Welcome to the Applied Materials Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, you will be invited to participate in a question and answer session. I would now like to turn the conference over to Michael Sullivan, Corporate Vice President. Please go ahead, sir.
Good afternoon, everyone, and thank you for joining Applied's Q4 of fiscal 2020 earnings call. Joining me are Gary Dickerson, our President and CEO and 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 and 8 ks filings with the SEC. Today's call also includes non GAAP financial measures.
Reconciliations to GAAP measures are found in today's earnings press release and in our quarterly earnings materials, which are available on the IR page of our website at appliedmaterials.com. And now, I'd like to turn the call over to Gary Dickerson.
Thanks, Mike. I'm very pleased to report that Applied Materials delivered record revenue in our 4th fiscal quarter and earnings hit an annualized run rate of $5 per share for the first time. For the fiscal year, we grew revenues 18% and earnings 37%, while making significant strategic investments in new technologies and products to address the industry's highest value problems and position the company for sustained long term success. These results are all the more impressive considering the unprecedented disruptions we've navigated this year. I really want to thank all our employees, suppliers and partners for their resilience and adaptability.
Our teams have switched to new ways of working, delivered on our commitments to customers and investors, and kept our technology and product development on track. While our actions to date are driven by a need to protect the health and safety of our employees, while keeping our company strong, I'm very excited about the long term benefits of working in new ways, especially remote support in R and D. In today's call, I'll begin by sharing our current view of the market environment. Then, as this is the end of our fiscal year, I'll highlight some of our major accomplishments in 2020 before describing the growth drivers and inflections that will shape our markets over the next several years. I'll conclude by outlining our strategy and investments that will drive Applied's long term profitable growth.
As we adapt to the challenges created by COVID-nineteen and prepare for the post pandemic era, we are seeing fundamental changes in many areas of our lives and the world is depending on semiconductors more than ever. Investments in IT and communications infrastructure, combined with the accelerated digital transformation of companies and the economy as a whole are driving very robust semiconductor and wafer fab equipment demand. In foundrylogic, we see leading edge customers building out their fabs and aggressively driving advanced R and D. This gives us confidence that current investment levels are sustainable into 2021 beyond. In addition, specialty markets underperformed in 2020 due to headwinds in industrial and automotive and therefore represent an upside for 2021 as these sectors rebound.
In memory, spending is growing faster than foundrylogic this year as customers push forward with their technology roadmaps. We see NAND outgrowing DRAM in 2020 and then DRAM growing significantly faster than NAND in 2021. Consistent with perspective we shared on the August call, our outlook remains very positive. We are outperforming the market and we are demonstrating we can grow independent of the spending mix. This quarter, Semiconductor Systems revenues were an all time record year over year.
The midpoint of our guidance will be up another 12% next quarter. For the fiscal year, semi systems revenue grew 26% with broad based strength across products and device types. Our traditional leadership businesses that provide solutions for creating and modifying materials and structures are benefiting from innovations that enable leading edge transistors and interconnects. For example, our metals deposition business, technology that is critical to interconnect performance, grew revenues 42% in fiscal 2020 to nearly $2,200,000,000 In our businesses that focus on shaping and analyzing materials and structures, we have significant opportunities to grow our share and we're demonstrating our strong momentum. In fiscal 2020, our etch business generated record revenues, growing nearly 30% year on year.
We're gaining share in conductor etch as we win new applications in DRAM and foundry logic. Our inspection business also delivered record performance as systems revenues increased 46% for the year. We have significant traction with leading edge customers and are winning share in optical wafer inspection and e beam with new products that are still in early stages of adoption. As the benefits of traditional 2 d Moore's Law scaling slowdown, leading companies are describing how the industry is transitioning to a new playbook to drive performance, power, area cost and time to market of new devices. This PPAC T playbook includes new architectures, new structures, new materials, new ways to shrink geometries and new packaging technology.
Applied is uniquely positioned to accelerate this playbook. The breadth of our product portfolio is a key advantage because it allows us to combine technologies in innovative new ways. Where we generated nearly $1,100,000,000 of revenue in fiscal 2020, we have been winning new applications across multiple customers with a new product that delivers a novel hard mask material combined with a co optimized etch solution to open the hard mask. This is a great example of a new class of highly differentiated products we call integrated material solutions or IMS. We have numerous IMS engagements with our leading customers and I'm very excited about the IMS products we'll be bringing to market in the next several years.
Another area where we are creating value using our broad capabilities is advanced packaging that enables chips to be connected in new ways. Our packaging business is scaling, generating record revenues of $500,000,000 for the year, up over 20% from fiscal 2019. We're also expanding our ecosystem footprint through a combination of organic investments and partnerships. Moving to service, AGS also delivered record revenues for the quarter the year. The portion of AGS revenue generated from subscription style business also grew to record levels.
In fiscal 2020, we increased the number of tools covered by long term service agreements by 13%. As a result, 60% of our service and spare parts business now comes from the stickier and more predictable recurring revenue streams. Our renewal rates for long term agreements are also very high at more than 90%. This illustrates the value customers see in our advanced service products. Rounding out our portfolio with display, we hit our 2020 revenue target in a challenging market.
