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Applied Materials surprise lifts earnings

The company, which makes chipmaking equipment, tops forecasts by 2 cents in the third quarter, with sales falling less than most analysts feared.

Applied Materials topped the consensus forecast by 2 cents in the third quarter as sales didn't fall as much as most analysts feared.

After market close Tuesday, the largest maker of chip-manufacturing equipment reported fiscal third-quarter net income of $29 million, or 3 cents per share. Not counting one-time charges, Applied Materials earned $41 million, or 5 cents per share.

First Call's survey of analysts produced a consensus estimate of 3 cents per share for Applied Materials' third quarter. First Call estimates normally exclude nonrecurring charges and goodwill write-downs.

Third-quarter revenue fell to $1.33 billion, down 30 percent sequentially and 51 percent year over year, but more than the $1.25 billion predicted by First Call. Applied Materials' gross margin fell to 40 percent from 44.8 percent in the second quarter.

The company received $1.21 billion in new orders, more than some analysts expected. "We believe that orders will continue to decline for semiconductor equipment until late in 2001," Merrill Lynch analyst Brett Hodess wrote in a research note before the quarterly report. "However, the rate of decline is slowing to a trickle as we approach an 80 percent drop from the peak."

Customers are buying equipment for newer technologies using copper materials, smaller circuits and larger silicon wafers, said Applied Materials Chief Executive James Morgan.

Orders of more than $10 million came from 14 customers, down from 19 in the second quarter.

Chip capital spending has shifted to new technology and away from expanding total manufacturing capacity, said Joseph Bronson, chief financial officer. Systems for the 0.15-micron or smaller manufacturing process generated 75 percent of orders, compared with 36 percent in the second quarter, he said.

Revenue will not grow in the fourth quarter, Bronson said. The company expects to make a profit in the fourth quarter, but didn't provide a specific earnings target.

The company expects fourth-quarter orders overall, in dollar terms, to be about the same as in the third quarter. Orders should see "modest improvement" in early fiscal 2002, Bronson said. Some customers in the PC and wireless industries have indicated that demand has reached a bottom, executives said.

No word about layoffs
Applied Materials may see a bottom to its industry's decline, but analysts remain divided over the issue.

Wall Street in recent weeks has speculated about layoffs at Applied Materials, but the company on Tuesday did not announce any major cost-cutting moves. The company needs to spend on research and development so it will be ready when the chip market starts growing again, Bronson said.

Prudential Securities analyst Shekhar Pramanick last week said Applied Materials laid off a "modest" amount of employees; the company has not commented on this. In March, Applied Materials announced about 1,000 layoffs.

"We have cut costs very, very hard in this company in the past nine months," Bronson said. "What we have done is to really focus on this opportunity. I don't think people really understand...the kind of effort that it takes for a broadline supplier to keep up with this kind of activity."

The cost-cutting initiatives included travel restrictions, hiring freezes, reductions in contractors, deferments of merit salary increases and reductions in salaries for some executives. Applied Materials has also asked U.S. employees to take unpaid time off.

Tech advances
The semiconductor industry is shifting to three technology advances at the same time: 300-millimeter silicon wafers, which results in more chips per wafer than the current standard of smaller wafers; copper interconnects for chips, which are faster and cheaper than their aluminum counterparts; and 0.15- and 0.13-micron circuit widths, which also allow for cheaper and faster chips than the current benchmark of 0.18-micron.

Applied Materials had to spend money as it learned to make and install 300-millimeter systems, Bronson said. "We're beyond that now," Bronson said. Now that the company has solved that problem, those expenses will disappear and its cost cuts in other areas will look more effective, Bronson said.

Salomon Smith Barney analyst Glen Yeung believes Applied Materials' research investment is a smart move.

"We anticipate that Applied will use the current industry weakness to bolster its market share against its weaker competitors," Yeung wrote in a research note released immediately after the quarterly report.

"As the industry enters the next up cycle, Applied?s significant R&D clout should position the company well to benefit from the pending surge of technology buys associated with 0.13-micron, copper and 300mm," wrote Yeung.

Shares of Applied Materials traded at $44.50 in after-hours activity on the Island ECN, immediately after the release of the company's quarterly results. Shares fell $1.19 to $43.65 in regular trading ahead of the news.

Shares of chip-related companies have tumbled this year, as slowing PC sales and an inventory glut among communications equipment makers sent the chip industry to its worst growth performance in recent memory. Applied Materials now believes semiconductor capital spending will fall 27 percent this year.