Applied Materials, Inc. (AMAT) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Stacy Rasgon. I'm Bernstein's senior research analyst for the U.S. semiconductor space. [Operator Instructions] Also working with our partner, Procensus, to do live polling on the presentation after the session ends, a link to the Procensus pole is also on the left of your screen. Again, this will be a live poll with immediate access to results and sentiment on AMAT for those who choose to submit. So do please take the 60 seconds it will take to fill out afterwards. With the logistics out of the way now, I can't express what an honor it is to have our guests, plural, here today, Gary Dickerson, the President and CEO; and Dan Durn, CFO of Applied Materials. Now the semiconductor capital equipment industry has been enjoying a bit of a renaissance over the last several years. And even given some of the current conditions, I'd say total WFE spend remains very strong compared to prior peak trough behavior. I'd say the much anticipated end of Moore's Law far from reducing the need for customers to spend on equipment seems to have exactly made the contributions from companies like AMAT more important than ever as materials-driven innovation moves to the forefront of process technology development. Now obviously, in the current environment, there are some near-term controversies around the trajectory for wafer fab equipment spending given the current COVID situation, some of the geopolitical issues. But over the longer term, I think controversies around the changing dynamics that could allow the industry over that long term to remain a secular rather than cyclical grower, new opportunities and new applications for leading-edge growth, consequences of the shifts with China and everything else, I think these are the primary controversies that many investors are focused on in the space. And to answer these, and other questions, it gives me a great pleasure to welcome Gary and Dan with us today. Guys, thank you so much for being with us today.

Well, thank you for inviting us, Stacy. And best wishes to you and your family and everyone that's on the call today.

Thank you. Thank you. Now Gary, in this format, I like to stay away from the near-term stuff. Today, just given what's going on, I'm not sure I'm going to be able to avoid it. But before we go down that rabbit hole, I do want to start higher level and more open-ended. I mean, again, consistent with some of my earlier comments, near-term cyclicality and virus aside, I mean the structural attractiveness of the semi cap industry has, at least to my eye, greatly improved over the last decade plus. I mean, the contributions and value that the sector is adding to semis, especially as Moore's Law gets ever more difficult to be growing every year. Cyclicality, it's still there, but it seems to be reduced. The semi cap companies are now profitable I believe -- well, very profitable, I believe, even at the trough of the cycle. The magnitude is [ very big or bigger ]. I mean, even trough levels of WFE spend today seem to be decently above where historical peaks sat. So I'm just hoping you could give us just a minute or 2 of your thoughts on where you kind of see semi cap has broadly come -- obviously, you've been in the industry for a long, long time. Where are you seeing it going and at least at the high level for the moment, how do you think AMAT fits into that story?

Well, thanks for the question, Stacy. So if we look at this near-term challenge that we're facing, technology is going to transform every industry, and we see that every day in this current situation. E-commerce certainly has been accelerated. I have 10-year old twins, a little boy, a little girl. They get up every morning and do their remote school, their remote learning. Every -- again, all of these changes are going to be the most profound that we've ever seen over the next decade, and it's all accelerating in this current environment. And I can talk later about Applied and how we will work different going forward based on technology. But if you go back over many years, you went from mainframe to PC, PC to mobile, social media, with a camera and computer in your pocket. And now we have AI, big data, transforming every aspect of our lives, 1 trillion connected devices over the next decade. And generating all of that data, storing, processing, connecting all of that data, the biggest opportunity of our lifetimes. At the same time, you talked about Moore's Law slowing down. And I think it's very evident. You look at the rate of technology transitions are much longer, much more difficult. And our customers care about performance, power, area, cost and time, so PPACT, as the big driver. And when you think about the infrastructure for these trillion connected devices on the edge or the cloud and the power and performance that you need to enable that future data economy, you cannot scale what exists today. You have to innovate. And the innovation is not going to be just shrinking in 2 dimensions. Again, you see many, many people talking about new architectures, new device architectures; new structures; new ways to shrink; new ways to connect devices together; new materials, those 5 drivers, you see repeated by a number of different people and enabling the future, and Applied is in the best position we've ever been in because we have the broadest portfolio to create, shape, modify, analyze and connect structures and devices. So our relationships with our customers have never been better. You have the biggest inflection of our lifetimes at the same time that you can't scale what exists today and enable that future. So that's a tremendous, tremendous driver for us. We've talked about the next few quarters. And this year, seeing strong double-digit growth. So even in this current environment, Applied is extremely well positioned. And I would say, over the long term, we've never been in a better position than where we're at today. I don't know, Dan, if you want to add anything to that?