Our outlook for 2021 is similar to this year with no significant changes to the view we shared in our last call. However, we're starting to see some encouraging leading indicators of future growth that we'll be watching closely in 2021. These include increasing adoption of organic LED displays OLED for IT applications, higher OLED adoption in the smartphone market with more than 70% of the 5 gs handsets launched to date equipped with OLED screens and foldable OLED handsets approaching a price point that could spur volume adoption. As I've said before, we're optimistic about the long term opportunities for Applied in the display market as we focus on addressing the OLED inflection and expanding our available market. Finally, as I look back on our accomplishments this year, I'm also very proud of our new 10 year roadmap for environmental and social responsibility that we announced over the summer.
This roadmap lays out the detailed actions behind our vision to make possible a better future for everyone. We've taken a holistic approach to these plans that considers our operations, how we work with customers and suppliers, and how our technology can be used to advance sustainability on a global scale. We call our framework 1x, 100x, 10000x, and we've used it to rally the company around challenging new goals and commitments. Before I conclude, I'll take a few minutes to describe the longer term growth drivers we see for Applied. As I look ahead to the next decade, our opportunities have never been better.
There are numerous $1,000,000,000,000 inflections that can be enabled by advances in materials engineering, from next generation displays and ARVR to electrification of economy. And it will touch every major industry and area of the economy. AI also has major implications for the electronics and semiconductor ecosystem. 1st, we're moving from an application centric to a data first world where almost all data will be generated and consumed by machines. This means that the industry's growth will no longer be limited by humans' ability to create or consume data.
2nd, the new computing approaches needed to make sense of the massive volumes of data available will work best with workload specific hardware built from customized and entirely new types of silicon. This diversification of designs and devices is great for the industry. And 3rd, training neural networks for AI computing is incredibly power intensive. So there's a huge imperative for the industry to drive improvements in the performance per watt of computing solutions. The advances in technology needed to unlock the potential of AI create tremendous opportunities for Applied Materials.
We've aligned our strategy and investments around this vision for the future and we're uniquely positioned to accelerate the industry's new PPAC T playbook to advance power, performance, area cost and time to market of next generation semi devices. Before I hand the call over to Dan, let me quickly summarize. Despite the unprecedented challenges of 2020, Applied is delivering record performance. We're outperforming the market overall and have strong momentum in key growth areas like etch and inspection. The demand for semiconductors remains very strong, driven by IT infrastructure, digital transformation of businesses, and an acceleration of longer term technology trends, especially AI.
Our future opportunities have never been better. We've been investing in next generation technologies that are critical for the AI ecosystem and laying the groundwork for Applied's future growth. Our strategy to accelerate the PPAC T playbook is already yielding results for our customers and Applied. And as I look ahead, I'm very excited about the innovative new products and integrated solutions we will bring to market in 2021 beyond. Now, I will turn the
call over to Dan. Thanks, Gary. Today, I'll add my perspective on our Q4 performance and full year results. I'll share some noteworthy developments in our installed base business and I'll provide you with our backlog entering our next fiscal year along with our business outlook for Q1. Beginning with our Q4 performance, I'm pleased that our company delivered record revenue and earnings per share despite the ongoing challenges related to COVID.
Our teams managed to significantly increase our system shipments and customer support and we did it in a very disciplined manner that resulted in higher operating profits and free cash flow. We've now shipped all of the unmet backlog from earlier in the year and our Q1 guidance gives you a direct look at the healthy demand trends we continue to see in our business. In Q4, we delivered revenue above the midpoint of our guidance across all of the segments, including record revenue in semi systems and AGS. We grew revenue by 25% versus the same period last year, increased non GAAP operating profit by 49% year on year and delivered record non GAAP EPS of $1.25 which was up 56% year over year. We also increased operating cash flow to over $1,300,000,000 up 59% year over year.
About 2 months into our quarter, the U. S. Government imposed a licensing requirement related to one of our foundry customers in China. This requirement reduced our revenue in Q4 and our guidance for Q1. We've already applied for licenses where needed to comply with the new rules.
Turning to our full year results, I'm especially pleased with the growth of our semiconductor related businesses. Semi Systems and AGS combined grew by over 20% year over year. Our installed base business, which includes AGS plus 300 millimeter upgrades, grew by over 9% year on year and continues to represent close to a third of Applied's revenue. This growing part of our company provides an annuity like revenue stream that makes us more resilient across market cycles. Within AGS, we've seen positive developments in our long term service agreements.
Until recently, the vast majority of our agreements had 1 year terms. But in 2020, about a third of the agreements we signed had terms of at least 3 years. We've increased these extended service agreements by a factor of 10 over the past 3 years. This outstanding growth underscores the close working relationships we have with customers who are using our data enabled services over the life of a node to generate world class yields, output and costs. In fact, in 2020, we grew the installed base of our data enabled tools by nearly 40%.
