Welcome to the Applied Materials Special Announcement Conference Call, which is being recorded. During the presentation, all participants will be in a listen only mode. Afterwards, you will be invited to participate in a brief question and answer session. I would now like to turn the conference over to Michael Sullivan, Corporate Vice President. Please go ahead, sir.
Good morning, everyone. We a copy of today's news release along with a companion slide presentation on the Investor page of our website at appliedmaterials.com. During this brief call, we'll focus on today's news only. We are joined today by Gary Dickerson, our President and CEO and by Dan Durn, 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, 8 ks and other filings with the SEC. And now I'd like to turn the call over to Gary Dickerson.
Thanks, Mike, and good morning to everyone on the call. Today, we're excited to announce that Applied Materials signed a definitive agreement with KKR to acquire Kokusai Electric Corporation for $2,200,000,000 in cash. Kokosai is a company with a long history of innovation and serves fast growing areas of the wafer fab equipment market where Applied does not currently participate. By bringing Kokusai into Applied, we believe we will accelerate innovation for our customers, create significant value for our shareholders and provide expanded opportunities for the employees of both companies. Kokusai Electric is a leader in batch processing technology, supplying all major semiconductor manufacturers globally and is especially strong in the memory market.
Their key strengths include a high quality portfolio of products that complement Applied's, a large installed base of systems that underpin an attractive service business, outstanding customer relationships, world class supply chain and manufacturing capabilities and a talented team of experienced employees. In the wafer fab equipment market, Applied's long standing focus has been single wafer processing systems and we've earned leadership positions in many of the areas where we participate. Kokusai is a leader in batch processing technology for diffusion, oxidation, chemical vapor deposition and thermal processing. For certain applications, batch processing systems can deliver significant performance and cost benefits. These high productivity systems are especially enabling in DRAM and NAND manufacturing.
The market for batch processing systems has experienced robust growth in recent years. Between 2016 2018, the available market for coca sized products grew about 35% annually outpacing overall WFE spending by nearly 10 percentage points per year over that period. Kokusai has an installed base of over 10,000 systems, which provides the foundation for a healthy service business. As we look ahead to the industry's future challenges, batch processing has an important role to play and we're excited by Kokasai's pipeline of new products. I strongly believe in the power of combining talent and technology in new ways, connecting CokerSci's talent with Applied's global R and D resources, including our state of the art lab infrastructure will accelerate Cococi's roadmap and enable us to speed the delivery of innovative new technologies for our customers.
The transaction is subject to regulatory approvals and other customary closing conditions and we expect to complete the transaction within approximately 12 months. Upon closing, Kokusai Electric will be a separately managed business unit within Applied's Semiconductor Systems segment and we expect acquisition to be immediately accretive to Applied's earnings. Kokusai will remain headquartered in Tokyo with R and D and manufacturing in Toyama, Japan and Chonan, Korea further expanding Applied's footprint and capabilities in Asia. In summary, we're delighted to be bringing Kokusai Electric into Applied and we're excited about what the 2 companies can accomplish together. We look forward to welcoming CokerSci's talented and experienced leadership team and employees to the Applied Global family.
Now I'll hand the call over to Dan, who will provide further details about the transaction.
Thank you, Gary. I'm also excited about the transaction and look forward to welcoming the Kokusai Electric team to Applied Materials. Kokusai has generated excellent financial results, growing revenue from $733,000,000 in calendar 2016 to nearly 1.5 $1,000,000,000 in calendar 2018. About 20% of this revenue has been generated from high value services. We expect to finance the $2,200,000,000 transaction using a combination of cash from our balance sheet and a new pre payable term loan facility.
The agreement is very attractive to Applied, both strategically and financially. We are making the acquisition at a synergized multiple of about 7.3 times estimated adjusted EBITDA for Kokusai during Applied's current fiscal year. This multiple compares favorably with other recent deals in the semiconductor equipment industry. Kokusai Electric has historically operated on an IFRS accounting basis. Based on standalone financials for their fiscal years ending in March, Kokusai has generated healthy revenue growth of over 20% per year from $754,000,000 in fiscal 2016 to $1,200,000,000 in fiscal 2018.
Over the past 3 fiscal years, gross margin has been in the range of 34% to 37%, while operating margins expanded from about 17.5% in fiscal 2016 to 21% in fiscal 2018. Kokosai has not yet reported audited IFRS results for fiscal 2019. However, we estimate for that fiscal year, Kokasai generated IFRS based revenue of approximately $1,500,000,000 adjusted IFRS gross margin of approximately 35% and adjusted IFRS operating margin of approximately 23%. I'll now close with some comments about our capital allocation plans. Applied Materials has maintained a strong and flexible balance sheet.
