Q1 2025 Applied Materials Inc Earnings Call

Brice Hill

Thanks, Gary, and thank you to everyone joining us for today’s call. We had a strong start to the fiscal year, with healthy revenue growth and meaningful margin expansion helped drive a 12% year-over-year increase in non-GAAP earnings per share. In addition, we distributed $1.6 billion to shareholders with $1.3 billion of share repurchases and $326 million of dividends. For fiscal Q1, our results were largely in line with our expectations, with total net sales of approximately $7.2 billion, up 7% year-over-year with growth in both Semiconductor Systems and Applied Global Services.
Non-GAAP gross margin was 48.9%, up 100 basis points year-over-year and our highest quarterly gross margin since fiscal year 2000. The strong margin performance in Q1 was the result of a very favorable mix and increasing adoption of our leading-edge technologies and advanced integrated systems. In addition, we progressed on our value-based pricing initiatives and cost reductions. Non-GAAP operating expenses were $1.31 billion, with increased R&D investments to support our technology growth areas. Non-GAAP EPS was a record $2.38, up 12% year-over-year given the revenue growth, better profitability and share repurchases.
Moving to the segments. Semiconductor Systems sales were $5.36 billion for Q1, up 9% year-over-year, driven by 20% growth in foundry logic, partially offset by an expected decline in DRAM sales as prior year sales to customers in China did not repeat. Non-GAAP operating margin of 37.3% was up 160 basis points year-over-year. Sales for the ICAP nodes, which serve customers across the IoT, communications, automotive, power and sensor markets, were down slightly year-over-year and flat quarter-over-quarter.
Moving to Applied Global Services. AGS delivered revenue of $1.59 billion in Q1, up 8% year-over-year with healthy growth in services, partially offset by a decline in sales of 200-millimeter equipment. Non-GAAP operating margin of 28% was down 30 basis points year-over-year. Lastly, our display business delivered revenue of $183 million.
Moving to the balance sheet and cash flows. We ended the quarter with cash and cash equivalents of $6.3 billion and debt of $6.3 billion. Cash from operations in the quarter was $925 million. Capital expenditures were $381 million, and free cash flow was $544 million. We distributed $1.6 billion to shareholders in the quarter, including $1.3 billion in share repurchases and $326 million in dividends.
As of the end of the quarter, approximately $7.6 billion remains available under our share repurchase authorization.
Turning to our outlook. We are seeing strong momentum for leading-edge foundry logic where we are particularly well positioned as our customers ramp the most advanced technology nodes gate all around transistors into high-volume manufacturing. Offsetting leading edge is the more measured level of investment in the ICAP nodes, following strong spending in ’23 and ’24. In DRAM, we are seeing healthy demand, but faced tough year-over-year compares given the purchases from Chinese customers in 2024 that do not repeat this year. We are also seeing growth in NAND, albeit from historically low levels.
As Gary mentioned, as a result of the expanded export controls announced in December and January, we expect to face a headwind to revenue of approximately $400 million in fiscal 2025. Nearly half of that impact will be in Q2. The impacts in the second half of the fiscal year will be more weighted to AGS and as we are no longer able to serve certain customers. And following the step down in revenue in Q2, we would anticipate a return to growth in Q3 for AGS.
Based on these trade restrictions and our view of our business, for Q2, we expect that China as a percentage of total revenue will be about 5 percentage points lower than in Q1. This is below the normalized level of approximately 30%. Taking all of these factors into account, for fiscal Q2, we expect total revenue of $7.1 billion, plus or minus $400 million, which represents a 7% increase year-over-year and non-GAAP EPS of $2.30 plus or minus $0.18, which represents a 10% increase year-over-year. We expect semiconductor systems revenue approximately $5.3 billion, up 8% year-over-year; AGS revenue of approximately $1.55 billion, up 1% year-over-year and display revenue of approximately $250 million. We expect non-GAAP gross margin of approximately 48.4% and non-GAAP operating expenses to be approximately $1.3 billion.
We are modeling a tax rate of approximately 13%.
In closing, our business is strong, and we remain confident in our growth opportunities across all of our business segments. We are making significant investments in R&D to grow our share at the leading edge, and we are increasing our capital investments to be the leader in high-velocity co-innovation with our customers. This is an important indicator of the confidence we have in the growth trajectory of our business. And with our differentiated technology, unique insights and deep industry relationships, we are poised to benefit from the technology transitions and semiconductor growth that is expected over the coming years.
Liz, we’re now ready to begin the Q&A.