Yes, I couldn't agree more, Gary. The mega trends that are shaping semis and by implication, semi cap equipment industry are firmly intact. And I would argue they are even stronger today than they were maybe 6 months ago. And as you take a look at what's happening, work from home, school from home, companies thinking about how they're going to optimize their operational footprint and flexibility, how they're going to build that into the system. When you think about localization of supply chains, whether it's geopolitical or COVID related, localization of supply chains, there's going to be a stronger demand for automation and intelligence in those supply chains. And all of those come together, I think, to make those mega trends that shape our industry even stronger today than they were 6 months ago. So I couldn't agree more with where Gary is going and the opportunity set in front of us. It's never looked this good.

Thank you. That's I think a good way to sort of set the stage for today's discussion. If I were to dive into those next couple of quarters, though, Gary, as you mentioned, just to look at it, you didn't give official guidance. You did, however, give a view of where you thought things might go. You talked about, it was a $650 million of potential push-outs that you say get satisfied in the second half. And it does really seem like you see overall the demand situation staying very robust and within that kind of soft guidance you've given for Q3 and Q4 for kind of continued growth. Can you just talk a little more about the different dynamics that you're seeing? Maybe by region or any of the other differences across your customer base? And what are the different things that can potentially swing this positively or negatively over the next couple of [ years ]?

Yes. So when we think about the overall market, when we think about the overall market, we've talked about foundry logic continuing to show signs of strength in this environment. And when we think about what we're seeing, it's multiple customers and it's multiple nodes. I don't think you can narrowly look at what's happening in foundry logic today through the lens of a single customer and what that investment profile looks like for them. I think there's a broader story playing out of multiple customers, multiple nodes. And we see that in our business. We gave some insight into what we think for the rest of our fiscal year. And then from a memory standpoint, what we see is continued investment in technology road maps. And we talked about the second half of the calendar year being a bit of the swing factor in terms of what happens to wafer starts per month in that industry to really dial in bit supply to meet end market bit demand. And 2019 is a good baseline and benchmark to think about the memory industry. WFE, the overall market size was $51.5 billion. Memory was 40% of that. Foundry logic was 60%, and there is balance between device types within memory, roughly equally weighted DRAM and NAND. And that was an investment year in just technology road maps, where you actually saw wafer starts per month in each of those industries come down year-over-year. And I think that's the first time in history, we've seen that dynamic. We see a similar thing playing out in 2020, strong investments from a technology road map standpoint. And I think the big question in the back half of the year is where our customers dial in wafer starts per month. Do they let it fall for a second year in a row? Do they add some incremental greenfield capacity to bring it back up to where we exited 2019? Or do they grow at a little bit off of those 2019 levels year-over-year? I think that's the question mark right now. And the answer to that is it's certainly going to be a function of the offsetting pushes and pulls we see in the market. Cloud, PC, infrastructure, comm infrastructure showing signs of strength, consumer-oriented devices, automotive, industrial, some pockets of weakness and ultimately, how the consumer responds to containment actions that governments are taking around the globe and what that means to the shape of the recovery, V Shape, U shape, elongated U, W, fish hook. There's a lot of different sort of descriptors of how things could play out. They'll dial in that capacity statement to make sure bit supply meets true end market bit demand. And I think that will be the swing factor on what we see this year.

If I take what you just said and I sort of expand on it a little bit, the argument to me that you just made was for continue to increase potentially in capital intensity. I mean, you talked about like wafer starts coming down, but still a very strong kind of overall market with the technology investment. The technology investment doesn't stop, we're just getting started. Like what are your thoughts on capital intensity trends both in memory as well as logic? I mean, we see memory capital intensity go up by multiples, for example, the last few years. We've got more layers and everything else coming on top of that. And so I'd love to get your point of view on, I guess, within the framework you just set, how do you see capital intensity across both of those end markets, memory and logic, playing out. Because what you said, it really does seem to sort of fuel that kind of thesis.

Yes. I think if you look, Stacy, at memory, I think it was maybe 2013 investor meeting, we talked about the shift from 2D to 3D NAND. So that was a major shift at the time we first started talking about that, it was still very early relative to that transition, but a tremendous change in terms shift from the 2D scaling to 3D scaling. And we see that continuing. If you look at the memory market, people are going to higher stacks, multiple stacks, different technologies for the peripheral areas of those types of devices. All of that is....