We are committed to our investment grade credit rating. Over the past 10 years, we've returned nearly all of the company's free cash flow to shareholders through a combination of stock buybacks and dividends. We plan to continue to return excess cash to shareholders during the regulatory review period. Upon closing the transaction, we expect to prioritize paying down the term loan within about 24 months. Now Mike, let's begin the Q and A.
Thanks, Dan. To help us reach as many of you as we can, please ask just one question and not more than one brief follow-up, if any. As a reminder, we are only taking questions related to today's news on this call. Operator, let's please begin.
Thank And our first question comes from Krish Sankar from Cowen and Company. Your line is open.
Yes. Hi. Thanks for taking my question. I have 2 of them 2 quick ones for Gary. Congrats on the acquisition.
It kind of makes sense in the long run. I was just wondering, is there any kind of product overlap with your Olympia or Vantage platform? And the second question I had is, do you ever see memory going to single wafer process, like kind of like what the logic guys are using today? Thank you.
Yes. Thanks for the question. First of all, we're excited about this opportunity to combine with Kokosai. For everyone that's there on the call today, Kokusai's strength is in batch processing, batch wafer processing, applied leaderships in single wafer processing. And for some of you that don't know what that means, batch processing you can process many wafers in parallel.
And of course, that gives you a cost advantage in some applications. You can also go to very high temperatures to deliver high film quality in certain applications, especially in memory devices where they have a good position. So in the last 5 weeks, I've been traveling pretty much continuously. And in a 2 week period of time, I met with the R and D leaders in Korea, Taiwan, United States. And what I would say relative to the future for the batch wafer processing, the applications are very different than the applications that we have with our single wafer processing tools.
And what we see going forward is that there's a new playbook driving the industry. I really heard that loud and clear on all of these visits that I've had over the last month. And it's really about new structures and new materials. And Kokusai has some very strong capabilities. Again, they're very, very different applications than what we see with our products within Applied.
Very excited about the team as I was traveling with customers. We talked to a number of different customers about the opportunity, heard a very positive view of Kokasai. And also all those discussions gave us confidence to move forward with the deal. So again, we see this technology still having a very strong position for the future.
Thanks, Gary.
Thanks, Rich.
Thank you. Our next question comes from Charles Long from Goldman Sachs. Your line is open.
Hi, guys. Thanks for taking the question and congrats on the deal. I was just wondering, in your view, how meaningful are any potential revenue synergies post the deal closed and over what timeframe would you expect those to materialize? And then relative to Tokyo Electron Solutions, just wondering how you think Kokusai are differentiated? Thanks.
Yes.
So I'll take the first one and pass the second to Gary. From a modeling standpoint, we are not baking material revenue synergies into our pro form a model on a go forward basis. This is a great company with great technology and a great team, and we're looking forward to driving value. But right now, we're not baking that into our forward looking model.
Yes. I'll take the second part of the question. Again, all the discussions I've had with customers are very positive regarding Kokusai, the team and the technology. The batch processing technologies are very highly regarded in the industry. But we're not going to make any specific comments about the portfolio or relative portfolio until we've closed the deal.
But thanks for the question.
Thanks, Charles.
Thank you. Our next question comes from John Pitzer from Credit Suisse. Your line is open.
Yes. Good morning, guys. Let me add my congratulations on the deal. Dan, you talked about sort of a valuation metric based upon adjusted EBITDA. I'd be kind of curious as to what adjustments you're making, what synergy targets you have.
And I guess importantly, given the exposure here to memory, you guys have had a last couple of really good years of revenue growth. How should we be thinking about calendar 2019 for their revenue?
Thanks, John. So if you take a look at that synergized EBITDA multiple, again, we think it's great technology and a great team at a great price. So we're really looking forward to driving value for shareholders going forward. But if you take a look at that 7 point 3 times multiple and a 2,200,000,000 times purchase price, that gets you an adjusted synergized EBITDA of around 300,000,000 dollars And you think about synergies in the context of a deal like this, maybe being about 10% of that number. So on a combined company basis, it's less than $0.01 a share from a synergy standpoint.
And this deal isn't really about driving synergies. This is about driving great technology and strong customer relationships and creating value long term for shareholders. So we feel really good about the transaction. And for calendar year 2019, we don't own the asset yet. So we don't want to make forward looking statements around the financial performance of the asset other than what we've already communicated as part of this synergized multiple.
And hopefully, the color I shed on the 7.3x EBITDA multiple gets you a good sense of performance of the asset through the end of October of this year and a sense of what we're thinking about from synergy capture over a longer period of time with this asset.