Liz Morali

Thanks, Brice. To help us reach as many people as we can on today’s call, please limit yourself to one question. If you have an additional question, please requeue and we’ll do our best to come back to you later in the session.

Operator

(Operator Instructions)
Toshiya Hari from Goldman Sachs.

Toshiya Hari

I know you guys aren’t or haven’t been giving specific WFE numbers, but at a high level, Gary and/or Brice, I was hoping you could provide a little bit of context on how you’re thinking about the year. I know you gave a couple of comments, but by application, by geography, how is 2025 likely to shape up in your view? And more importantly, your outperformance vis-a-vis the market, what are some of the key drivers we should be focused on? And if you can speak to the magnitude of outperformance relative to what you achieved in ’24, that would be really helpful.
Thank you.

Brice Hill

Okay. Toshiya, nice to hear from you. So first, we’d say that our Q2 guide gives a really good indication of how we think the market is evolving. So leading edge with all the strength that you see in AI pulling DRAM, advanced logic and HBM that factors into what we see in the market today. So leading edge is growing.
We’ve been thinking it will be accelerating through the course of the year, and we do see that growing strongly in Q2. And we highlighted that we’ve also been watching the ICAPS market after the significant build out the last couple of years in China, and that is lower in Q2.
So those things offset, but you see in total that we still have consistent year-over-year growth in the overall market. So that’s the big change from a market perspective. If you look at the memory side, our memory is roughly flat quarter-over-quarter.
We see some additions on the NAND side, and that’s offset by a slight reduction in DRAM. NAND is growing, but of course, that’s from a smaller level.
And the last thing I would share is when you think about advanced packaging, we had a significant amount of capacity adds last year in the HBM side for the initial burst of capacity. And we’re still selling into HBM still adding equipment into that market, but it’s at a slower rate. So that’s part of the outlook also.
So the key thing there is we’ve all been waiting to see if advanced logic would ramp strongly enough to offset any slower rate of investment in ICAPS, and that is what we’re seeing in Q2. And that’s our best — what we try to do is share what we’re seeing today, and we think that’s our best indication and how you can think about the year at this point.

Gary Dickerson

Yes, Toshiya, relative to the outperformance question. Over the last 4 years, including last year, we outperformed in aggregate across leading-edge foundry logic, DRAM, high-bandwidth memory, advanced packaging and ICAPS markets outside of China. And we’ve been talking about this a lot. We’re focused on major device architecture inflections critical to AI energy-efficient computing. When we’re meeting with all of our customers, that’s where they’re all focused.
So for us, we’re on track to capture greater than 50% share of our served market in gate all around in backside power and foundry logic. We gained 10 points of DRAM share, and we’re positioned to gain share as 4F squared and 3D DRAM architectures are adopted.
Packaging was around $1.7 billion in 2024, up 3x in 4 years. And as we’ve said many times, we’re positioned to double this business in the coming years. In ICAPS, we gained several points of share since we formed the group 6 years ago. We brought several new products to market. We have a strong pipeline of new products that will grow our available market and position us well in this segment and materials engineering intensity where Applied has clear leadership is increasing in next-generation chip architectures.
So going forward, I like how we’re positioned to win these major inflections. Again, we’ve been outperforming in all of these segments over the last 3 years, and we’re well positioned to continue to outperform going forward.

Operator

Atif Malik from Citi.

Atif Malik

Hi, thank you for taking my question. Brice, I appreciate the color on the April quarter. The silicon systems down a little bit explained by the China impact. And you’re talking about the return to growth in AGS. Can you also comment on the silicon systems. Do they return to sequential growth in the July quarter or we’ll have to wait and see?

Brice Hill

Yes. Thanks, Atif. I think we’ll have to wait and see on the semiconductor systems. But what we’re sharing is we’ve been expecting the leading edge to accelerate. When you think about the gate all around and backside power nodes in the market and the advantages of those nodes for leading-edge architectures, we expect a significant amount of capacity to be put in place in those nodes.
And that is what you see in Q2. And we expect that, that is a good indication of where the market will be going. And then on the offset for that, we highlighted the ICAPS and we’ve been watching that. But I’ll just say that market continues to evolve. Our forecast for ICAPS and for ICAPS China seems to change every single quarter.
And so we’ll see how that evolves through the rest of the year.
And then on the services business, yes, this will be similar to 2022 when there were new trade rules. We’ll have a step back, as you can see in our guide in Q2, but we expect to grow from there at the low double-digit rate as we continue to add customers, add new types of services. And the new customers and new locations will make it more likely the services business is utilized by the customers.
Thank you.