You don't think that asymptotes in memory...

Pardon me?

You don't think that asymptotes in memory is like, I mean, when you went from 32 layers to 64, you're doubling, right? It does...

There's going to be tremendous innovation, Stacy, in memory technologies. And certainly, I think the NAND technologies, they're going to continue to drive forward. It's all about materials. It's how high can I build the skyscraper and you go with different materials. That's an area, that's an opportunity for Applied that try to make those materials thinner or different types of materials. And there will be tremendous innovation. In DRAM, you see that is very difficult. Adding letters to the technology nodes, many, many letters, I think that's an indication. People are having a really hard time scaling the current type of device. You see a lot of innovation around high-speed memory so that's where they're adding processes like high-k/metal gate. That's also very good for Applied. It's similar to 28-nanometer foundry. And so you're adding those kinds of technologies because the input-output speed, the bandwidth is very, very important for many of those memory devices. So that is continuing to increase. I'd say on the -- and you will see tremendous innovation going forward, not just incremental innovation, if you look out over a period of 3 to 5 years, in terms of those memory technologies. And of course, customers are investing and working on those future structures today. In foundry logic, it's really all about power, performance, area and cost. And so when you think about, again, the trillion connected devices and you have devices on the edge or in the cloud, and we're working all the way to some of those big systems companies, relative to their strategies and what they're deploying and that whole continuum from the edge to near the edge to the cloud, their power consumption is enormously important. If you look at all of the data that you're processing from an application focus and application-specific type of a device, power consumption is tremendously important. Latency and bandwidth is tremendously important. So what we see going forward is tremendous focus around structures, tremendous focus around materials, tremendous focus around how you connect those chips together. I don't want to talk about everything we see from a competitive standpoint. But absolutely, that is really the nature of the competition for all of those different customers, and we're deeply, deeply, deeply connected to all of those leading companies. I'm on the phone, many times a week with all of the R&D leaders, CEOs of many of our leading customers driving those technology road maps.

So I guess to build on that, I mean, if you're focusing on performance and power and area and cost and time, those are the variables. What are the technology inflections that you think are most critical in order to support and drive those requirements? And like where is AMAT like placing their bets in order to attack it? What are the key areas that you guys are focusing on from a technology standpoint to do that?

So near term, you have the transistor technologies. One of the things I talked about 18 months ago was an approach that can improve gate leakage by 1,000x. And really what I described there was an ability to bring together different technologies in a single platform. As you're building any of these different devices, all of those interfaces, Stacy, you know, you have 1,000 steps as you go to build up all of those different structures, those interfaces are very, very critical for electrical performance. So combining some of these technologies under vacuum -- very high vacuum, so you're not oxidizing or damaging those interfaces, incredibly, incredibly important. So within Applied, we added new capabilities in the company to understand all of those structures and integration. We have deep, deep, deep engagements with our customers around the transistor, I talked about that one particular technology. The focus there is to improve drive current 10% to 15%, which is huge. And then also in interconnect, all of the wiring in the chips, that's also a major technology challenge for our customers. You can make it faster, but if you lose it all in the resistance and the wiring, obviously, that impacts your system. And so those are areas, Stacy, where we have tremendous technologies and capabilities to create, shape, modify, analyze and connect those structures and devices. And I would say the other one is how you connect chips together. There's tremendous innovation that's happening there. You can see some systems going to market that are 3x faster and 50% lower power just in how you connect the chips together. So those are big, big areas of focus for Applied in engagements with customers.

Got it. Can you talk a little more about some of the scaling techniques that AMAT's most excited about? So for example. You've talked about like selective action in the past, you've talked about cobalt. I think you're looking at things like selective deposition now. Like what are the areas that you think where AMAT is like truly differentiated? And what are the problems that those things are solving?

