to Michael Sullivan, Corporate Vice President. Please go ahead, sir.
Michael Sullivan — Corporate Vice President, Investor Relations and Marketing Communications
Good afternoon, everyone. And thank you for joining Applied’s Third Quarter of Fiscal 2022 Earnings Call. Joining me are Gary Dickerson, our President and CEO; and Brice Hill, our Chief Financial Officer.
Before we begin, I’d like to remind you that today’s call contains forward-looking statements, which are subject to risks and uncertainties that could cause our actual results to differ. Information concerning the risks and uncertainties is contained in Applied’s most recent Form 10-Q and 8-K filings with the SEC.
Today’s call also includes non-GAAP financial measures. Reconciliations to GAAP measures are found in today’s earnings press release and in our quarterly earnings materials, which are available on the IR page of our website at appliedmaterials.com.
Before we begin, I have a calendar announcement. Applied plans to host our Services Master Class five weeks from today on Thursday, May 26th at 9 o’clock Pacific Time. We will describe the market opportunity for our Services business, explain why 87% of AGS revenue is truly recurring and give you the growth formula for the business through our 2024 financial model horizon and beyond. We hope you will join team members of our global services team for presentations and Q&A.
And now, I’d like to turn the call over to Gary Dickerson.
Gary E. Dickerson — President and Chief Executive Officer
Thank you, Mike. In our third fiscal quarter, Applied Materials delivered results at the high end of our guidance range and record quarterly revenues. The actions we have been taking to mitigate supply chain challenges are beginning to have an impact and we expect steady incremental improvements from here. Resolving supply issues has required new levels of collaboration between our global teams, suppliers and customers.
While all of this hard work is yielding results, global supply chains remain stretched. Demand for Applied’s products is still higher than our ability to fulfill it and our backlog continues to grow. In addition, our relentless focus on meeting customer’s needs in this very difficult environment has created margin headwinds that we are working hard to overcome. We are driving actions to reduce costs and improve value capture, including price adjustments.
In my prepared remarks today, I will cover three key topics; first, our near-term outlook on supply and demand dynamics; second, our longer term view of the markets and the industry’s roadmap; and third, Applied Materials strategy, priorities and progress. After that, Brice, will provide more color on our financial performance in key areas of operational focus.
Let me begin with our near-term perspective on the market. Due to large gaps between demand and supply, as well as equipment companies shipping partially finished systems and emerging components in the field, overall 2022 wafer fab equipment spending is difficult to quantify with precision. Our best estimate is that it will land somewhere in the mid-$90 billion range.
For Applied, the picture is clearer. If we use the midpoint of our fourth quarter guidance, we expect our wafer fab equipment revenues to be up approximately 15% for our fiscal year. As we look ahead to 2023, there are three major factors shaping our view of the market. First, memory spending 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.
Second, leading-edge foundry/logic looks strong, with customers battling for leadership and racing to be first to implement major technology inflections.
Third, ICAPS customers, who serve IoT, communications, auto, power and sensor markets, are reporting areas of strength and weakness. These customers serve broad and diverse applications. They are seeing softness in consumer-centric markets, which are being impacted by macroeconomic factors.
Auto and industrial demand continues to be solid, because those investments are driven by large inflections, such as electric vehicles and industrial automation. In these areas, chip makers are securing long-term capacity agreements that underpin their capital spending plans. While it’s too early to provide a forecast for 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. We expect Applied to remain supply constrained for the next several quarters.
We are working through our very substantial backlog of orders, which provides a buffer to in-year demand fluctuations, and in addition, customers are providing us with longer term visibility and commitments in response to their own customer’s actions to lock-in the strategic capacity they need. Although, we are confident in our ability to perform well in a range of market scenarios, we are mindful of the current macroeconomic trends. 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.
Regionalization of supply chains is also something new for the industry. We expect this will provide a small positive tailwind for overall wafer fab equipment spending starting in late 2023. Also, 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.
Last week, I was in Washington, D.C. for the signing of the CHIPS Act and met with government officials and leaders from across the semiconductor and automotive ecosystems. 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.
I am also excited about the potential to create a new high-velocity innovation platform in the United States to accelerate the development and commercialization of next-generation technologies.
As I look further to the future, I feel very positive about the direction of the industry and our long-term opportunities at Applied. Consensus within the industry is that semiconductor revenues can reach $1 trillion before the end of the decade. That translates to a high single-digit compound annual growth rate from today.
In parallel, the technology roadmap is becoming increasingly complex. As a result, we expect equipment intensity, the ratio of wafer fab equipment investment to semi revenues to remain at today’s level or increase over this period.
Then the major technology roadmap inflections, including gate-all-around transistors, backside power distribution networks, new materials for interconnect and contact, and heterogeneous integration of chips and chiplets, are enabled by materials engineering, where Applied Materials is the leader and this shifts more dollars to our available market over time. We have invested ahead of these inflections to create a portfolio of differentiated solutions that positions us to outperform as these new technologies transition to volume manufacturing.
Applied Materials strategy is built upon the breadth and strength of our technology and capabilities. This provides us with a unique ability to engineer, co-optimize and integrate solutions that address our customer’s highest value technology challenges. Co-optimized solutions, where we optimize adjacent process steps and Integrated Material Solutions or IMS, where we optimize a combination of process steps in a single system under vacuum are becoming an increasingly important part of our product portfolio.