For the company as a whole in 2020, we delivered record revenue in both semi systems and AGS. We increased non GAAP gross margin by 110 basis points, invested 69% of non GAAP OpEx in research and development, grew non GAAP operating profit by 32% and increased EPS by 37%. We also generated $3,800,000,000 in operating cash flow setting a new record and returned $1,440,000,000 to shareholders. We raised the dividend for the 3rd year in a row, paid dividends of $787,000,000 and allocated nearly $650,000,000 to stock buybacks, repurchasing at an average price of $56.32 We increased cash on the balance sheet by nearly $2,000,000,000 as we prepared for the Kokusai Electric transaction. In Q4, our stock buybacks were limited to $50,000,000 as our legal department imposed a trading blackout out of an abundance of caution in connection with our discussions with the Chinese regulatory agency that is reviewing the Kokusai Electric transaction.
We continue to have constructive discussions and we're working to secure clearance for the transaction before the end of the calendar year. Next, I'll share some color regarding the demand we see as we enter our new fiscal year. Applied's backlog reached nearly $700,000,000 in Q4, setting a new year end record. The combined backlog of our semi related businesses also set a year end record, growing to nearly $5,500,000,000 Our display backlog declined year over year. And as Gary discussed, we're tracking the leading indicators of the eventual recovery.
Now I'll share our Q1 business outlook. We expect company revenue to be approximately 4 $950,000,000 plus or minus $200,000,000 with the midpoint up about 19% year over year. We expect non GAAP EPS to be about $1.26 plus or minus $0.06 or up nearly 30% year over year. Within this outlook, we project semiconductor systems revenue of around $3,450,000,000 up nearly 23% year over year, AGS revenue of about $1,070,000,000 up around 7% year over year and display revenue of around $400,000,000 up about 20% year on year. We expect non GAAP gross margin to be about 45.3%, which is higher year over year and lower sequentially due to near term changes in product and customer mix.
We expect non GAAP OpEx to increase to $860,000,000 reflecting higher expenses from a 14 week quarter plus 1 month of annual merit increases, partially offset by holiday shutdown savings. Our Q1 guidance assumes a tax rate of around 12% and a weighted average share count of around 925,000,000. In summary, I'm pleased that Applied delivered record performance in Q4 and has strong momentum entering our new fiscal year. Our backlog is at record levels as our products and technology generate strong customer pull. Our installed base business is becoming larger and more resilient with growth in our data enabled services and multi year service agreements.
I'm incredibly proud of our teams for supporting our customers under challenging global circumstances, while delivering record earnings and increased cash flow to our shareholders. Now Mike, let's begin the Q and A.
Thanks, Dan. Now to help us reach as many of you as we can, please ask just one question and not more than one brief follow-up. Operator, let's please begin.
Our first question comes from the line of C. J. Muse from Evercore. Your question please.
J. Muse:] Yes, good afternoon.
Thank you for taking the question. I guess, first of my first question, if I look at your DRAM business and make assumptions around your January quarter, it looks like you're going to grow about mid-thirty percent for DRAM and that's far better than what we're seeing industry wide. So I guess can you discuss what's driving that outperformance, including some discussion on your success with conductor etch? And how should we think about your share of wallet for DRAM given that that's probably the fastest growing sub segment in calendar 2021?
Yes. Thanks, C. J. I'll take the question. As you pointed out, our DRAM business is showing significant signs of strength this year.
We've built momentum throughout the year and we expect to close the year very strong. As we think about the overall growth rate of the DRAM market in this year against the backdrop of an industry that's probably growing 10% to 15%, probably at the high end of that range for overall WFE. Our overall systems business is going to be up over 20 5% for the calendar year. Against that, DRAM as a market is probably a couple of points higher than the overall industry. So based on the math you walked through, you can see that the company is significantly outperforming.
On last quarter's call, Gary talked about the momentum we're seeing from a conductor etch standpoint. So the team is performing really, really well there. And then as you think about things like high k metal gate to get the IO speeds on and off the DRAM device. We've been talking for a while about that inflection coming into the market. And we're just really well positioned from a technology standpoint to drive our customers' roadmap and seeing strong adoption.
So we feel really good about how we're performing against the backdrop a good market, but clearly strong performance. And we're really encouraged by what we see going forward. And we would expect this strength to continue into next year as we continue to push our customers' roadmap and drive strong adoption of the technology.
Yes, maybe C. J, just to add
a little bit more color. This is Gary. For high speed, the periphery is moving to more like as Dan said, more logic like processes where that's in the sweet spot of where we have leadership with a number of different products. So that's part of a unique inflection that's really fueling our growth in DRAM. And I talked, I think, in the last earnings call about the growth that we've seen in our DRAM conductor etch gaining about 30 points of share since 2016.
And so with the key technology inflections for the high speed memory and also the strength of the SIM 3 and etch, really that's fueling our growth and we feel really good that we're going to continue to enable the future inflections and continue to grow outgrow the market in DRAM.
Very helpful. And as my follow-up, I guess perhaps if you could focus on domestic China and overall China. I think the concern out there is that the types of numbers we're seeing is not sustainable, particularly given what's going on with SMIC. But curious if you could offer thoughts on the greater breadth of spending that we'll probably see in calendar 2021 and then how we should think about multinationals layering in and what impact that will have on overall CapEx coming out China? Thank you.