Yes. I think that it really comes back to creating, shaping, modifying, analyzing and connecting devices and structures. So if you look at Applied, again, you look at interconnect. How do I build those future, high-speed, low-power transistors? Or how do I wire all of those transistors together? And then how do I connect that into a system in the future. So for us, it really is all of our deposition technologies. We had a great year last year relative to growth around those different technologies. epi, PVD, ALD, CVD, a number of different areas where we have tremendous strength. We have strength in removal. Our etch business, certainly, we've grown conductor etch to over 30%, mostly in memory. We have tremendous growth in foundry logic, tremendous momentum, significant growth from node to node. We have the selective removal technologies, where we can remove one material selectively 1,000:1 or 10,000:1 to any other materials that are rounded. That allows you to build structures in a completely different way. And then in the modification area, there are a number of areas where we're modifying those materials. We're modifying those structures. And then the last one, I would say, Stacy, where we have momentum, we had record performance in our inspection and measurement business in the first half of the year. We have always had strength in electron beam. We have new capabilities there that are 50% higher resolution than any technology that exists today. So if you think about building some of these structures, if I want to build a nanosheet or a gate-all-around, seeing that structure is very, very, very critical to speed of innovation. And we have a new optical inspection system, too, that we'll be announcing soon. So we have tremendous strength, and that's one of the fastest-growing parts of our business today. But the other thing, Stacy, I would say, besides those individual technologies, it's really connecting those technologies together that will become more and more important in the future. So having that broad portfolio of technologies and competencies really relative to enabling those future structures is really important. And the gate leakage example I gave is one example of many where we're deeply engaged with customers.

Got it. What does EUV mean to you as nodes progress? I mean you talked about like increasing opportunity from node to node. But EUV is also gaining more and more use node to node. And presumably, that's taking some of the way. What does that interplay look like to you?

Yes. So if you look at last year, EUV, certainly right now is at the highest, if you look at the rate of growth, last year was high. We gained share overall, even in a year where EUV penetration was increasing. We've talked about strong double-digit growth this year. And, another year where the rate of change is very high. So really, again, I deeply believe, and I believe this is going to be more important in the future than it is today relative to the 5 drivers of the technology that I talked about. New architectures. Short term, we'll improve the transistors, we'll improve the interconnect. Longer term, you'll have analog computing, in-memory computing; more 3D devices; tremendous innovation from a device structure standpoint; tremendous innovation from a material standpoint; tremendous innovation from connecting all of these devices together. So that really is the future. And again, last year, we gained share, in a year where the rate of EUV penetration was high. This year, we're gaining share. We are also working on innovative patterning technologies. One of the things I think we talked about 2 quarters ago was a new technique for multiple patterning that reduces the number of steps 30%, improves the edge placement. So we're definitely also very focused on patterning EUV coming in. Those steps were not Applied steps in the past. And so those are other areas for us from a growth perspective. And I also talked about significant growth in foundry logic in our etch business from node to node. So those are all drivers. I don't know, Dan, if you want to add anything to any of that.

Yes. No, I think that was really well said, Gary. I really don't have anything to add.

Okay. So overall, do you think that semi cap outgrow semis, do you think the capital intensity of the industry overall continues to go up, plus it sounds like you think you continue to take share. Would you agree with both of those statements?

I would agree with both of them, Stacy, but I'm always wary of creating an argument that says our industry is great if capital intensity increases. That's a true statement. But I don't think you need to buy into capital intensity improving. I think there's a strong argument that it would over time, and Gary mentioned a lot of things that would drive that. But if you look at the last 40 years of our industry, I think the average WFE divided by semiconductor revenue, I think it's about 11.5% on average over 4-plus decades of industry history. You know what it was over the last 5 years, 11.5% on average. And I do think that there's a dynamic that says it grows over time. If you look at 28-nanometer, about $9 billion to $10 billion to build a 100,000 wafer start a month factory, just the factory floor equipment. 7 and 5 nanometers, which are being invested in today are 50% to 70% higher from a capital intensity standpoint than we saw just a few years ago at 28-nanometer. It would suggest over time that there's an upward bias. Gary talked about transistor techniques on the periphery of DRAM to get faster IO speeds. We really like that development. We were foundational in driving high-K/metal gate into foundry at the 28-nanometer node, and it's great for our leadership businesses, epi, PVD, thermal, implant, really good technology inflection. And I think you alluded to it in one of your earlier questions, in NAND, $1 billion of investment is yielding lower bit growth than it was in the past. 32 to 64 is 100% growth. 128 from 96 is 30% growth. And so you've got a bit of a math problem, which creates incremental investment is lower utility from a bit growth standpoint. And so I think the setup in the industry would suggest that, yes, capital intensity rises off of what we've seen in the past. But I don't think you need to believe that argument to think that this is going to be a nice growth industry over time as semiconductors punch through $500 billion on their way to $750 million on their way to $1 trillion as the data economy cuts in.