In our recent Master Class, we talked about a breakthrough IMS approach for tungsten-only contacts that are free of conventional barrier materials. This provides significant improvements in contact resistance and is critically enabling for smaller foundry/logic nodes.
The number of process steps are growing as these customers migrate to this pure metal technology and these low resistance integrated solutions for contact and wiring represent new multibillion dollar revenue opportunities. Over the past two quarters, we have secured multiple tool of record positions at all leading customers.
Our ability to co-optimize materials engineering solutions with novel inspection and metrology is also driving record performance in our Process Diagnostics and Control business. We expect PDC revenues to be up almost 40% in fiscal 2022 with broad-based customer adoption of our eBeam Metrology and new optical wafer inspection platforms.
In the quarter, we also strengthened our ICAPS portfolio with a tuck-in acquisition. Picosun is a leader in batch ALD technology and we are delighted to welcome their talented team to the Applied Materials family.
Turning to Service, AGS delivered record quarterly revenues despite headwinds for our transactional spares and 200-millimeter equipment businesses due to supply chain constraints. The subscription portion of AGS continues to demonstrate strength. Installed base tools under long-term service agreements grew 9% over the past 12 months. Our renewal rate for these agreements continues to be strong and is currently running at 93%.
Before I hand the call over to Brice, I will quickly summarize. We are beginning to see gradual improvements in our supply chain, which enabled us to deliver record revenue for the quarter. We expect demand to remain higher than supply for the next several quarters and we are continuing to drive actions to close the gap.
The changing macroeconomic environment is causing some customers to adjust the timing of their investments. However, we are confident that our business will be more resilient, thanks to strong pull for a uniquely enabling technology, our large backlog, longer term visibility from our customers and industry-wide investment in strategic regional capacity.
Our long-term view of the market remains unchanged as multiple parallel secular trends drive the semiconductor and wafer fab equipment markets structurally higher. At the same time, large technology inflections that are enabled by our core capabilities in materials engineering create outsized growth opportunities for Applied Materials.
Now, I will hand the call over to Brice.
Brice Hill — Senior Vice President and Chief Financial Officer
Thank you, Gary. I’d like to begin by saying thank you to our teams and our supply chain partners for helping to increase our output, despite ongoing constraints and unexpected shortages. Our factory and logistics teams operated with agility, adjusting to almost daily changes in supply schedules. We are still not meeting all of our customer’s demand and solving the supply chain shortages to increase our manufacturing output remains our top priority.
Before I summarize our Q3 results, I’d like to emphasize four points. First, our overall demand remains healthy. Specifically, our orders remained strong in Q3, our backlog increased, overall factory utilization remains high and customers have added four new factory projects to the long-term road map. There are pockets of weakness in the semiconductor market and a number of affected customers have asked us to reschedule their capacity additions. At the same time, there are areas of strength and we have broad market exposure and strong customer pull for technology investments.
Second, our supply chain improved incrementally in the quarter, as Gary mentioned. We have added significant investments in talent to our supply chain teams to resolve bottlenecks and to improve our inventory and overall output.
Third, we remain committed to our long-term gross margin targets. Today, we are still experiencing the effects of higher costs and unfavorable mix, which are being partially offset by pricing adjustments. We expect to incrementally improve gross margins over the coming quarters, driven by forecasted improvements in manufacturing volumes, product mix, pricing and logistics costs.
And fourth, we are confident in the industry’s underlying growth trajectory and our unique materials engineering capabilities for process innovation. While we are slowing our headcount growth, we have increased our R&D spending by around 10% year-to-date and remain fully invested in enabling our customer’s roadmaps.
Turning to our Q3 results, we delivered record revenue of $6.52 billion, which is in the high end of our guidance range. Non-GAAP gross margin of 46.2%, declined 80 basis points quarter-on-quarter. Non-GAAP operating spending was $1.06 billion, which is right on target and up $39 million quarter-on-quarter, as we increased R&D and added supply chain resources. Non-GAAP operating margin declined 60 basis points to 30%, driven by the lower gross margin and headcount additions primarily in engineering. Non-GAAP earnings of $1.94 grew $0.09 quarter-on-quarter and matched our previous record.
Turning to the segments. The Semi Systems team did a great job maximizing shipments, growing revenue by $276 million, up 6% quarter-on-quarter. Segment non-GAAP operating margin declined 100 basis points sequentially to 36.1% due to higher materials, freight, expedite and labor costs, partially offset by price adjustments.
The AGS team delivered record quarterly revenue, growing $37 million or 3% quarter-on-quarter. We continued to deliver healthy year-over-year growth in subscription revenue, while the supply chain shortages constrained our growth in transactional parts and 200-millimeter systems. AGS non-GAAP operating margin was 30.6% and slightly up quarter-over-quarter.
I will take a minute to share a few observations about AGS. Next month, we will host a Services Master Class where you will have an opportunity to learn more about our strategy to increase our recurring revenue.
The three key drivers are the growth of our installed base, equipment service intensity and long-term service agreements. AGS is making excellent progress toward our 2024 financial model. We exited Q3 tracking around $500 million ahead of the base case of our AGS revenue plan and around $250 million ahead of our high case. In addition, the Services business is capital light and produces excellent cash flow.
Moving on to Display now, the market is weaker due to its high exposure to consumer portion of the economy. During the quarter, we lowered spending in line with the current market environment. Our Display revenue declined by $48 million or 13% to $333 million. The business contributed $70 million of non-GAAP operating profit, which is down sequentially by $12 million or 15%.