Operator

Stacy Rasgon from Bernstein Research.

Stacy Rasgon

Hi guys, thanks for taking my question. You said the China impact in the second half will be weighted to AGS, but you also said AGS returns to growth in Q3. So like how do I square that so? What’s offsetting the China impact in the second half? And just like broadly, if I were to add the $200 million issue that AGS is getting hit by the China sanctions, if you added that $200 million back in, would it still grow the digits this year?

Brice Hill

Yes. That’s a good question. Thank you, Stacy, for the question. So on the AGS side, the way to think about it is, approximately half of the impact will be taken in Q2, and then it will be a continued impact in the following quarters. But we don’t expect it to be a sequential reconciling line item.
In other words, whatever business we can’t support in Q2, that’s the same business or less in Q3 and Q4. So there is an impact in Q3 and Q4, but we think you shouldn’t worry about it from a modeling perspective. We’ll just begin to add from there and we’ll grow at rate that we’ve described low double digits as we continue to add installed base and tools to support. And then I didn’t do the calculation. I guess what I would say is from a core AGS perspective, if you take the $200 million out, we’re absolutely growing at low double digits or higher.

Operator

CJ Muse from Cantor Fitzgerald.

Christopher Muse

I was hoping you could speak a bit to gross margins. You talked about value-based pricing starting to come in, in the January quarter. I would love to hear more about how you see that flowing through the model throughout all of calendar ’25. And I guess as part of that, how should we be thinking about kind of evolving mix in terms of modeling gross margin, either first half, second half or kind of exit rate for calendar ’25 would be very helpful.

Brice Hill

Okay. Thank you, C.J. Good to hear from you. So on the gross margin, 48.9% and 48.4% in our guide in Q2, very strong mix in both quarters, obviously, with the China impacts for Q2, it’s a little bit lesser mix strength. We’re still going to reiterate our 48% underlying rate.
So we think with — when we don’t have those quarters with ultra-strong mix, that’s still about the ballpark for our normalized rate. So I think in the second half that unless we maintain the exact same mix which we likely don’t expect, we will be closer to that 48% gross margin for the year — or not for the year, sorry, we’re not giving a guide for the year, but that is our underlying baseline rate to think of as you think about where the business is normally.
And then if you think about the pricing, I think of two dynamics with pricing. One, the solutions that we’re developing that Gary has pointed the company toward the inflections, those are increasingly valuable solutions for the customers. And so there’s an increasing value proposition for the equipment itself. And then our pricing mechanism is to make sure that we’re including that in our thinking with respect to the pricing. And we also have a disciplined infrastructure to have those discussions with customers.
So as we allocate our R&D, we’re, of course, allocating to the areas that we think are most valuable in the market. And we think it’s a matter of execution to achieve that value in the marketplace, which is what we’re trying to do. So I said third inning last quarter on those — on the process for pricing, and I think that’s still accurate.

Operator

Vivek Arya from Bank of America.

Vivek Arya

I actually had a longer-term conceptual question for Gary related to Lite versus H&F intensity. If let’s say, overall WFE intensity stays around mid-teens. It means WFE will grow in line with semiconductor industry sales over the next several years. And if that happens, do you think, Gary, takes more share? Or do you think etcher debt take more share and has grown faster or slower than overall semiconductor industry sales?
I’ve heard arguments on both sides, but would appreciate your views.

Gary Dickerson

Vivek, thanks for the question. So if I look at the major inflections that we’re focused on going forward, if you look at leading-edge foundry logic, GATR all around and backlog power, our customers have talked about being able to achieve in backside power, 30% area scaling benefit beyond power and performance benefits with really no change in feature size. So that’s basically what we’re seeing in foundry logic, and we think that continues going forward. In DRAM, if you look at what our customers have talked about in 4F squared, they also talk about significant area savings as they implement that new architecture. And of course, again, for all of these things, we’re incredibly well positioned.
And then when you get to 3D DRAM, 3D DRAM is more similar, not the same materials, but a similar impact where the relative spending for materials engineering goes up significantly versus lithography.
And then, of course, another area that we’re focused on and the entire industry is focused on is advanced packaging. And when we look at what the AI servers look like 3 or 4 years from now, the architectures are going to be very different. And the way the data is connected in those architectures, there’s just going to be tremendous innovation around materials innovation. So when I look across any of these different markets, and of course, ICAPS is really all driven through materials innovations. We’ve talked about this before in our master assets.
We see the percentage of materials engineering relative spending to be increasing going forward around all of these different architecture inflections.