That's helpful. And then Gary, in your prepared comments, you talked about Kokusai helping strengthen your Asian supply chain. I'm just wondering if you could elaborate on that a little bit. Are there opportunities here for you to take some of the Kokusai suppliers and leverage them through the core AMAP business?
Yes. Thanks for the question. Kokusai has a very strong footprint in Asia, both in manufacturing and also in R and D facilities, in Japan and in Korea. So those are certainly areas that we see as a positive. Relative to supply chain in Asia, there are some very specific technologies and components that strengthening our footprint there, we think longer term is going to be a real advantage.
So we plan to build off of this platform.
Our next question comes from Harlan Sur JPMorgan. Your line is open.
Good morning. Congratulations on the acquisition. 7.3x EBITDA multiple implies roughly about 14% cash on cash return, so very good return for the team. I guess my first question is, can you guys just articulate the company's current end market profile, DRAM, NAND, FoundryLogic?
Well, I think, Harlan, what we're what we looked at is 2018. We gave you some indicators of what that looked like on a calendar year basis. I think that was clearly a very strong memory year. And we at Applied Materials will break down our revenue by device type. I don't think that that data exists for COCA size.
So I'm afraid that we can't go into that. But I think it's very, very fair to say that 2018 was a strong calendar year for WFE. We talked about mid-50s and we also talked about it having been one of the strongest memory years on record, probably something approaching 60% or so based on our profile. But we won't be able to talk about that with respect to Coccasin.
Yes, Harlan, maybe I'll add a little bit more color. There was a question earlier about kind of this technology going forward. Certainly, as we talk to the R and D leaders, as I said, I spent time, many hours in 1 on 1 meetings and also reviewing technical roadmaps for our key customers this month. And we see a strong position for batch wafer processing in applications like deposition, diffusion oxidation, thermal processing. As Mike said, we're not going to break down any more detail beyond what we've communicated, but we definitely see a strong role for this technology going forward and very complementary to what we do with single wafer processing.
Yes, makes a lot of sense there. And obviously, you mentioned the leadership in things like tube CBD, furnace type batch processing. They did have some single wafer processing systems. It was a smaller part of the business, about 5% to 10% of total sales. Your thoughts on these single wafer or their single wafer processing technology?
Yes. Thanks for the question. Our focus is really around the batch processing capability. There are unique capabilities, unique advantages there from a cost standpoint. And again, the applications are very, very, very different applications.
There are some cases where you have high temperature processing, where you end up with a better film quality. And as we look at the customer roadmaps going forward, we certainly still see a very strong position for those types of products. But thanks for the question.
Yes. Thank you.
Thanks, Harlan.
Thank you. Our next question comes from Patrick Ho from Stifel. Your line is open.
Thank you very much and congratulations. Gary, maybe first off, in terms of these batch applications, are there additional market opportunities, particularly as trailing edge logic and foundry starts to grow as well in the marketplace where they're still using batch applications? And my second question, in terms of some of the thermal and oxidation products that they have, how complementary are they to your leadership position in the RTP space?
Thanks, Patrick for the question. I would say that the weighting of their applications are more in memory. And as I said earlier, what we see going forward is that when I'm meeting all of these R and D customers, which are very stimulating meetings, they're all struggling with the technology roadmaps. And I deeply, deeply believe with more conviction that the future is about new structures, new materials. And again, the batch processing plays a very strong role there.
I would say in memory, that's really where they're more weighted, and that's going to be more of the focus going forward for them.
Thank you.
Thanks, Patrick.
Thank you. Our next question comes from Vivek Arya from Bank of America Merrill Lynch. Your line is
I have 2 quick ones as well. First one, gross margins, somewhat below your corporate average, 35% or so. Do you see them getting to corporate average? Or do you think it's better to look at the 21% operating margin and envision those getting to corporate average over time? I'm just curious what your longer term goals are in terms of the margin structure?
Yes. Thanks, Vivek. I think the best way to look at this right now is if you take a look at the historical performance and a modest set of synergies, math would suggest that this is an asset that's got lower gross margin and operating margin, but also a lower revenue profile. So when you combine the two assets, you should see modest dilution from a gross margin and operating margin standpoint. The math would suggest that, that would be a little bit less than 1 percentage point.
I think it's premature at this point to talk about what the combined company performance and profile looks like as we get through the regulatory process and get closer to closing. We'll have more to say with specificity on what that go forward financial profile looks like.
Got it. And as my follow-up, do you anticipate any competitive bids here because the valuation is very attractive? And any sense of which specific regulatory approvals will be required? Thank you.
Yes. So this is I can't comment for what other people will do. We've clearly got a strong deal in place with the right kind of contractual commitments and approval by both respective boards. So we feel good about where we stand from a deal standpoint. From a regulatory approval standpoint, we need approval in 6 geographies.