Turning to our cash flows, we generated $1.47 billion of operating cash flow during the quarter, which was 23% of revenue. We returned $1.23 billion or 97% of free cash flow to our shareholders, deploying $1 billion to repurchase 9.8 million shares of company stock and paying $225 million in dividends.
We also deployed around $440 million for two strategic acquisitions. We expanded our ALD portfolio with the addition of Picosun, and we acquired a talented simulation software team. Year-to-date, we have produced over $4.5 billion in operating cash flow and nearly $4 billion in free cash flow, and returned $5.25 billion to our shareholders.
Now I will share our guidance for Q4. We expect revenue to increase to $6.65 billion plus or minus $400 million. We expect non-GAAP EPS to be $2 plus or minus $0.18. Within this outlook, we expect Semi Systems revenue to increase to $4.93 billion or up 14% year-over-year.
We expect AGS revenue to increase to $1.43 billion or up 4% year-over-year, with continued healthy growth in Services and ongoing supply chain limitations in 200-millimeter systems and transactional parts. Display revenue should decline to around $250 million. We expect to incrementally increase our non-GAAP gross margin to 46.4%. And we expect non-GAAP operating expenses to increase slightly to $1.08 billion. We are modeling a tax rate of 11.8%.
Before we begin the Q&A, I’d like to summarize our company’s position in the current environment. We continue to see very strong customer pull for advanced technology in all of our markets and our backlog continues to grow. We believe some of our customers will moderate their capacity additions in areas that have been impacted by weak consumer spending.
However, I expect Applied’s business to be more resilient than in past periods for three reasons. One is that we have strong exposure to technology investments, particularly in the foundry/logic market, which has grown to become approximately two-thirds of wafer fab equipment spending.
Second is that we have multiple quarters of backlog for products that are essential to our customer’s technology road maps and we expect to continue to increase supply over the next several quarters.
Third, that our Services business has grown to over $5.5 billion in size and generates 87% of revenue from recurring demand for parts, services and software.
And now, Mike, please begin the Q&A.
Michael Sullivan — Corporate Vice President, Investor Relations and Marketing Communications
Thanks, Brice. To help us reach as many people as we can, please ask just one question on today’s call. If you have another question, please re-queue and we will do our best to come back to you later in the session. Operator, let’s please begin.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question comes from C.J. Muse of Evercore ISI. Your line is open.
C.J. Muse — Evercore ISI — Analyst
Yeah. Hi. Thanks. Thanks for taking the question. I guess a question for me would be in light of record backlog and extended lead times, and then some of the puts and takes around customers moving out production plans. How are you thinking about the timing of easing of supply constraints? How are you thinking about kind of internal tool production into 2023 and as part of that driving, I assume, gross margins higher throughout that time, would love to hear your thoughts around that?
Brice Hill — Senior Vice President and Chief Financial Officer
Good afternoon, C.J. It’s Brice. Just — yeah, good question on supply constraints and timing versus the demand environment, etc. So let me explain what we have done the last couple of weeks. We just went through a cycle where we reconfirmed all of our 2023 demand with our customers.
Something we do once or twice per quarter on a regular basis and it gives the customer base a chance to signal if they want to make changes, they want to make adds, they want to make drops, and in a constrained environment, that lets us balance our supply across the customer base in the best way. So we have just completed that.
And there are a number of changes, but what we see for 2023 and the next three-plus quarters, as we said in our initial comments, is that demand is still significantly above our ability to supply, but we have got the confidence that we just reconfirmed all of that. And then when we think about supply, our comments — we have invested significantly in the supply chain. So we are working to identify issues and loosen the supply chain and solve problems in the supply chain both at our direct suppliers and our secondary suppliers. So our expectation is that, we will increase output for the next several quarters and continue to work on that backlog, which as you highlighted, has been — has continued to grow.
Gary E. Dickerson — President and Chief Executive Officer
Hey, C.J., this is Gary. I guess, also relative to supply chain, what we have been, certainly, the zero COVID lockdown in Shanghai, March 28, that set us back relative to overall supply chain. We are continuing to make incremental progress. And I just — right now we see it still being incremental going forward. We are doing everything we can, making investments, adding manpower, but it’s more incremental, and I think the same thing is true on margins.
I think last quarter we said that, we would see incremental progress from where we were and I think that’s really the direction both for supply chain and for margins is more incremental improvement throughout 2022 and going into 2023.
C.J. Muse — Evercore ISI — Analyst
Thank you.
Operator
Thank you. Our next question comes from Mark Lipacis of Jefferies. Your line is open.
Mark Lipacis — Jefferies — Analyst
Question, I guess the question I have is, Gary, maybe if you could help us understand the mechanics around what you guys do when your customers come in, and say, oh, we are adjusting that, I think you used the expression adjusting the timing of the orders. So do you push there, are you able to, like, take the slot that you have allocated for them and push them back a quarter or two or do you — at some point, do you just say, listen, we can’t push this back anymore, you either got to take it or go to the end of the line. If you could just provide some color about what you are seeing real-time on the ground, is — like how many people are pushing back, is it a quarter, is it two quarters and the mechanics operationally about how you guys manage that process? Thank you.
Brice Hill — Senior Vice President and Chief Financial Officer
Yeah. I know Gary is going to comment. I will just make a quick comment, Mark. When we go out and test the backlog with the customers, if they want to make changes a lot of times, that’s a mutually beneficial change. We have another customer that’s interested in taking the tool, because the demand is exceeding supply at this point.