Operator

Timothy Arcuri from UBS Securities.

Timothy Arcuri

Brice, do you think as you look at — I think you’re on to give us a WFE number for last year, but do you think you gained WFE share? That’s the first question. And then how do you kind of assess, Gary, the headwind from these companies in China? Because I know that they have laid rev rec, so it makes it hard to sort of measure year-to-year. But they’re about 5% now of WFE.
It’s up like 400 basis points over the past 4 to 5 years, and that’s all You’ve done a great job holding share and gaining share. But how do you sort of think about that headwind from China because so much of the incremental spending is from there?
Thanks.

Brice Hill

Okay, Tim. Nice to hear from you. On the in ’24, of course, we don’t know yet in terms of the final measures there. But — you heard in Gary’s script, he talked about — we think we’ve gained share in all the markets, except for likely China. So we’ll just have to see what that reading is once all the share numbers are in.
So we feel well positioned from that perspective. And even in China, we feel good about the way we compete. It’s just, yes, the local Chinese vendors have some advantages with the trade rules that have been put in place.
And then on the headwinds for China, I think we do have lower visibility, but we continue to add customers, and we think that’s a huge market. It’s our largest ICAPS market, and ICAPS is the largest market for Applied. And we expect that to grow over time at the device level, mid- to high single digits. As you know, equipment investments in the last couple of years have been ahead of the market. So we’ve expected it to moderate for some period of time.
So we’ll see how that plays out. But for us, that continues to be one of the most important markets for the company.

Gary Dickerson

Tim, just I would add, and again, I talked about this a little bit earlier. Leading-edge foundry logic, we’re incredibly well positioned for those inflections. DRAM, we’ve gained 10 points of share. And again, really well positioned for 4F squared and 3D DRAM, high-bandwidth memory. That’s another one where we have a very strong leading position.
And advanced packaging is another area where it’s up 3x in 4 years, and we anticipate that we’ll double that business. And then that will keep going into the future. And again, we’re just really well positioned for all those inflections.
In ICAPS, we have room to grow in PDC and etch, and we have momentum in those segments. And I talked earlier about the pipeline of ICAPS innovations. Again, we formed this group 6 years ago, we brought 20 new products to market. And we have new products in the pipeline that will expand our total available market. We have new products for cost competitive applications, and we have innovations to enable new ICAPS device architectures that co-innovating with leading customers.
So as Brice said, in the areas where we can compete, I feel really good about our positions and our pipeline going forward.

Timothy Arcuri

Thanks a lot, Kate.

Operator

Harlan Sur from JPMorgan.

Harlan Sur

We track many of your end customers in the semiconductor industry, both fabless and IDMs and retracting their design starts, especially at 2-nanometer design starts super to be accelerating since the second half of last year, especially in areas like AI, accelerated compute mobile. Is the team — in talking with your customers, is the team getting a sense on how big the upcoming 2-nanometer node transition? And more importantly, volume production potential could be relative to 3-nanometer?

Brice Hill

Harlan, Gary might also add on to this. I’ve seen various estimates for 2-nanometer. Based on the performance benefits of 2-nanometer, I think we’re expecting that to be a large node. If you look at some of the third-party estimates, that should be a good landing spot for just like 7-nanometer in the past was a good landing spot for designs. So we’re expecting it to be on the large side from a node perspective.

Gary Dickerson

Yes, Harlan, I would just add that everybody is focused on energy-efficient computing for AI. And if you look at what our customers are saying, they’re very bullish about the size of that 2-nanometer node.

Operator

Krish Sankar from TD Cowen.

Sreekrishnan Sankarnarayanan

Yeah, hi, thanks for taking my question. Gary, I had a question on around You’ve spoken about getting over 50% share of the incremental TAM there. But it seems like the EPI stack is one of the more critical ones, and your epi competitor seems to be making some strides. So I’m just kind of curious, can you talk a little bit about your EPI market share? And if you still feel confident in the 50% per share gain of the overall gate-all-around opportunity?