Got it. I think that's a good view of kind of like how you're operating. I want to shift the discussion a little bit to what you're operating within right now, in particular, China and some of the new regulatory and geopolitical risks that seem to be out there. First, I want to ask you about some of the new commerce department rules, in particular, the military end-user restrictions. The first time I've ever seen the commerce department ever explicitly mentioned semiconductor capital equipment directly in the press release. So that does seem to be a strategic area that the administration is now starting to focus on. What is the impact of some of these new regulations on your business? How do you see that playing out?

Yes. Relative to the military end-use, we talked about that on the earnings call. Basically, we believe that we'll be able to comply within this time period. And we don't see a significant impact on our business. So -- and I would say that since our call, we're definitely aligned with that, maybe even a stronger understanding relative to minimal impact to our business. We do have, and we talked about that on the call, significant flexibility from a geographic footprint perspective. I think many investors know, we have large operations in Singapore. We have large operations in Austin. In many cases, we're dual building products between those 2 operations. It really helps us also from a business continuity perspective. Whether it's COVID-19 or any other type of situation. But again, Stacy, what we communicated on the call is still the case. We believe that we'll be able to comply with minimal impact on our business. And then, Dan, I don't know if you want to talk about the other regulation that came out after our call.

Yes. So the second of the 2, as it relates to Huawei, is not necessarily -- have implications for us. But certainly, our customers will have to apply for a license. And again, based on interactions with government officials, senior-level advisers who used to be senior-level officials in the government and because this is a rule targeted at our customers for compliance, certainly, there's a lot of interaction throughout the combined ecosystem. When we net all of that together, based on what's written today, and we're still in the comment period, the final rules will be promulgated in a couple of months. But at least what's written today and interactions with advisers, ecosystem, government officials, we think there's a path forward where there's not a need to reprofile our expectations for the balance of the year. And so based on our understanding on what's written today, we feel pretty good about a path forward to have compliance within the industry that doesn't significantly impact the business.

I mean, for the rest of the year, is that just a statement of like kind of like the 4-month waiting period that's there now? Or is that a statement on -- demand that one customer shifting to another customer? Like what gives you that kind of confidence?

Yes. And so it was less time-bounded other than for the fact that we gave insight around how we see our business unfolding over the next couple of quarters. But our point of view of this impact isn't trying to thread a needle that says in the near term, it's not impacted, but there's longer term. We think there's a path forward on this based on our discussions with the ecosystem where it doesn't impact our expectations around the business. And so it's a much broader statement on what we think the ultimate impact is, again, based on what's written. The only reason for time-bounding it was connecting it back to the earnings call and what we said around our Q3, Q4, but we've got more line of sight on this issue over a longer period of time based on metrics.

I wouldn't think you have this like over -- not just like the next couple of quarters, but over the next like several years, I mean it seems to me -- I'd like to be hopeful, but at the same time, it seems to me that the geopolitical environment is getting worse, not better. And we're already seeing just because of the trade stuff. We're seeing supply chain start to move and everything else. What does it mean for you in terms of like China's move towards self-sufficiency? And we've already seen smaller semi cap companies at least try to take like little niche bits and pieces out there. What does that mean if I'm thinking longer term, 5 years, 10 years? Is there a bifurcation of the supply chain of the manufacturing? Is this a positive because there's more inefficiencies, and therefore, you need more equipment or the negative because like China can build their own? Like how does this play out like if we're thinking of long term strategically? Gary, you have to still -- you have to be thinking about this like longer term presumably.