So the first thing we do is try to accommodate those changes. We are not trying to demand the customers stay on the schedule that they have, etc. So we try to be flexible. And that was really the point of going out and retesting and re-verifying all of the demand that we have across the customer base. So, Gary, you may want to add to that.
Gary E. Dickerson — President and Chief Executive Officer
No. I think that’s exactly right. Again, the challenge we face right now, again, many of our customers are really driving major technology inflections. And Mark, I think, you see also, especially in high performance logic, everyone is racing to these new inflections. So we just have tremendous demand from those customers in ICAPS, automotive, industrial automation. So, unfortunately, we are not able to supply to that demand. And as Brice said, memory is weaker, and we try to manage and work with the customers to come up with the right outcome for them and for us.
Mark Lipacis — Jefferies — Analyst
Very helpful. Thank you.
Operator
Thank you. Our next question comes from Vivek Arya of Bank of America. Your line is open.
Vivek Arya — Bank of America — Analyst
I am trying to reconcile the two things, right? One, I think, Brice, you mentioned you are going to be increasing capacity over the next several quarters. But then from a demand perspective, I believe, Gary, you said that, memory could be down, I think, you have said kind of mixed views on ICAPS, but then leading-edge should be up. So my specific question is, based on — I know you are not giving next year’s guidance per se, but based on what you see, are we looking at kind of a garden variety, flat to down 5%, 10% in terms of the spending environment or is it very different than that view? Just so that we have some baseline view of how you are thinking about the industry going into the next year given you do plan to increase supply?
Brice Hill — Senior Vice President and Chief Financial Officer
Hi, Vivek. It’s Brice. So to reconcile those two, I think the first thing to be clear on from our side is that, demand for the next several quarters, three-plus is far higher than supply. So we are going to concentrate, like, we say, on increasing our supply and we will do our best to do that over the next several quarters and that’s our expectation is demand will stay above where we can supply across that time period.
So I think someone said it before that we are under serving the market so far that such that if there’s a change in demand, it’s still above where our supply line is. That’s the perspective we have. And if you think about or if you are asking about 2023, like we said, it’s too early to make a call on 2023. But what we would point out is different areas of the market, sure, are having some weakness, some inventory issues.
Other areas are very strong and are on schedule to build the processes that they need for customer products that are also on schedule. So we think those puts and takes more or less will continue the demand signal for us into next year.
Vivek Arya — Bank of America — Analyst
Okay.
Operator
Thank you. Our next question comes from Stacy Rasgon of Bernstein. Your line is open.
Stacy Rasgon — Bernstein — Analyst
Question, I was wondering if you could comment separately on your memory and your foundry/logic backlog. So I assume the memory backlog is coming down given it’s weaker, but it sounds like your overall backlog is still increasing if your demand is still well exceeding supply. So is it a case of like your foundry backlog is increasing more than your memory backlog is shrinking or like how do I think about the different pieces of that?
Brice Hill — Senior Vice President and Chief Financial Officer
Yeah. Exactly right, Stacy. This is Brice. Definitely, the backlog is increasing, and definitely, the foundry/logic backlog is the strongest — yeah, strongest component of that in terms of orders and adds to our order book.
I’d say that’s good. We know there has been reductions on the memory side. I don’t actually know if the memory side is down in total overall. But I think that’s a fair way to look at it. Some customers have reduced backlog on memory, but overall foundry/logic and some of the ICAPS customers are driving an outweighing increase on the positive side.
Gary E. Dickerson — President and Chief Executive Officer
Hey, Stacy. This is Gary. So also the foundry/logic is an increasing percentage of overall wafer fab equipment. So if you look at the percentages, foundry/logic is really around two-thirds of total wafer fab equipment. And so, certainly, the rates for competitiveness in high performance, you see that with companies making significant investments.
ICAPS, you have seen a lot of announcements with companies making long-term investments in the ICAPS capacity. So, certainly, you see that in the increasing percentage of foundry/logic in the overall market. So, yeah, I think that, what Brice said and what you had also asked in your question, certainly, foundry/logic is strong and that backlog still, unfortunately, we are not able to meet demand.
Stacy Rasgon — Bernstein — Analyst
Got it. That’s helpful guys. Thank you.
Operator
Thank you. Our next question comes from Atif Malik of Citi. Your line is open.
Atif Malik — Citigroup — Analyst
First question for Brice. Brice, some of your U.S. peers had talked about expanding China restrictions to sub-14-nanometer. Did that impact your July or October quarter outlook and if you can remind us of your total China sales, what is Display Systems versus silicon?
Brice Hill — Senior Vice President and Chief Financial Officer
Thanks, Atif. Yeah. First of all, we did get the same notice as our peers did on that. So that is sub-14-nanometer shipments to China customers, and it did not impact our July quarter and very small for October quarter, and that’s included in our guidance. So that part is clear.
And we will work to make sure that we are in full compliance with all the changes on trade rules as we always have. So, but nothing significant in July or October periods. And then could you repeat the Display question…
Gary E. Dickerson — President and Chief Executive Officer
Yeah. I will take it.
Brice Hill — Senior Vice President and Chief Financial Officer
Yeah.
Gary E. Dickerson — President and Chief Executive Officer
Atif, thank for the question. So we are not going to break out the exact amount of our business in China. But Display, most of our Display revenue does come from China and then you have the global customers and the domestic customers. So that’s the — and you have Systems and Service for all of those different businesses.