Gary Dickerson

Yes. We’re — as I mentioned earlier, we’re in deep partnerships with all of our customers focused around this concept of high-velocity co-innovation. And we’re working with every one of our customers out a decade into the future on multiple technology nodes. For gate-all-around, we have — we still are on track to do what we had talked about earlier with gaining more than 50% of the incremental spending for gate-all-around. And EPI is part of that, we’re in a very strong position I think 85% of those epi steps are selective epi where we have tremendous strength.
We have new innovations we’re bringing to market in Epi, and so we still feel very confident in our outperformance going forward.

Operator

Srini Pajuri from Raymond James. Your question, please.

Srinivas Pajjuri

My question is on Brice, you said for Q2 outlook, you used the word China will be below normal in terms of percent of exposure. I would think that the export restrictions, those are permanent. So I’m just curious as to when you say below normal, are you expecting China to recover to like the 30% level that you previously communicated? And then when do you think we might get to that level? And then maybe for Gary.
Gary, over the last 90 days, excluding the export restrictions, can you talk to how the demand conditions are within China?
Thank you.

Brice Hill

Okay. Thanks, Srini. So first of all, 30%, we still think will be a good long-term rate for us or a good long-term estimate of the share to China. When you think about the market, of course, for us now, that’s an ICAPS market. We can’t serve leading edge.
But that will be a growing market over time. The devices will grow mid- to high single digits, if not more, heading to the — helping to get to the 1.3 — or yes, $1 billion to $1.3 trillion semiconductor market by 2030. So that market will continue to grow. We may pause a little bit less. We may have a little bit lower rate of investment as we go through the next short period of time, will that adjust.
But that’s a very strong market for us. So 26% in Q2 and 30% is a good estimate for the company. And of course, that includes all of our businesses, AGS and Display also. . And then, Gary, on what we’re seeing with respect to demand?
Yes, I think I’ll just make a comment on that. It’s still our largest market. So you see leading-edge accelerating, but ICAPS is still our largest market and China is the largest country inside that market. And so when you’re thinking about it and you’re thinking about what we’re describing as a step back in the rate of investment, you should still think about it as just a very large opportunity and growth opportunity going forward. And so we think the rate slows down a little bit after 2 huge years of investment, but we expect that market to grow over time.
We’ve continued to add customers. We’re tracking a lot of projects. that are underway. We expect capacity to be added every single year, and that forms the backbone of our expectations.

Gary Dickerson

Yes. The one thing I would add is that we believe that the ICAPS market over the longer term, will grow kind of mid- to high single digits. And as I mentioned earlier, we have new products in the pipeline that expand our total available market, new products for cost-competitive segments and opportunities to grow in segments where we have momentum. So I think longer term, we’re positive on the market and positive on our position in the market.

Operator

Brian Chin from Stifel.

Brian Chin

I’ll ask a few questions or maybe one question. Maybe for Brice, I think you previously disclosed a $549 million reduction in backup for the fiscal year in a filing. And you’re quantifying a $400 million impact for the year. Did you revise what that actual impact would be? Or is there some maybe the residual amount of [ 5.49 ] that sits outside of the month horizon?

Brice Hill

You’ve got it exactly right, Brian. So it’s not much of a change. That $5.49 was our backlog and it covered more than just a year. And so we shared, I think, what was in the 12 months. And if you did that math, I think it was about $3.80.
So we’re still very close in terms of what we’re thinking the impact is for the year.

Operator

Joe Quatrochi from Wells Fargo.

Joseph Quatrochi

I was wondering if you could talk a little bit more about your expectations for DRAM growth. If we were to exclude just the benefit of China DRAM spending in the comparison a year ago, how should we think about the growth in your business this year?

Brice Hill

Yes. Thanks, Joe. I’ll start on this one. I think we’ve seen 2 record years of DRAM. And of course, ’24 was buoyed by the extra China demand that we saw.
And I can’t call the year here, but we see the rate of investment in DRAM continuing in the rest of the world. So there’s a lot of pull for the HBM solution, and there’s a lot of pull in for DRAM in the advanced compute performance systems. So I would expect continued momentum in DRAM, and that’s included in our outlook in Q2.