Oh, for sure. Yes, definitely thinking about that. I would say that relative to the overall electronics ecosystem, if you look at the interconnection across the whole ecosystem, it's pretty significant. And if you think about, Stacy, what we talked about earlier, relative to the data economy and 1 trillion connected devices and generating, storing, processing, connecting all of that information and that infrastructure, there are different parts of the world where you have leaders and different kinds of sensors or you have leaders in different types of memory devices and leaders and different types of processing or connecting the device together whether it's 5G or 6G or any of those different technologies for the future. So the global electronics ecosystem is very interconnected. And our view is certainly that we believe in free and fair trade and intellectual property. And it's in everyone's best interest to have a constructive environment going forward for the future. So that's -- I believe that there's such a deep interconnection across that whole ecosystem that there's a lot of good reasons why it would be good to come up with a constructive solution. Relative to our view, there -- I still look at the next decade, Stacy, that technology is going to transform every industry. And as I talked about earlier, COVID-19, we see that now accelerating across many, many parts of our lives. So we still see that. And as I've talked to some of our -- the CEOs recently of some of our largest customers, and we've talked about this specific topic, these trends are tremendous waves that will drive their business and will drive our business. And so that demand is going to be there, no matter how this plays out. I think, certainly, that ending up in a more constructive place relative to employment growth, economic growth, all of those things, I think, from a global perspective, a constructive solution is going to be the optimum outcome. But again, longer term, these trends are inevitable and are going to be really great drivers for our business. And if you think about TSMC, the TSMC announcement here recently, and certainly, I've been encouraging them to make that move. And as any of those customers move to new geographic locations away from their centers of talent from a technology perspective, that does create an opportunity for us. And certainly, and I've said that Applied will do everything we can to support success in that type of strategy. And certainly, there's a potential we'll see more of that in this environment. But I would go back to -- it's in everyone's best interest to have a constructive outcome from the entire electronics ecosystem.

Yes. I'm going to ask a question from the pigeon hole. We've got a number of votes wanting to know about the prospect for your customers. Pigeon holes, funny. But Ross said from your -- for your customers to potentially try to diversify their equipment supply out of you like some -- is that something that is practical? Like how do you judge that risk?

Well, maybe the other aspect of your previous question was our suppliers going to emerge in different parts of the world. I would say that is extremely difficult. If you look at -- and you talked about it earlier, the technology road maps are very complex. They're very difficult, and it's all about competing on power performance area and cost. And so our customers are driving those road maps, it's life and death for them relative to how fast they drive those road maps, how fast they drive the innovation, and Applied has never been in a better position than today, enabling power performance area and cost. We have tremendous deep engagements with our customers. We are absolutely essential relative to those foundational structures, materials, all of those drivers for future innovation. And I would also say our technology pipeline of products and capabilities has also never been better. And you'll see more of that as we go forward over the next months. But very, very, very strong position. And I would also say, you have to look forward not back. You can't scale the infrastructures effectively today for this future data economy. You're going to have to drive tremendous innovation. So I think just scaling what exists today is not a winning strategy. We have to innovate. And also for Applied, I would say, we're driving our innovation faster today than we ever have. I have a goal inside the company to go 10x faster and better not 10% better. So again, I believe that we've never been in a better position relative to the whole ecosystem within Applied Materials.

So I guess along those lines, then like how is that ecosystem changing? What are you doing differently with companies and customers like today that things maybe that change that they didn't work in the past that you're doing now? How are you helping them address problems, frankly, that they may not even know that they have today, let alone know how to address? Like, what are you doing differently today that you were doing 5 years ago on?

Yes. I think that a couple of things I would say. One is really looking at the combinations of technologies. So the creating, shaping, modifying, analyzing, connecting and bringing those technologies together, I've done maybe 100 products in my life, and I believe you can't survey innovation. So really approaching the problem, Stacy, in fundamentally a different way is what we've been driving over the last 2 or 3 years, bringing in different kinds of talent from a standpoint of materials to systems, understanding all of the steps necessary to get to a disruptive edge device or cloud data center, those types of things. So I would say we've made tremendous progress in terms of the talent, the technologies, restructuring the organization and driving that type of initiative. The other one that we've been focused on, and I've been personally focused on over the last 18 months, is really changing how we work. And so really thinking about how do we reengineer our process development, how we connect with customers in the field. And certainly, with COVID 19, we're all faced with how do we work from a remote perspective, and I would say we're doing a fantastic job in our labs. They're all up and running. We're driving innovation. But we're working in a smart way, where we're managing social distancing. We're connecting remotely to many of those products. We may have someone in there loading wafers or unloading wafers but even running the tools from outside the lab and so more of those types of technologies. There's going to be tremendous innovation in terms of the speed of R&D, how we help our customers ramp these multibillion-dollar factories, how we connect to maximize yield output and cost in high-volume manufacturing. Applied has thousands of tools in the field that are already connected remotely outside of those factories. So if you think about it, if you have eyes and brains and new sensor technologies that you're implementing into these systems and if we can connect with the best expert anywhere in the world in a very safe IP-protected way, it's enormously impactful in speed and effectiveness for Applied inside our labs and also connecting with our customers. And certainly, we already have thousands of tools connected. In this environment, every customer is looking at how can they work better and faster. And so I think it's just a tremendous opportunity for us to reengineer how we work.