So not going to break out all of those different percentages, but what I would say is that, and I think we have talked about this before, that by far, the majority of our semi foundry/logic business in China is ICAPS, which is on the trailing nodes.
Atif Malik — Citigroup — Analyst
Thank you. That helps.
Operator
Thank you. Our next question comes from Krish Sankar of Cowen. Your line is open.
Krish Sankar — Cowen — Analyst
Brice, if overall WFE is down, say, 10% next year, how should we think about AMAT’s total revenues, including Semi and Services, given the strong backlog? And more importantly, how to think about the EPS, if you say WFE was down 10%? Brice, any color you could give there and how to think about revenue and operating leverage in that environment would be very helpful?
Brice Hill — Senior Vice President and Chief Financial Officer
Sure. Thanks, Krish. So the first thing, just to remind investors, you kind of made the point in the question about our backlog. We do have, as you said, a large backlog and we expect for the next three plus quarters, we will just be working on raising our output and serving that backlog.
But if you want to do a what if, if revenue goes down or if WFE goes down, the first thing I would remind investors also is that our Services business doesn’t fluctuate or correlate 100% with WFE. It’s driven off our installed base, which grows every time we ship a tool and the utilization across the entire factory network that we are serving transactional, spares and subscription service agreements across that.
So that portion of our revenue tends to dampen any weakness that we would have from a lower WFE, I would just highlight that for people that are thinking model. So whatever would change on WFE and change on the equipment side, it would be a dampened signal on the Services piece of the business.
And then for overall modeling purposes, I would look at probably as a proxy year 2019 to see how the business reacted to a lower revenue environment, where you can look at the margin performance in 2019, which was down 1 point or 2 points and you can look at spending where it was controlled, relatively flat. I think those would be the same sort of reaction the company would be able to implement in that sort of environment if you were doing a what if, which again is in our forecast.
Krish Sankar — Cowen — Analyst
Got it. Thanks a lot, Brice. Really appreciate it.
Brice Hill — Senior Vice President and Chief Financial Officer
Thank you.
Operator
Thank you. Our next question comes from Toshiya Hari, Goldman Sachs. Your line is open.
Toshiya Hari — Goldman Sachs — Analyst
Hi. Good afternoon. Thanks so much. Gary, I was hoping you could expand on some of the comments you made regarding the CHIPS Act and the implications for the broader industry, but more importantly, your business. I think you stated in your prepared remarks that you expect it to be a small tailwind or a minor tailwind starting in late 2023. First of all, if you could sort of quantify that for us for 2023 and 2024, that would be super helpful. And then, more importantly, how has the conversations you are having with your customers changed since the CHIPS Act has gone through? I guess the main question that I get from investors is, if a big foundry in Taiwan decides to build capacity in the U.S., isn’t it sort of a zero sum game where you sort of subtract from what could have happened in Taiwan and you just kind of take that over to the U.S.? So net-net, isn’t it sort of a zero sum, but how would you kind of respond to that? Thank you.
Gary E. Dickerson — President and Chief Executive Officer
Yeah. Thank you, Toshiya. So on the CHIPS Act, first, I’d say, just I am very happy to see the CHIPS and Science Act pass and become law. That’s really positive to the United States and the overall industry. And then relative to the investment question that you asked, I would look at it as a small positive tailwind for overall wafer fab equipment spending and really timing-wise starting in late 2023.
If you look at the investments, at least the ones that have been announced so far, it’s really in high performance logic, some ICAPS investments, those kinds of things. So as I mentioned earlier, again, two-thirds of wafer fab equipment is in that foundry/logic space today and so that’s going to be incrementally positive going into late 2023 and beyond.
Those investments also are time bound. If you look at the incentives, there are certain time frames where the funding is available and investments have to be made. So that creates a higher degree of certainty.
I would say, as those companies, I have talked to many of them and as they move to new locations, there is start-up costs and some incremental less efficiency, as they start those fabs and especially for our Service business, that’s an incremental positive. So I think you would see small incremental spending late 2023 and beyond, as all of those investments in those factories are starting up.
Over time, Toshiya, I think, really as they — it really depends on the scale of those factories, a bigger factory is more efficient than a smaller factory and so until they build them out, which will take many, many years, there will be a degree of less efficiency for some period of time. But, again, if you look at it in the grand scale of overall WFE, it’s not a huge tailwind, but it’s definitely a tailwind.
Toshiya Hari — Goldman Sachs — Analyst
Got it. Thanks so much.
Operator
Thank you. Our next question comes from Harlan Sur of JPMorgan. Your line is open.
Harlan Sur — JPMorgan — Analyst
Good afternoon. Thanks for taking my question. I wanted to expand on some comments that Brice had on services. Maybe this is a plug for your upcoming Master Class. But I mean in the event of a weaker WFE environment next year, you have several positive buffers. I think the biggest one, your Services business historically does not decline during downturns, in fact, over the past 11 years, and I think, that’s four WFE down cycles, I believe that there’s only been one year that AGS was down and it’s driven a pretty stable like 8% to 10% sort of revenue CAGR over that period of time. So outside of the annuity like subscription contracts that I assume will be partially offset by, let’s say, 200-millimeter equipment sales, which may fall off in a weak WFE environment. What is the team doing to ensure continued outperformance of Services doing WFE weakness and your confidence on driving growth in Services if WFE is down next year?