It's Israel, it's Ireland, it's Japan, it's Korea, it's Taiwan, it's China and it does not require U. S. DOJ approval.
Okay. Thanks very much.
Thanks, Vivek.
Thank you. Our next question comes from Quinn Bolton from Needham and Company. Your line is open.
Gary, just wanted to follow-up on the new materials question. Are you seeing greater use going forward for batch processing, especially at high temperature some of those new materials? And then I have a follow-up.
Yes. What I would say is that memory is a really interesting area relative to the roadmaps going forward. And obviously, we can't comment on specifically what customers are doing, but we definitely see a very strong position for batch processing continuing into future memory structures. And I'd also say there's a tremendous focus there on innovation. Obviously, with AI, big data and the data economy, storing information is going to be an area of growth.
And for especially for power and performance, power efficiency, there are tremendous drives there for cost and then also power and performance. So we're deeply engaged with customers on innovation it looks like Kokosai and ASM
International this morning, it looks like Kokusai and ASM International this morning settled their patent infringement lawsuit. Wondering if you think that that lawsuit may have had any impact on Kokusai's historical revenue? And would there be any change in the margin structure going forward given any payments as a result of that patent infringement lawsuit settlement? Thank you.
Yes. Thanks for the question. I think the best way to look at it is, is there's 2 parts of the ongoing litigation between ASMI and Kokosai. The settlement that was announced yesterday, based on our thorough due diligence, we are clearly aware of the litigation. We're happy to see it be resolved constructively.
That deals with the go forward period. There's also an arbitration case that's currently ongoing that we expect to be resolved within the next couple of months that covers the historic aspect of the discussions between the two companies. So it's premature to understand how the historical financials would be altered because the settlement hasn't been adjudicated yet. But on a go forward basis, the performance of the asset will be very similar, assuming market two companies. And so, it should be fairly similar apples to apples.
But pending the arbitration, we won't understand what the historical impact would have been.
Great. Thank you.
Okay. Thanks, Quinn. And operator, we have time for one more question, please.
Thank you. And we'll take our last noticing
the focus noticing the focus on Asia here and given kind of the U. S.-China dynamics, can you provide some color in terms of what type of overall exposure to China this has and if Huawei is in there in terms of percentage of revenue that's materially that?
Yes. Mitch, we haven't really broken out any kind of regional in terms of our prepared commentary. So it's probably a better question for someone else. But clearly, we are expecting to have China approval. There are customers there and we will make that a part of our process.
We did indicate that that's one of the jurisdictions we'll be closing with and we indicated that we'll be done, we believe in approximately 1 year. So we have confidence on that.
Maybe I can add a little bit more color on China. Again, the business is really complementary for Applied Batch Processing and Single Wafer Processing. I said earlier, we've talked to many key customers around the world and those conversations have really been positive and give us confidence to move forward with the deal. What I say about China specifically, Applied has a long history in China, strong relationships. I go there on a very frequent basis personally.
And we think the deal will be treated fairly there by the regulators. But our overall position in China is strong. As Michael said, we're not going to break out on the call the geographic revenue. But thanks for the question.
Okay. And just one last small one. You guys mentioned that the services business is kind of outpacing the product segment. Is there anything to be aware of there in terms of the margin profile difference, meaning that as the services kind of seem to grow the product side, that the margins would go up or how do we think about that, Robert?
Yes, I don't think Coatsui has broken out historical margin performance between the two assets and probably premature for us to comment since we don't own the asset.
One thing I would add though, again in all of the customer discussions, I think the perception of Kokusai, the team, the technology and the support they provide for customers is extremely positive and certainly we want to continue as we go forward.
Okay. Thank you.
Thank you, Mitch. And Dan, I'd like to turn it over to you to just summarize before we close.
Yes. Thanks, Mike. I think it probably makes sense to close with a couple of thoughts. Short, we're enthusiastic. We like today's transaction, and we're looking forward to giving CokerSci's talented team a really warm welcome into the Applied family.
By bringing Kokusai into Applied, we believe a few things. 1, significant amount of value for our shareholders. 3, we're going to provide expanded opportunities for the employees of both companies. And 4th, immediately upon close, we expect the transaction to be modestly accretive to our non GAAP EPS. I guess the last thing I'll say, we're as committed as ever to providing our shareholders with attractive capital returns.
Let's go ahead and close the call, Mike. Thank you.
Great. Thanks, Dan, and we really appreciate you joining us, especially on short notice this morning. A replay of this call will be available on our website by 5 o'clock Pacific Time today, and we'd like to thank you for your continued interest in Applied Materials.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.