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Booming sales nudge Applied Materials past estimates

The largest maker of the gear used to produce semiconductors reports earnings and sales that narrowly top Wall Street estimates.

Following earnings that narrowly topped analysts' estimates, Applied Materials today predicted an upswing in the chip cycle will last through next year, with continued sales growth in the coming quarters.

The largest maker of the gear used to produce semiconductors said it earned $604 million, or 70 cents a share, on sales of $2.73 billion for its fiscal third quarter ended July 30. That compares with earnings of $256 million, or 31 cents a share, excluding one-time items, on sales of $1.49 billion from the same quarter a year ago.

The Santa Clara, Calif.-based company had earlier guided analysts to expect $2.6 billion to $2.7 billion in sales. Analysts were expecting the company to earn 68 cents per share, according to First Call/Thomson Financial.

New orders came in at $3.2 billion for the quarter, in line with what several analysts had predicted. The company's gross margins increased to 50.9 percent, up from 50.1 percent in the prior quarter and 48 percent in the third quarter of last year.

Chief financial officer Joseph Bronson predicted a strong next quarter and following year amid renewed growth in Japan, a shortage of memory chips and a strong world economy.

"Our assessment is that the semiconductor industry is still quite healthy, and the underlying demand is strong," Bronson said in a conference call following the announcement.

The company projected that sales in the coming quarter will rise to between $2.85 billion and $2.95 billion. With gross margins also expected to rise, Bronson said per-share earnings should be in the range of 73 cents to 75 cents.

Applied Materials also forecast that new orders would rise to $3.5 billion from this quarter's record level, leading to revenue gains in the following quarters as well.

The company said it expects 13 new semiconductor plants, or fabs, to be built this year, with 16 major expansions of current fabs. For 2001, the company expects 16 new fabs to be built along with 15 more major expansions.

Applied said the renewed growth in Japan was particularly strong.

"Japan nearly doubled their investment from last quarter," said senior vice president David Wang. "I am sensing an increased level of optimism today regarding their outlook for year 2001."

Orders from memory chip makers accounted for 15 percent of Applied's new business, a lower rate than Applied has seen throughout its history.

"We believe a shortage of DRAM is (emerging) and expect manufacturers to increase capacity spending," Wang said. "In Korea, it is clear that capacity shortages are beginning to develop and will increase next year even with increased levels of spending."

Foundries, which accounted for 25 percent of orders, are aggressively adding capacity but still do not feel they will keep pace with demand, Wang said. Orders form logic chipmakers, companies like Intel and Texas Instruments, accounted for 60 percent of orders.

In an interview, chief executive James Morgan said all indications are that the chip business is strong.

"We've anticipated that 2001 will be another strong year for the industry," he said.

While companies boosting their computing capacity, Morgan said, new applications creating even greater demand. Companies are forced to aggressively upgrade their data and communications capability. Applied itself has spent $150 million upgrading its infrastructure of late, he said.

Simple changes, such as the move from black-and-white to color screens on cell phones can increase the demand for particular chips several-fold, he said. Meanwhile, goods such as cars and televisions are using more chips than ever.

"A car now has more silicon dollars, I think, than it does steel," Morgan said.