Brice Hill — Senior Vice President and Chief Financial Officer
Yes. Thanks for the question, Harlan. If I got it there, what we are focused on, the two drivers for that business as you kind of hinted to are really the installed base that grows every time we ship a tool. And then, as you highlighted, our ability to serve that installed base both through transactional support spares and services and then the subscription agreements that we have with customers that offer spares plus insights that we have across the network on how to optimize for yield and how to optimize for capabilities.
So I think what we are doing is increasing our portfolio of service offerings that make it more valuable to the customer. It allows them to ramp more quickly, reach higher yields and really benefit from the intelligence that Applied has across the whole ecosystem of tools that they don’t have potentially on their own.
I think that’s the focus area for the company and that’s what gives us confidence that as that installed base grows, we will be able to continue to grow our subscription agreements. And just the last piece is, you are right, we have the same analysis on not being 100% correlated with WFE and…
Harlan Sur — JPMorgan — Analyst
Right.
Brice Hill — Senior Vice President and Chief Financial Officer
Even as — if there’s changes in WFE or weakness in the revenue and the rest of the business, it’s really about the underlying utilization in the factories that exist and the need for services and intelligence in those factories. So I think those are the key drivers.
Gary E. Dickerson — President and Chief Executive Officer
Harlan, just — yeah. Thanks for reminding people about the Master Class coming up here next month. The one thing that I think has helped us also, so if you — you talked about 10 years, 11 years. If you go back over that time period, we — I think close to doubled our percentage of subscription agreements versus transactional. So certainly — and we have increased the length of those agreements to two and a half years. So that percentage of agreements being so much higher and it’s still growing, that makes that business more resilient. And I think that…
Harlan Sur — JPMorgan — Analyst
Yeah.
Gary E. Dickerson — President and Chief Executive Officer
Also relative to the environment we have been in, where everybody is focused with chip shortages, producing good chips out, it really has also highlighted more value in our services. Things like managed part services, where people have the parts available versus competing for what’s available from a transactional perspective, along with all the things that Brice talked about. I think that’s really helped highlight the value of these longer term subscription agreements for our customers.
Michael Sullivan — Corporate Vice President, Investor Relations and Marketing Communications
And Harlan, this is Mike…
Harlan Sur — JPMorgan — Analyst
Yeah. Thanks for the insight. Yeah.
Michael Sullivan — Corporate Vice President, Investor Relations and Marketing Communications
Yeah. Hey, Harlan. It’s Mike. I think that earlier I gave the right timing for the next Master Class. It’s in five weeks from today, but I think I heard myself say May 26, which is the last date. It’s September 22nd, of course. So thank you.
Harlan Sur — JPMorgan — Analyst
Yeah. Thank you.
Operator
Thank you. Our next question comes from Joe Quatrochi of Wells Fargo. Your line is open.
Joe Quatrochi — Wells Fargo — Analyst
You talked about still seeing strength in — especially in leading-edge, foundry/logic investments, but there’s also some consumer driven demand there as well. So, I guess, have you maybe seen a change in terms of like the capacity that your customers are looking to put in place there, but still not change their technology roadmaps?
Brice Hill — Senior Vice President and Chief Financial Officer
Yeah. Thanks for the question, Joe. Yeah. The way I would think about it, first of all, I think, yes, we have highlighted that demand is higher than our supply level, there’s been changes. I think in total, that demand came down a little bit, but it’s still above what we are able to supply for the out quarters. But I think the way we think about it for a leading-edge foundry is, they are building processes that their customers are building products on and they need to be able to hit those schedules for the customer products. So they are fairly committed to getting that technology in place.
And then you are right, the volumes will fluctuate depending on what the market is for those products. But if you are building a logic node for a product two years from now, you are really thinking about what the market is two years from now when you are putting that equipment in place. So it’s not as simple as just looking at the current quarter’s macroeconomic environment, GDP and lowering your demand. You really have to think about that forward looking function. But the dynamics — you have the dynamics right. We just retested all of the demand for next year and that’s what all the customers are thinking about.
Joe Quatrochi — Wells Fargo — Analyst
Thank you.
Operator
Thank you. Our next question comes from Timothy Arcuri of UBS. Your line is open.
Timothy Arcuri — UBS — Analyst
Around some of the mixed signals around what’s happening this time around, and on one hand, customers are pushing out, but you also mentioned that you are getting long-term commitments from some other customers. I was wondering what that means, because it kind of sounds like you are confident that foundry/logic is going to hold up at this time even as memory pushes out and that’s not usually how it works. Is it something that there’s such a concentration of leading-edge foundry capacity and there’s going to be others such as your neighbor that are trying to compete to get back in the foundry business? Is that what’s different this time, because I am hearing these mixed signals and there’s something obviously different. So I am just wondering if you can call on your past knowledge to help on that?
Brice Hill — Senior Vice President and Chief Financial Officer
Sure, Tim. Just two comments, the first is we have definitely expanded the horizon with all of our customers from a planning perspective. They are giving us longer signals than before and giving us the opportunity to engage in the discussion on capacity planning with them. And second, some customers are also giving us a sense that or a promise basically that they will operate within a certain band of capacity. So they are giving us additional confidence to what we should plan for from a high confidence perspective and that’s a little bit different than what we have done before.
Gary E. Dickerson — President and Chief Executive Officer
Hey, Tim. This is Gary. I would say one other thing that is helping us in this timeframe. If you look at the relative investment for the upcoming inflections, more of the dollars are going to new materials and new structures.