So I guess along those lines, as we think through the pandemic, do you expect your priorities to shift at all, especially as they relate -- whether it's increasing levels of investment in certain things or cutting costs, like how do you expect your priorities to shift as we look through this?

I would say that this creates an opportunity for us, Stacy. It forces you to rethink how you work and what you do and I -- again, I had already been very focused on driving the R&D acceleration. That's really been a tremendous focus. We've had significant progress in terms of the technologies that we're driving. That pipeline is extremely strong. But we're rethinking everything we do in the company and how we work across the entire company, Dan's group is driving agile finance. And it really gets back to reducing or eliminating some of the things that are not creating tremendous value and reengineering many significant parts of our company. I think it's an enormous opportunity for us to work better and faster and more productively and more efficiently. I don't know, Dan, if you want to add anything on that?

I think that's exactly right, Gary. And I think most companies on the planet are reflecting on this, but we certainly are in a very, very deep way. How we organize, how we're structured, how we do more from an efficiency standpoint, from an agility standpoint, you see it in the way that we're connecting with customers and tools out in the field without physical presence, the way we're connecting without the physical presence in our labs to accelerate those road maps. I would also say, as we look at our infrastructure, and Gary has talked about the flexible operating footprint I think all companies are thinking how they become more flexible and more agile and more efficient from an operating footprint standpoint and why we're highly fungible within our site in Austin and within our site in Singapore and across those 2 sites. There are opportunities to do that even more and be better and this is a perfect opportunity for us to engage with our footprint and think about how we drive to an even more efficient and agile footprint, adopting things like more insight into data on our business and more real-time understanding of the business. So now we're operating on a time scale where we can control outcomes as opposed to just reporting the weather, actually start controlling the weather along the way. Super important operating principle, and we're driving on all those fronts. And then as you think about taking those best-known methods in terms of how we're operating and driving and then translating that into our supply partners and driving into their footprints to create that resiliency across the globe so that we can withstand and better withstand and risk mitigate unexpected global events. I think there's a real opportunity here to take a step-function increase in the resiliency and efficiency and agility, not only in a bar business, but the important suppliers that are going to come along with us for the journey.

Got it. Got it. So there's another change, another opportunity that's potentially coming up. Tell us about Kokusai .

So great company, long history and tradition. Great team, great technology. It's an asset we picked up at a great price. The fundamental difference between the 2. We're an industry leader in single-wafer processing. And Kokusai has got great technology batch processing where they process multiple wafers at the same time. Combination of those 2 technologies, I think, creates some interesting opportunities to continue to drive innovation for customers. And when you think about our installed base, industry largest, 40,000 tools, over 150,000 chambers in the industry today. This is a company that's got an installed base of over 10,000 tools. So it increases our installed base by 25%, which creates a nice opportunity overtime to take the strategy and execution that we've been driving into our service business and now have a larger installed base to execute against. When we take a step back and we think about the benefits from a customer standpoint, broad customer support for what we're doing. We're encouraged by the progress we've made to date from a regulatory standpoint. We now have 5 of 6 approvals, and I think that's a testament to the broad-based support we see from customers. One geography that's left, China. We're constructively engaged there. We announced this transaction in the summer middle of the summer in 2019, and we set approximately 12 months. So we're still working towards that original time line, and we're optimistic about where things stand. So we'll continue to engage constructively, but we like the progress to date, and it's going to be a fantastic transaction for the company.

So at the moment, you don't think that any of the -- I guess, the geopolitical issues have increased the risk of closing the deal by the summer at this point?

Yes. It's hard to comment on the sort of geopolitical tensions. What I would say is, is there's actions we take, constructively engaged with the regulators, and we really like the nature of the dialogue that's ongoing. And so we're optimistic about continuing to march to our time line based on the engagements we've had. And we'll just keep engaging constructively and monitoring it over time, but that's all we can do.

Okay. Great. Another question on the pension hole. On the display business. Question's, why stay in display? Why is this a good business to be in?