Yes, sure, C. J. Let me jump in on that and see if Gary wants to add anything at the end. From an overall market standpoint, in calendar year 2020, we see meaningful spend by both the domestic customers as well as the multinational customers. And if I were to think about weighting of that spend, I would say it favors the domestic market, over the multinationals.
But both groups of customers are having meaningful spend. I think what you see is a broad base of investments. You're seeing investments across 200 millimeter geometries, 300 millimeter geometries. And within 300 millimeter geometries, you're seeing investments in NAND, DRAM, foundrylogics, so all device types. We think that continues into 2021.
We probably won't see the growth rates that we did in 2020. It's going to be a strong year, but you certainly won't see those growth rates. From a growth standpoint, I would expect multinationals to show more growth than the domestic customers, but still strong spend in both categories. So we see it's a good market. We continue to see strength in China and expect to see that for the foreseeable future as they build their ecosystem in a slow disciplined manner.
Thanks, C. J.
Thank you. Our next question comes from the line of John Pitzer from Credit Suisse. Your question please.
Yes, good afternoon, guys. Congratulations on the solid results. Just a follow-up on C. J. Question on China, Dan.
You talked about in your prepared comments that the ruling against SMIC did impact your fiscal Q4, fiscal Q1. Wonder if you can just confirm with us how much of an impact was it? And does SMIC now represent 0 within the forward looking numbers? Or how are we thinking about kind of the impact there?
Yes. Thanks, John. Here's what I can share with you. As you can imagine, we probably don't want to be too detailed on what any one customer is doing. But the licensing requirement that we talked about, it was put in place about 2 thirds of the way through our fiscal Q4.
So we saw about 4 or 5 weeks exposure to that new requirement. As we said in the prepared comments, Q4 revenue and Q1 guidance would have been higher if those restrictions had not been in place. So we're complying with the new rules. We've already applied for licenses where we need them. Trade situation remains fluid, so we don't want to speculate about the future.
But certainly, the revenue in Q4 and guide for Q1 would have been higher absent that requirement. As you know, we've been in China for a very long time. We've got a broad base of relationships, and it's across all device types, and we would expect the China market to continue to be strong for us going forward. And again, we're working with governments to get the licensing requirements satisfied.
That's helpful. And then maybe for my follow-up for Gary. Gary, a lot of the conversation around U. S.-China trade tensions have been concerns around restriction of shipping equipment into China. But there's clearly a second side of the story where a lot of countries now are looking at the strategic necessity for semiconductor capacity.
You have things like the CHIPS acts in the U. S, you have TSMC announcing a foundry in Arizona earlier this year. EU officials have been talking about perhaps incentivizing more domestic production, Japan the same. So I'm just kind of curious, given your vantage point in the industry, how important of a trend do you think this will be, this idea of regionalization of semi capacity? And what kind of potential growth driver could it be for your business?
Yes. Thanks for the question, John. So first off, I would say that, really the major focus for all our customers is to drive their roadmaps, deliver the lowest power, highest performance chips at the best cost. And I deeply believe that the future roadmap is going to look very different than the past. I've talked before about classic Moore's Law and 2 d scaling not being enough to enable the future AI infrastructure at the edge and in the cloud.
So I do believe, kind of aligned with your question, that this is highly strategic for many countries and many regions. And I do we do see that certainly, we see some near term trends with big customers moving to new regions in alignment with that trend. And I think that that's going to continue. So that definitely creates an opportunity for Applied going forward. Certainly, as these customers are moving to new regions, the support in terms of accelerating their R and D, their ramp, transfer of technologies into these new regions, all of that creates a great service opportunity for us.
And then even more important, as I said, I do believe the future is going to look different than the past. We're at an inflection point in the industry relative to how you drive the technology forward. 1 of our biggest customers 2 months ago talked about their roadmap beyond 2020 to double energy efficient computing every 2 years. And if you go look at the slide 2 months ago, it exactly aligns what I've been talking about with the 5 elements of the playbook around new architectures, new materials, new structures, new ways to shrink and new ways to connect chips together with advanced packaging. So exactly what we've been talking about and Applied is in a really great position with innovative products and integrated solutions to enable that new PPAC T playbook.
So I think we've never been in a better position. And again, I do believe that the industry is at an inflection point and the countries and the companies that are best aligned to this new playbook and get there first are going to win. It's very, very important for the whole AI infrastructure going forward.
Thank you, John.
Thanks, guys. Appreciate it.
Thank you. Our next question comes from the line of Toshiya Hari from Goldman Sachs. Your question, please.
Hi, guys. Good afternoon and thank you for taking the question. Gary, my first question is on inspection. I think in your prepared remarks, you talked about your business being up 46%. I think it was your systems business was up 46% in fiscal 2020.
You probably outperformed most of your peers, if not all your peers during that timeframe. Where are you seeing the most traction in inspection? And how should we think about sustainability for that business into 2021? And then I've got a quick follow-up.