Gate-all-around, we talked about that in the Master Class. Wiring for interconnect from 7 to 3 goes up, I think, 3X dollars per wafer as you go, you have — go to the 3-nanometer node, there’s more steps. We have these Integrated Material Solutions that combine seven technologies on one integrated platform to lower the wiring resistance by 50%.
Backside power distribution, if you look at what one of our customers said recently, they talked about significant increase in materials and structures relative to power performance for them going to their future technology nodes.
Backside power distribution is another one that’s a significant inflection. You can reduce the area up to 30% without shrinking the features by placing some of the structures on the backside of the wafer. So, again, for us, that relative contribution and the relative investment in our types of technologies is going up and that’s another thing that’s helping us.
Timothy Arcuri — UBS — Analyst
Thanks, both.
Operator
Thank you. Our next question comes from Joseph Moore of Morgan Stanley. Your line is open.
Joseph Moore — Morgan Stanley — Analyst
Thank you. In terms of the view that you have been more resilient going forward than you have been in the past, would you say that’s true for memory in isolation, and I guess, if we sort of — if we think this is a memory downturn that looks similar to 2019, should we think about WFE being down similarly to 2019 or do you think that would be too pessimistic and why is that? Thanks.
Brice Hill — Senior Vice President and Chief Financial Officer
Thanks, Joe. The first part, I guess, I haven’t thought of it like that, but I would say that, we are resilient — more resilient philosophy or position would play to memory only. And the reasons that I would point to are, first, the backlog that we have talked about, even though memory may be weaker than it was last quarter. We still have significant quarters of backlog for memory customers. So that dynamic is the same and the overall backlog strength is one of the reasons we are saying we are more resilient than in other periods.
And the second is the Services business is one of the reasons that we are thinking that we are more resilient and that also applies to memory customers and customers that we service from a spares perspective, etc. So I think that also is larger than it has been in the past and is more resilient relative to changes in WFE.
And then the last piece, just to make sure for everybody else, I wasn’t implying that 2019 would be the P&L for the company. We won’t go back to 2019, but that it was a good proxy for how gross margin and spending would behave if we were in a weaker environment. So just to clarify that.
Gary E. Dickerson — President and Chief Executive Officer
Yeah. Joe, this is Gary. I think, if you say what’s changed or what’s the same and what’s changed? Certainly, the percentage of foundry/logic is significantly higher than it was back in that timeframe. Again, it’s tracking around two-thirds. There’s this race for leadership in high performance logic and significant investments that are happening in that part of the market.
And we see customers — our customers announcing longer term agreements with their customers and that’s something that we didn’t see back in that timeframe. So I think the foundry/logic percentage and the relative strength there is definitely different than, certainly than it was in the 2019 time frame relative to the overall wafer fab equipment market.
Joseph Moore — Morgan Stanley — Analyst
Okay. Thank you.
Operator
Thank you. Our next question comes from Sidney Ho of Deutsche Bank. Your line is open.
Sidney Ho — Deutsche Bank — Analyst
For taking my question. My question is on, another question on China. When I look at the revenue from China, it came down about 7 percentage points quarter-over-quarter. I think that’s more than some of your peers. Can you walk us through the dynamics there, I know in answering a previous question, you talked about the new export restriction have no impact in the July quarter. Maybe you can talk about the demand strength from domestic Chinese customers versus multinationals and the foundry versus memory, that will be great? Thanks.
Brice Hill — Senior Vice President and Chief Financial Officer
Thanks, Sidney. This is Brice. Yeah. I think one specific driver and one just general observation. The specific driver is most of the downside on our Display business relates to customers in China, so that’s the probably the primary change element. The rest is just the ins and outs normal quarter activity. We don’t think the China market, as we look forward, is any weaker. We think the ICAPS investments that are being made there are largely on schedule, no real change in signal there.
So it’s just the ins and outs of having different-sized deliveries in the quarter. It happened to be a quarter overall that was a little smaller than the prior quarter. So we would point to Display and then just general ups and downs for the rest of the change, and just to reiterate, no change on the — no change because of the trade rules like we said before.
Sidney Ho — Deutsche Bank — Analyst
Okay. Thank you.
Operator
Thank you. Our next question comes from Quinn Bolton of Needham & Company. Your line is open.
Quinn Bolton — Needham & Company — Analyst
Really ask you a clarification and then a quick question. The clarification is, when you talk about memory reschedules, are these memory customers just pushing out delivery dates by some number of quarters or are they canceling the tool entirely and you are just taking that slot and reallocating it out to one of the foundry/logic customers? The question is just on the memory rescheduling, is that equally happening across DRAM and NAND or is it predominantly on the DRAM side? Thank you.
Brice Hill — Senior Vice President and Chief Financial Officer
Okay. Quinn, thanks. On the clarification, there are both — there are all three events happening with basically all customers, so there’s adds, there’s drops and there’s schedule changes. I think on the memory, there’s more drops than there are adds in the short-term window. So those are cancels and there are plenty of reschedules and there are even some adds for memory. So I hope that clarifies, it’s a mix. But, overall, we would say, memory cycle-over-cycle memory is lower than what it was in the last cycle.
Quinn Bolton — Needham & Company — Analyst
And it’s equally across DRAM and NAND?
Brice Hill — Senior Vice President and Chief Financial Officer
That part I don’t have off the top. I don’t think we would specify that. So I can’t answer that one.