Gary Dickerson

Yes, Joe, I would just say that, as I mentioned earlier, we’re more bullish on compute memory than we are in storage memory. And then what our customers have said is it takes 3x the number of wafers to produce the same number of bits for HBM. So that’s going to certainly help the growth rate over the longer term.

Operator

Charles Shi from Needham & Company.

Unidentified Participant

I have a question about the revenue — expected revenue from gate all around nodes. You previously said more than $2.5 billion in fiscal — I mean, in probably calendar ’24, and you expect to double has the ’25 number move up or down or any changes to that number? And — maybe the other part of the question, I think that you previously said last year’s $8 on revenue plus this year kind of implies 100,000 global capacity built on 2-nanometer by the end of this year. Do you see potentially that data spending can accelerate further into ’26? Because we were trying to think about with the end capacity, it could be in ’26, but do you want to get your early thoughts on 2026, if possible?
Thank you.

Brice Hill

Okay, Charles. Thanks for the question. So first thing, yes, we have not changed our expectations for growth looking into ’25 with the gate-all-around related equipment. So 2.5 in ’24 and then the opportunity to double that in ’25. And if you put those together, that’s just over $7 billion.
And when we describe the SAM for us with Gadea around the backside power, yes, you can back in and say that implies that there’s approximately 100,000 wafer starts of pilot and HBM — HVM, excuse me, high-volume manufacturing capacity being put in place in the beginning. And then, of course, you’ll have to do your own research to see what size you think the node would be. I would just suggest that nodes are generally larger than that. So we would expect that to continue and the ramp to continue beyond ’25 for sure.

Gary Dickerson

Yes, I would say the one thing incrementally is that as you go forward, you’re going to add in backside power, that also is growing our available market, and we have a very strong share there. So once you have gate all around and backside power together, our opportunity grows significantly

Operator

Chris Caso from Wolfe Research.

Chris Caso

Yes, thank you. Good evening.I guess the question is regarding sort of where your level of confidence is in your customer forecast right now? And I know you haven’t given us guidance for the full year, obviously. But I know the customers generally give you pretty good visibility on the forecast. Maybe you could talk about the different segments and you sound pretty constructive with regard to foundry logic spending for the year. Your comments suggested that ICAP, the forecast has been changing a lot.
So I’d imagine that there’s some uncertainty there. Perhaps you could speak in those terms for the different segments.

Brice Hill

Sure. Thanks for the question, Chris. So I think I would put the level of confidence for larger customers is fairly high. So especially since COVID and the inflation events that we saw, we’ve asked for longer perspectives from all of our customers. So we have more visibility with the larger customers.
So if you think about leading logic, more visibility, certainly for DRAM, certainly for NAND. And then I would split up ICAPS, it would be the same sort of observation for the more mature, longer-standing companies in the ICAP space good visibility, same practices. And then for the long tail in ICAPS, including a lot of the customers in China, there’s just more less experience there on side. And so the visibility gets lower, and that’s where we’ve seen a lot of volatility in our forecast. So I think — in the past couple of years, we’ve continually increased our China forecast as we’ve gone through the year.
So you have less visibility and the plans change as that goes forward. . And then just a last comment, thinking about foundry logic because there’s lots of questions about the various foundries, our perspective there is not only do we have the information from the customers, but we try to also triangulate with our end market expectations. And so we think we’re pretty comfortable with our forecast for leading logic being driven by data center, PC, smartphone and understanding what the end demand is for those markets.
Thank you.

Operator

Vijay Rakesh from Mizuho

Vijay Rakesh

Just a question on the packaging side. I know packaging is becoming more and more important and on the memory side. I’m just wondering if there’s a way to look at what the mix of just packaging was of total WFE if you had to look at 2025? And how you see that mix of WFE growing as packaging becomes a bigger and bigger chunk of both memory and logic?
Thank.

Brice Hill

I’ll try, Vijay. We said last year that in ’24 that our packaging related revenues in Advanced Packaging were $1.7 billion. And so you know that we have an advantaged share in that space. So you probably have to do some backward math to imply what packaging is. And it’s growing at a strong rate.
I think just thinking about the — what’s behind that, we all know that there’s — Gary calls it a race for performance on these leading-edge systems, getting the highest utilization out of GPUs, CPUs, accelerators, et cetera. And that’s really what’s driving the increased demand for these packaging technologies. So we expect that to grow significantly over the coming years.

