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Applied Materials warns of lower revenue

The largest manufacturer of the equipment used to make chips warns that its sales and earnings for the quarter that ended Monday will fall below its prior guidance.

Applied Materials, the largest manufacturer of the equipment used to make chips, warned Tuesday that its sales and earnings for the quarter that ended Monday will fall below its prior guidance.

The company said it now expects revenue to be 7 percent to 10 percent below the $2.9 billion to $2.95 billion revenue target the company gave in its Nov. 15 earnings conference call. Earnings will also be below estimates, the Santa Clara, Calif.-based company said.

"Demand for semiconductors began to slow late in the fourth quarter of 2000," CEO James Morgan said in a statement. "Inventory buildups in telecommunication products, slower than expected PC sales and slower global economic growth are now causing customers to reevaluate their capital spending plans."

Since the beginning of January, he added, "a number of our customers have been revising the timing of their capital spending and rescheduling or canceling existing backlog, resulting in the postponement in delivery of equipment."

Shares of Applied Materials sank in after-hours trading, changing hands recently at $51.25 on the Island ECN. In regular trading, Applied Materials rose $2.25, or 4.5 percent, to $52.44.

Applied Materials will release its financial results for its first fiscal quarter on Feb. 13.

A company spokesman said Applied Materials is undertaking cost-cutting measures but would not offer any specifics of the plan, saying those details will be announced at the time of the Feb. 13 conference call.

"We will continue to assess the impact of these industry factors on our business and share our outlook with investors on our...earnings conference call," Morgan said in the statement.

The move is a further sign that the chip business is deteriorating, with Applied Materials reporting that a large number of companies are canceling orders and scaling back the amount they plan to invest in chipmaking gear.

An early sign of the slowdown came in December, when Intel noted as part of a conference call that it had received more of the chip equipment it ordered than it had expected. That was seen as a sign that other companies were being less aggressive about buying chipmaking gear.

One financial analyst noted that other chip equipment makers, such as Novellus Systems and KLA-Tencor, also saw weak business in December but were able to beat Wall Street expectations for the fourth quarter. However, Applied Materials with its atypical quarter ending in January had eight weeks of weaker business, which left it unable to meet expectations.

Applied Materials also noted that the ratio of new orders to goods being shipped fell below 1.0, which the analyst said could mean more problems in the coming quarters.

However, CIBC World Markets analyst Ali Irani said the warning does not come as a major surprise given that Novellus and others have already cautioned about slowing orders. Irani said that the current problems are already priced into the chip equipment stocks and that he expects a wave of new orders beginning next year as chipmakers move to larger, 12-inch wafers.

"We have been talking increasingly, and will continue to focus on, 2002" and beyond, Irani said.

Robertson Stephens analyst Sue Billat said Applied's earnings warning was natural given the slowness in the overall chip gear market. But Billat said Applied may fair better than most given it has been building share and is a leader in the move to copper chips and larger wafers.

"I expect them to do well, but they are just too big not to be affected by changes in industry," Billat said.

Billat said the current downturn appears to be less severe than other recent slowdowns, and chip gear makers may be better prepared. She said the companies saw their stock prices go down about nine months ago and have been looking over their shoulders for signs of weaker business ever since.

"The last one felt like somebody clipped the cable on the elevator," Billat said. "This downturn has been rolling out rather slowly."