Quinn Bolton — Needham & Company — Analyst
Understood. Thank you.
Brice Hill — Senior Vice President and Chief Financial Officer
Yeah.
Operator
Thank you. Our next question comes from Patrick Ho of Stifel. Your line is open.
Patrick Ho — Stifel — Analyst
For you, Gary, since a lot of the industry questions have been answered. You talked about the above average growth in your Process Control business. Obviously, foundry/logic is a big driver of it, particularly on the advanced node side, are you seeing any penetration in terms of your ICAPS business in Process Control or is it entirely within the advanced nodes?
Gary E. Dickerson — President and Chief Executive Officer
Hi, Patrick. Thanks for the question. No. ICAPS is very strong for our — ICAPS is very strong overall for the company. PDC is up 67% in 2021 and we are up almost 40% in fiscal 2022. What I would say, relative to the breakdown of the different markets, certainly, it’s stronger in high performance logic than in any other part of the market. Although, we are seeing growth in memory and we are definitely also seeing growth in ICAPS.
The biggest thing for us, if you look at our PDC business last year, eBeam pretty much doubled. So we have vertical integration with our electron optics, leadership in resolution and imaging technologies and that business is also very, very strong into 2022 and then also going forward.
We are seeing incremental strength also in optical inspection and we believe we will outperform the overall market in optical inspection and overall PDC has a really strong tie to PPACt inflections. So when you look at gate-all-around or some of these other big inflections, our unique imaging capability enables us to map out those processes in fingerprints faster and better than anyone else. So that synergy, not only do we see really strong growth in PDC, but real strong synergy with the rest of our semi portfolio.
Patrick Ho — Stifel — Analyst
Thank you.
Michael Sullivan — Corporate Vice President, Investor Relations and Marketing Communications
Great. Thanks. And Operator, we have time for one more question, please.
Operator
Thank you. Our next question comes from Mehdi Hosseini. Your line is open.
Mehdi Hosseini — Susquehanna Financial Group — Analyst
Asking a WFE question, two follow-ups, what would be your revenue guide if you had all the components that you needed to shift to demand?
Brice Hill — Senior Vice President and Chief Financial Officer
That’s a good question, Mehdi. Since it’s been several quarters since we have been at that level. It’s difficult to predict. But we did say, I think, two quarters ago that the supply constraints probably impacted us by $300 million. So I would say that and more if we had zero supply constraints and we would be on a higher curve going forward.
Mehdi Hosseini — Susquehanna Financial Group — Analyst
Thank you. And of your inventory, how should I think about the mix of WIP and finished system — or finished goods?
Brice Hill — Senior Vice President and Chief Financial Officer
Well, the changes for inventory, it’s relatively balanced across the both, across the entire inventory ecosystem. But the increase — I am looking at the number, sorry, right now…
Mehdi Hosseini — Susquehanna Financial Group — Analyst
Yeah.
Brice Hill — Senior Vice President and Chief Financial Officer
Relatively balanced, I mean here’s what’s happening on — here’s what’s happening dynamically. We have a much more raw inventory coming in as we are trying to solve the supply chain issues and 95% or more of our parts are available and we are able to build inventory and that shows up in our WIP in raw material.
And on finished goods, what’s happening is we do have material or tools that are complete or nearly complete that are awaiting one part or close to being shipped to customers and that inventory is also growing. So I think it’s relatively balanced across all those components.
Mehdi Hosseini — Susquehanna Financial Group — Analyst
So the push out by memory customers is not a factor in driving your increase in days of inventory?
Brice Hill — Senior Vice President and Chief Financial Officer
Yeah. Absolutely not. We are still underserved in total relative to the market. So when any customer delays a tool or cancels a tool at this point, we will be moving that inventory and those parts to another customer and we expect that to be the dynamic for the next several quarters plus.
Mehdi Hosseini — Susquehanna Financial Group — Analyst
Thank you. Thanks for detail.
Brice Hill — Senior Vice President and Chief Financial Officer
Yeah. And just to emphasize for everybody, yes, we — that’s what our perspective is on output. We will be raising our output for the next several quarters and we expect to be able to ship that based on demand being higher than the current supply.
Michael Sullivan — Corporate Vice President, Investor Relations and Marketing Communications
Okay. Thanks, Mehdi, for your question. And Brice, would you like to give us a summary?
Brice Hill — Senior Vice President and Chief Financial Officer
Yeah. Absolutely. So we have talked about puts and takes, weakness and areas of strength in the market. The overall story is we have multiple quarters of backlog. Job one for us is to increase our output and meet our customer demand as quickly as possible. As we do this, we will incrementally increase both our revenue and gross margin in coming quarters. We are confident in the long-term growth of the semi market and we are working to increase our investments in supply chain, and especially to continue to focus on the R&D to drive the power, performance and area cost road maps of our customers.
I look forward to seeing many of you at the upcoming conferences. Gary and I will be at the Goldman Sachs conference in San Francisco, and just before that, I will be in New York for the Citi and Evercore events.
Okay. Mike, please close.
Michael Sullivan — Corporate Vice President, Investor Relations and Marketing Communications
A replay of the call is going to be available on our website — I’d like to thank everybody for joining us today. A replay of the call is going to be available on our website by 5 o’clock Pacific Time today and we would like to thank you for your continued interest in Applied Materials.
Operator
[Operator Closing Remarks]