Gary Dickerson

Yes. Vijay, we also talked about doubling again our packaging revenue over a few years. And there’s just tremendous innovation happening in this space. We talked about chips grants on new substrate technologies for silicon and glass, how you connect the AI server and that architecture in 3 or 4 years is going to be very different than what it looks like today. So I believe this is a great opportunity for Applied.
We’re the leader in wiring on the front of the wafer, back of the wafer and in advanced packaging. And this segment is going to see a significant compound annual growth rate because it’s so important for energy-efficient computing.

Operator

Mehdi Hosseini from Susquehanna.

Mehdi Hosseini

One question, two parts. Based on the last 10-K, the SSE backlog of $8.3 billion, down 23% year-over-year. And then AGS and backlog of $6.8 billion, up 32%. When do you expect backlog for SSE to show the inflection point and show growth? And on the AGS, the $200 million that is going to come out because of the restriction in China.
That is a very small part of the AGS backlog. Is that a reflection of the AGS backlog in multiyear? Or any color you can have here would be great.

Brice Hill

Yes. Mehdi, thanks for the question. You’ve got it right on the AGS. We’ve got multiyear contracts in AGS that tends to make that backlog look larger and your book-to-bill look much larger when we signed those contracts. So the average contract life, I think, is in the 2.9-year region, and we’re signing some that are longer than that.
So — that really is what distorts the backlog or makes it larger for AGS. And then on the equipment side, since the supply chain and — issues related to COVID, we’ve been normalizing on the equipment side. So we stopped reporting that on a quarterly basis because it’s not a very good indication of our — the underlying business changes. We’re working to get longer visibility with our customers, and we’re working to get longer commits on the builds. And so there’s a lot of movement in that.
So I wouldn’t have anything to share other than what you’ve seen in our 10-K.

Operator

Timm Schulze-Melander from Redbrun Atlantic.

Timm Schulze-Melander

Maybe one for Gary and one for Brice, please. Gary, you mentioned advanced packaging and you referenced volume orders from multiple leading-edge customers. Maybe could you share a little bit of color in terms of what kind of device applications they are? And when you’d expect volume manufacturing to begin? And then Brice, just a modeling question on that tax asset revaluation.
Could you maybe just provide a little more color on that? And is there any real course or implication for the remaining $2.4 billion of deferred tax assets on the balance sheet?
Thank you.

Gary Dickerson

Yes, Tim, relative to packaging revenue, it’s really coming from all of the different packaging architectures, we have a very strong position, a broad, unique connected portfolio. So I wouldn’t say that, again, for us, including an HBM where we were at $700 million in revenue this last year, we have strength across all of those different architecture types. I don’t really want to comment, I’ll let customers comment on which architectures they’re ramping. I would say, as I mentioned earlier, there’s going to be tremendous innovation in this space with very different architectures than what are in the market today. This is going to be very important for energy-efficient computing.
Applied has been investing to be positioned to win those architecture inflections.

Brice Hill

Okay. And then Tim, thanks for the tax question. So yes, good to point out that on our GAAP net income, you’ll see a significant difference in the growth in our non-GAAP income. And what is happening there? It’s one of those situations where good news is bad news.
So we’ve just renewed our incentive rates in Singapore. And so the tax asset that we have in Singapore that was created years and years ago when we moved assets to Singapore, that is essentially a less valuable because it will protect from lower taxes, if that makes sense. So our tax rate goes down, which is good news. And then the asset that you have to protect from taxes is a little bit less valuable than what it was with higher tax rates. And so that $674 million, I think that number is a revaluation of that tax asset.
And I wouldn’t look we’re amortizing the benefit of that tax move of years to go. That’s always in our reconciliation. But this particular event that we’re talking about, I think there’s any look forward on that.

Operator

(Operator Instructions) And this does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Brice for any further remarks.

Brice Hill

Thank you. To recap, we believe we’re well positioned in both the near term and the longer term as the investments we’re making in our for leading-edge technology inflections, together with our efforts to accelerate industry collaboration set us up to benefit from the semiconductor growth as expected over the coming years. Thank you for attending today. And Liz, please close the call.

Liz Morali

Thank you, Brice, and thank you to everyone for joining the call today. A replay of today’s call will be available on the Investor Relations website by 5:00 p.m. Pacific Time today. Thank you for your continued interest in Applied Materials.

Operator

Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.