Yes. Thanks, Toshiya, for the question. So absolutely, the inspection business is a real bright spot for the company. And as you mentioned, we grew the systems revenue by 46%. We have a new optical inspection system and new e beam products that are seeing strong initial adoption with leading customers.
And in both areas, we have a lot of room to grow and we'll make an official launch fairly soon on some of these new capabilities. And the other thing I would say, certainly, in this business, we have some really, really great leading technology. And the other aspect that's important for Applied is the connection in driving the PPAC T roadmap. The analysis of all of these new innovations when you think about wiring to lower resistance to improve the power or gate all around for high performance transistors, having these unique imaging capabilities and we have launched a product that has dramatically higher resolution than any product e beam product that's on the market today, being able to see those gate all around structures and understand how to drive the different films and shaping the structures and modifying the structures, all of that tied together is also tremendously synergistic with the rest of our business and driving the PPAC T roadmap. So we're really in the early adoption of some of these new capabilities.
I'm very confident that 2021 and beyond, we're going to have really good results from our PDC business, but also I'm real excited about the connectivity to the rest of Applied's business in accelerating the PPAC T roadmap for customers.
Great. Thanks for that, Gary. And then Dan, as my follow-up, just on gross margin. I know there are multiple sort of levers both to the upside and the downside that could impact gross margins. And you guided to a slightly lower number for fiscal Q1.
But when you think about gross margins longer term, I think at your most recent Analyst Day, you put up a 40 7% number, if I recall correctly. But is that still sort of the right target for you internally? Or is it higher or lower? How should we think about gross margins on a multiyear cadence? Thank you.
Yes. Thanks, Shashia. Hi. So from a gross margin standpoint, the company is performing really well. If you think about what Gary said in the prepared comments in fiscal year 2020, we're up 110 basis points year over year.
Our fiscal Q4, we just reported, we're up 190 basis points year over year. And then like you pointed out, we see some different mix as we look into our fiscal Q1. It's down a little bit sequentially, but still up year over year. We think that's a little temporary, and that mix is going to reverse itself as we look out into fiscal Q2. So we think the company is executing well on a difficult environment.
When we think about the long term gross margin, I think the best way to describe it would be 45% plus or 2 points depending on where we are in the cycle. And if you look at the quarter we just printed, 45.7 percent and then you factor in some of the headwinds we're experiencing in the current environment due to COVID and the pandemic, we would be at the upper end of that range we've referenced of 45 plus or minus 2 points. So I think that model, that framework around gross margin holds and the company is performing well to that As the legacy impacts and the headwinds from the pandemic begin to wane, I think you would see the performance in the current gross margin.
Thank you.
Thank you. Our next question comes from the line of Atif Malik from Citi. Your question please.
Hi, thank you for taking my question. Gary, you made an interesting comment in your prepared remarks that you guys can grow independent of the mix, which is an important distinction from some of your peers, which are more leveraged towards memory or logic. And you talked about the outperformance in etch inspection markets. Looking into next year, where you are most excited about etch or inspection or different markets?
Yes. Thanks for the question. So I would say, if I look at what am I most excited about, it's what I talked about earlier that I really believe that the industry is at an important inflection point. And you can see this also many leading customers and companies in the ecosystem aligning around our view that classic Moore's Law and 2 d scaling is not going to be able to enable the future AI infrastructure at the edge and in the cloud. And you see this playing out in terms of the marketplace from a competitive standpoint, the companies that deliver lower power, higher performance at the best cost faster than others, that's the fundamental driver of all of our shape, modify, analyze and connect structures and devices.
So I think I talked on the last call about our performance in some of our deposition businesses. Last year, we gained 8 points of combined share in epi, PVD, CVD amounting to about $5,200,000,000 This year, we grew our metals deposition business 42% to $2,200,000,000 So these leadership businesses are very key to enabling next generation transistor and wiring, materials and structures and combined with other unique capabilities, I'm really optimistic about our opportunities as we go forward to drive the PPAC roadmap. And as you mentioned, etch, we're also performing very well in etch, significant growth in this last year. We've expanded beyond our strength in memory to foundry and logic, where we're winning steps, we're winning EUV steps as customers are moving to future technology nodes and really, really, really great performance there. That's really based on our new SIM III platform, probably the best platform in the history of Applied Materials.
And there are real fundamental advantages. 1 is conductance. Conductance is where you remove the etch materials from the chamber, so you're not redepositing on these structures and causing yield and performance issues, also particles that are deposited on the chamber. So that's just a fundamental advantage of that particular technology. Also, I'm on the phone often with R and D leaders last night with 1 of the our top logic customers and we are seeing yield benefits with the SEM3 or they're seeing yield benefits with the SEM3 with new coatings that we've enabled on that platform that again is giving us better particle performance.
So etch, again, very, very good momentum. And I talked already about inspection and we are in the early phases of adoption of some new products. So I'm also very optimistic about that business as we go forward. But the really key thing that I'm most excited about is I do believe the industry is at an inflection point. The future is not classic Moore's Law 2 d scaling.
And you look at what I talked about relative to creating and modifying and analyzing, connecting all of the structures and devices, we're really in a unique position. So again, we are doing really well in different environments from a mix perspective. And I believe that we're at the foundation of enabling the technologies for this future AI infrastructure.
