Applied Materials cuts short-term outlook, sees order rebound

Applied Materials told analysts to lower their third-quarter forecasts, but the company also sees orders reviving in the second half of its fiscal year.

After market close Tuesday, the largest maker of chip manufacturing equipment reported fiscal second-quarter earnings of $269 million, or 32 cents, excluding special charges. First Call's survey of 27 analysts predicted a second-quarter profit of 33 cents per share, with individual forecasts ranging from 28 cents to 37 cents per share.

During a conference call with analysts, Applied Materials Chief Financial Officer Joseph Bronson said he expects the company to break-even or post a slight profit on fiscal third-quarter revenue of $1.2 billion to $1.3 billion. Analyst consensus was predicting earnings of 22 cents per share on third-quarter revenue of $1.51 billion.

Shares of Applied Materials (Nasdaq: AMAT) traded at $49.51 in after-hours activity on the Island ECN after the release of quarterly results. Applied Materials rose 20 cents to $49.89 in Tuesday's regular trading ahead of the news.

The lower-than-expected third-quarter projection reflects continued economic weakness, Bronson said. "General lack of visibility makes it difficult to see when a true recovery will occur," he said.

Second-quarter revenue dropped 30 percent from the last quarter and 13 percent year-over-year to $1.91 billion, or slightly higher than the analyst consensus projection of $1.88 billion.

The company's second-quarter gross margin of 44.8 percent was down from 48.8 percent in the first quarter. However, the company's decision to accept lower margins as it preserves most of its work force makes sense, said Glenn Yeung, analyst with Salomon Smith Barney.

"I think that's absolutely reasonable," Yeung said. "They're going to need those people when the next up cycle comes."

New orders totaled $1.35 billion, down 44 percent from the first quarter.

Although Applied Materials' near-term revenue picture remains cloudy, the company believes orders will start growing again in the second half of the fiscal year, led by the PC industry. Applied Materials expects its book-to-bill ratio--which compares new orders to shipments--in the third quarter to be one, or slightly more than one, which should cheer investors, Yeung said.

"That's really the main theme from an investment standpoint," said Yeung, who upgraded Applied Materials to a "buy" rating last month.

Applied Materials has stabilized its bookings just with its current installed base already, Yeung said. As chip companies adopt new technology such as 300-millimeter wafers, copper materials and smaller line widths later this year, the company's orders are bound to rebound, analysts and executives said.

"Many of the new device designs are based on the emerging new production technologies: tighter geometry, new materials and in some cases 300mm (wafers)," said James Morgan, chairman and CEO of Applied Materials. "And that (manufacturing) capacity actually is in short supply."

More than 70 percent of Applied Materials' new orders are for systems used to makes chips at 0.18-micron sizes and smaller, company executives said.

Not everyone was cheered by the call. Company executives were vague enough to let listeners come away with either optimistic or pessimistic views, said Timothy Arcuri, analyst with Deutsche Banc Alex Brown.

"We're probably going to see a bifurcated view on Wall Street tomorrow," said Arcuri, who has a "market perform" rating on Applied Materials and heard nothing on the conference call that changed his mind. "They really didn't give us any reason to believe things are going to get better in the near-term."

Bookings may not decline further, but there are also no signs of strong growth, Arcuri said.

"It's a question of when do we start to see meaningful sequential growth," he said. "We're still in wait-and-see mode."

Yeung and Arcuri agreed Applied Materials has done well to preserve its profitability in the face of the sharp slowdown in chip demand over the last several months. Arcuri cited the company's increase in cash over the past six months, to $1.98 billion at the end of April from $1.65 billion in October, as an example of its strength.

"The operational excellence of this company comes through time and time again," Arcuri said. "They're really one of the best at weathering a storm."

Including a one-time charge of $58 million for previously announced restructuring moves, Applied Materials earned 27 cents per share in the second quarter.