Yes. So thanks for the question. Display is a really good adjacent market for applied materials. If you think about all of the technologies that we have inside apply, we're basically taking that from a wafer to a panel. And that business has grew about 5x over a period of 5 or 6 years. What we see going forward is significant challenges in terms of the introduction of new technologies. As you're going to the new technologies, whether it's from a mobile handset or a TV, you see an increase in terms of the materials intensity, the number of steps, the capital intensity. And so that's good for us. Now right now, we're bouncing along the bottom. The business is still very profitable, but we're deeply engaged with many of those leading system companies, those companies that are producing consumer devices. The visual experience is a key differentiator for many of those devices. And again, there's significant innovation that's still happening there. Just like we see in semiconductor, there's going to be higher capital intensity. When that business picks up again, there's a really good opportunity. And of course, we're focused on the key challenges in enabling those future technology inflection. So put that all together, we see that as a good opportunity going forward. Certainly, it's a good adjacent market for us. And longer term, we think that business can be very healthy from a growth and overall operating profit percentage standpoint.

Got it. Got it. One more question from the audience, and actually, it may apply to display as well as semis, but they'd like to know what percent of your sales are the local Chinese customers, I guess, memory, display, foundry and, any point of view on how competitive, especially in memory, the Chinese players are versus the U.S. and the South Koreans.

So let's take them in order. So when we think about our revenue, let's go back to 2019. And we're $14.6 billion of revenue in 2019. 29% of it went into China. But if we disaggregate that, to help create a framework of how to think about the business, so we do display business and semiconductor business, semi systems and service. So when you think about 29% going into China, the vast, vast majority of display goes into China. It's important to note that none of the display equipment is picked up in the ECCN list. And so we don't see that business impacted. But vast, vast majority, and we did $1.65 billion of display business in 2019. So when you take that out of the mix, you end up with something that's leftover in the high teens, semiconductor business into China. When we break it out in service and semi systems, think of it as roughly the corporate average, 70% systems, 30% service. That gives you a sense of the semi systems going into China, which is low to mid-teens, if you do that math correctly. We service both multinationals and domestic China customers with the semi systems that go into China. Think of it as roughly 65% domestic, 35% multinational. You do that math, right? You get a single-digit number of our revenue, which is semi systems going into China. And then it breaks out across foundry, logic, NAND and DRAM, and all of that is trailing node geometries. That drive the demand from domestic China, there are several nodes behind from foundry logic from DRAM.

Do you think they're credible on the memory front, though, the local Chinese?

I think what we see today are high-quality efforts to be very strategic about an industry and build it in a slow, disciplined way over time. We don't see hockey sticks of capacity deployment. We don't see overspending. What we see is a slow, steady, disciplined way of building an ecosystem. We see investments today predominantly around ecosystem building, technology road maps with some capacity additions. But even if you look at the incremental spend that we see coming into 2020 out of domestic China, we said initially an incremental 2 to 3. SMIC came out with their announcement. So now we're at the high end of that range. And if you think about the rough split, maybe it's 30% 200-millimeter of that incremental spend, 30% memory, 40% trailing node foundry logic. The 30% that's memory spend is split between NAND and DRAM. But 30% of that $3 billion, $900 million, whatever it happens to be. When you think about investments in technology and capacity, you're not seeing a lot of capacity coming online, which still fits with what we're saying. I think they're serious. I think there's quality companies pursuing road maps, but they're doing it in a slow, methodical, disciplined way in building that ecosystem over time. So I don't think you'll see the supply-demand balance change meaningfully in the near term based on these types of capacity adds. And mind -- we've got, in DRAM, 1.3 million wafer starts per month globally. And in NAND, you've got 1.5 million wafer starts per month globally. When you're adding $900 million to the memory mix, it's just very small incremental stuff on the margin. And what I see longer-term is actually a smart disciplined way of building the ecosystem as opposed to trying to get out in front of technology road maps or quality, a set of environmentals and infrastructure to put capacity online that's not productive. And so I continue to see disciplined behavior.

Great. We're over time, but Gary, I want to give you just 30 seconds, please, 30 seconds, so fast. Why should investors buy Applied Material stock?

Thanks, Stacy. Look, I think there's never been a better time for Applied Materials. Our markets are better than ever. We've talked about technology transforming every industry. And if we think about the infrastructure for those big inflections, Applied creating, shaping, modifying, analyzing, connecting devices and structures, we've never been in a better position.

Got it. To the audience. As a reminder, we're doing live polling with our partner, Procensus. If you wouldn't mind, please click on the link on the left side of your screen now. You should see a new window pop up with a short poll. It will take you 60 seconds, you'll benefit from real-time tracking of investor sentiment on the Applied Materials. And with that, I think we're going to close it up. Gary, Dan, thank you so much for being with us today.

Thank you, Stacy.

Thank you, Stacy. Take care.

Take care, guys. Bye.