Great. And as my follow-up, Dan, domestic China WFP still in that $9,000,000,000 to $10,000,000,000 range for this year?
Yes, that's correct. Our view on that hasn't changed. We've been pretty consistent on that over time. It's going to be in that $9,000,000,000 to $10,000,000,000
range. Thank you.
Thanks, Atif.
Thank you. Our next question comes from the line of Kirishankar from Cowen and Company. Your question please.
Yes, hi. Thanks for taking my question. I had 2 of them. First one for Dan. Dan, are we still targeting a December end close for the Kokusai acquisition or can it be delayed further?
And along the same path, any kind of buyback increase? Is it really tied to the outcome of what happens with Kokusai? And then I had a follow-up for Gary.
Sure. Thanks, Krish. So as you know, we've gotten 5 of the 6 regulatory authorities to approve the transaction. We're constructively engaged with the remaining authority, and we continue to be optimistic that we're going to receive clearance by the end of the calendar year. So we'll stay focused on that.
From a buyback standpoint, once we close the transaction, integrate the asset, I think we'll come back to the investment community and put forward a combined company model over the next several years to give investors a perspective of how the combined company will perform. As part of that communication, we'll talk about what But I wouldn't be surprised if it's what we've been doing now for quite some time, which is very shareholder friendly in terms of giving all excess cash back to shareholders and big buyers of our stock. Given what we see happening from an overall market standpoint, the structural growth we see and the execution of this company against that opportunity, we see our industry going structurally larger, higher highs, higher lows, and we think there's a real opportunity to many years. But we'll have that conversation once we get the investment community together post close of the transaction.
Got it. Thanks, Dan. And then a longer term question for Gary. Gary, on China, I'm not looking at it from a political angle, but from a long term business and philosophical standpoint, do you think it's good business practice for AMAT or other U. S.
Semicafs to ship to China, because on one side you're balancing the needs of your customers, but also on the flip side, it might enable local competition or reverse engineering or how do you protect your IP? So I'm kind of curious how do you balance those 2 as China gets bigger?
Yes. Thanks for the question. Local competition has been a factor for us for many, many years in many different regions. And I just keep coming back to the leading companies want to work with the most innovative technologies and products. And there's just no way to go forward with the technology roadmaps if you don't have the combinations of those different technologies.
And as I've said before, I just deeply believe that the future doesn't look like the past. I don't believe that following the classic 2 d Moore's Law playbook is the path forward for the industry or to enable this AI infrastructure. So, there's going to be tremendous innovation. I mentioned earlier, one of our leading customers 2 months ago, if you look at their Architecture Day, and they talked about the road forward beyond 2020 for energy efficient computing to double every 2 years. And it was exactly aligned with the things that I've been talking about over the last 2 years with the new architectures, new structures, new materials, EUV enhancements and new ways to connect the chips together with 3 d advanced packaging.
So I just believe there's going to be tremendous innovation. All of this is going to be a moving target relative to the products. And the other thing is you have the opportunity to connect these products and technologies together in unique ways to manage the interfaces and the interfaces on these structures are becoming much more critical than they've ever been in the past. So we know we've talked about some innovations in the transistor where we can enable enormous improvements in leakage current or drive current. And it really comes from being able to combine these technologies together, not oxidize or damage those interfaces.
Those are completely unique capabilities that you really having this portfolio is a tremendous advantage, a very unique advantage for Applied. So look, I think that the world will operate the best certainly with fair and free trade and that these inflections that we're seeing today around AI, biggest inflections of our lifetimes will transform every industry and Applied is right at the foundation of those inflections.
Thanks, Chris.
Thanks, Gary.
Thank you. Our next question comes from the line of Timothy Arcuri from UBS. Your question, please.
Hi, thanks. I had 2, I guess. Gary, first, I know you think about capital intensity a lot and I've seen your charts and I totally agree with the 10.5% to 11% longer term WFE intensity. And it seems like if you strip out some of the duplicative spending today, there's probably at least $3,000,000,000 to $4,000,000,000 in China that's not backed by revenue. So it seems like if you strip that out, we're probably closer to like 12% right now.
So I know when you think longer term, you do a lot of modeling about longer term WFE. But when you kind of think about where WFE can go and you build out an underlying semiconductor revenue number, is it fair to use like a 12% sort of a real or a core WFE intensity number and then you can like layer on top of that spending that you think might happen because of issues that John had mentioned before, but that's not real dollars that's backed by revenue. So the question is, is that 12% a good number?
Hi, Tim. This is Dan. I'll jump in on this one. So I do think 12% is a good number to start with. Do I think there's an upward bias on that over time given what we see from a technology roadmap standpoint?
Yes, I think you can make that argument, but I think 12% is a good number to lock in on. Just a couple more perspectives on it. We talked about when 300 millimeter came in around the 2000 time frame. We saw multiple concurrent investments in both WaferSize technologies and we saw probably 17%. So that's probably an all time high.
And what you saw is the 300 millimeter WaferSize technology came into the industry, and all of the efficiency gains that came with it, as well as the consolidation of our customer base, we hit a low point in 2013 at about 9% and it's been on a steady upward trajectory since then. And so we think the trend is a pretty good one. The other thing I would point you to, and maybe this is a little bit of a different way of thinking about the industry. If you take that low point of capital intensity, 20122013 as a combined 2 year window and then compare it to the next 2 year combined window of 2013 2014, compare that to the next 2 year window of 2014 2015 and onwards, and you do that exercise out to 2021, and what you'll see is each successive 2 year windows with an upwardly sloping line. And so we think our industry has gone from no growth cyclical to growth with an upward sloping trend line, and we'll see higher highs and higher lows as that thesis plays out.
And so we feel really good about where this industry is going in support of all the thematic trends that Gary has talked about for many quarters now.
Yes, yes. Got it, Dan. Thanks. And then I guess my second question is just on DRAM. I know, Gary, you sort of emphasized that DRAM is going to outgrow NAND on a percentage basis next year, which I guess sounds a little ominous for DRAM.
But can you put that in the context of demand? It seems like DRAM WFE is certainly coming off of a much lower base this year. And on the supply side, we're in a far better point right now than we are in NAND. So can you sort of back those numbers into what that means for the supply demand balance next year? Thanks.
Yes, sure. Tim, I'll jump in on that one again. And I think the best way to get at this and unpack it for the investment community is talk about what we see in 2020 and then use that as a jumping off point to describe the contours around 2021. So starting with 2020, we continue to see the overall market up 10% to 15%. We're probably at the high end of that range.
We talked about Applied Systems business against a market that's up 15%. Our Systems business is going to be up 25% for the calendar year. By device type, we see foundrylogic greater than 55% in 2020, but it's growing below the market average. DRAM, on the memory side of the house, DRAM, it's growing a little faster than the overall market. I think the real story in 2020 is NAND.
NAND is growing 2x the overall market in 2020. And so I think that's maybe a little contrary to what the conventional thinking is around 2020. 2020 is a memory growth year, especially for NAND. And against that backdrop of a memory growth year, Applied is outperforming very nicely. So we feel good about 2020.
As we look into 2021, we expect another strong year for the industry and for Applied. And while we're not sharing a specific forecast around WFE, I think it's premature to be point specific at this time. We see foundrylogic is going to continue to be strong and we see it as over 55% of total WFE again next year. But what you'll see in the memory side of the house is going to be a reversal from a growth standpoint. NAND, we expect to be flattish year over year and DRAM set up to significantly outgrow, the market.
So this is a great setup for Applied given the strong share gains we've been talking about now throughout 2020 in DRAM, gives us confidence as we look into 2021 that the setup from an overall end market standpoint, strong foundry logic, flattish NAND, strong DRAM, it's a good setup for Applied as we look into next year.
Thanks a lot, Dan.
Thanks, Dan.
Thank you. Our next question comes from the line of Harlan Sur from JPMorgan. Your question, please.
Good afternoon. Great job on the quarterly execution. On your commentary on leading edge systems driving much of the incremental revenue growth this year with lagging edge system shipments muted just given the weakness in auto, industrial and analog segments of the market. The recovery in these markets we're seeing now and into next year should be a tailwind for the business. And so what's your expectation on the mix of leading edge versus lagging edge over the next few years, just given the number of new 12 inches analog fabs and microcontroller content and analog content growth in all electronic applications?
And what's your positioning in these segments of the market?
Hi, Harlan. I'll jump in on that one. I think you pointed out rightfully this is a little bit of a weaker market for the trailing node geometries. A couple of quarters ago or even last quarter, we talked about auto and industrial markets showing some signs of weakness as a result of the pandemic. Markets showing some signs of weakness as a result of the pandemic.
Since then, we've seen those end markets continuing to perform stronger. But I think it's going to follow the natural progression we would see in any one of our end markets off of low utilization levels. We see utilization rise. Once utilization gets to a certain level, then you'll see customers begin to layer in capacity. And so I would expect to see legs up in those markets, trailing node geometries as we look into next year.
Longer term, we think the trailing node geometries as a result of communications infrastructure, industrial, auto, Internet of Things. There's a whole host of drivers that are taking that industry structurally larger over time. And we would expect that Trailing Node Geometry segment to outgrow the overall market over a multiyear window. So we feel good about it. In the near term, while customers are pulling really hard, multiple customers, multiple nodes on the leading edge, you've seen a rotation from a very balanced foundrylogic market between leading edge and trailing node to probably more weighted to leading edge technologies in the current environment.
Over time, we would expect that to moderate a bit and get back to a more balanced profile than what we've seen maybe in 2020 or 2021. But we do think that those markets are set up to do well and we're encouraged by that, because anytime you broaden the growth drivers of an industry, it just makes it structurally stronger, less cyclical, less volatile, and we think that that's going to benefit this industry significantly. From a positioning standpoint, we're well positioned competitively across that entire node profile. And so, we're going to continue to deliver enabling technology to the market and we continue to see strong pull from customers top to bottom across the node profiles. Thanks for the insights there.
And then as the
industry moves towards more innovative and complex packaging technologies, multi chip modules, chiplet strategy. We're actually, in some cases, even seeing the return of wafer scale integration. I'm pleasantly surprised by the size of Applied's advanced Packaging business, dollars 500,000,000 in revenues this year. How big is this market, do you estimate? And what type of growth outlook do you guys see for this emerging segment of the business?
Yes. Thanks for
the question. So as I mentioned before, the packaging part of the ecosystem is one of the key drivers. They're the 5 drivers that I talked about before. And then you see this being also
and then you
see this being also discussed
by many leading companies, our customers, other companies in the ecosystem, fabulous companies, relative to the importance of packaging. I definitely think if you look at the power performance and costs going forward, packaging is really, really, really important. And we have a very strong position. We're number 1 in advanced wafer level packaging. And we're working with a number of ecosystem partners.
We talked about a partner with another company to deliver the first industry's first fully integrated solution for hybrid bonding, where you can connect 2 chips together and die form, and that enables shorter interconnect distance, 4x increase in IO density. So, there's a lot of innovation that's going to happen in that market. And we have very, very strong positions. If you look at just that one particular innovation, you need to optimize etch CMP deposition, wafer surface cleaning. We have metrology inspection, defect particle control that we can add to enable that inflection.
And then we also have the Center of Excellence at Applied's Advanced Packaging Technology Center in Singapore and we have some very large leading customers working with us on some of these new innovative architectures. So I'm really excited. Certainly, it's a meaningful part of our business today. But I think we're really at the early phase of the adoption of many of these new technologies and we are number 1 in advanced packaging, expanding with partnerships through the ecosystem. So I'm excited about it.
I don't want to give a specific number right now, but I think it's going to become much more important than most people realize in the ecosystem. Yes.
Thank you.
Thanks, Harlan. And operator, we have time for 2 more questions, please.
Certainly. Then our next question comes from the line of Quinn Bolton from Needham. Your question please.
Hey guys, congratulations on the nice results and outlook. Just not to take anything away from what you've achieved this year in the foundry, logic and DRAM segments. But if I look at your NAND revenue, at least in fiscal 2020, revenue was roughly flat year on year, where it sounds like the overall NAND WFE may be up close to 30%. So it looks like you've lost share this year. Wondering, as you look forward, are there opportunities to stem that share loss in fiscal 2021?
Or does your outperformance really depend on continued strength in DRAM and foundrylogic? Thanks.
Yes. Hi, Quinn. I think you may be drawing the wrong conclusion. When we talk about the WFE end market and we talk about NAND, that's a calendar year comment. And so if you look at the 1st 3 quarters of calendar year 2020, you see our NAND business up significantly more than the flat you referenced.
And at the midpoint of our guide, we won't talk about by device type, but I think you'll see the performance of that business roughly in line with the overall market. It's just the peculiarities of quarters when they happen to hit and the revenue expectations within those quarters. And so if you look at the quarterly profile for the trailing 12 months, you'll see that the 1 quarter out there from a historical standpoint was quite large showing performance this year on a fiscal year basis, flattish. The 1st 3 quarters of 2020, you see a very different number. And when we're talking 3 months from now at next quarter's results, I think you'll see a business that's more roughly in line with the overall market.
So we're very comfortable, confident with how we're positioned within that end market and we're going to continue to drive our business in technology and look to do better over time.
Great. Thanks for that.
Our final question then comes from Joe Klotricki from Wells Fargo.
I was curious on your prepared remarks, you talked about long term service agreements now, one third of those being over 3 years. When you look at your current kind of book of contracts for your installed base, how do you think about that trending over the next two quarters?
So, hi, Joe. This has been playing out over a multiyear period. If we go back in time, at 1 point, 30% of our revenue was generated from long term service agreements, then we grew it to 40, then 50, now you see it at 60. I think we've got the right strategy around this business. You see those long term service agreements extending out in 10 year, which provides even more stability.
And we're going to look to drive that number north off of the 60 percent of revenues over time. We're going to look to continue to drive that number north. So we'll take it 1 quarter at a time, 1 year at a time and continue to execute against our strategy, but we see more headroom against that number and look to push this business forward in a much more stable growth oriented way.
Thanks, Joe, for your question. And Dan, would you like to help us close out the call today?
Yes. Thanks Mike. I'm really pleased that in a year we're all going to remember for its extraordinary challenges. Applied delivered revenue, earnings, operating cash flow, year end backlog, and I'd like to sincerely thank our employees and partners for everything they did to support our customers in that difficult environment. Looking into next year, just a few quick thoughts to leave you with.
I think the growth opportunities for the semiconductor industry are bigger than ever. The industry roadmap is clearly moving towards our new playbook and our balanced market exposure lets us perform well regardless of the spending mix. Our installed base business is growing and making us more resilient across the cycles and I'm encouraged by the early green shoots we're seeing in display. Gary and I look forward to seeing many of you at the Credit Suisse Conference next month, and until then, I hope you all enjoy a happy and safe Thanksgiving. Take care.
All right. Thank you very much. That concludes our conference call, and thank you for your continued interest in Applied Materials.