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Applied Materials offers grim outlook for current quarter

The chip equipment maker meets lowered expectations for its first fiscal quarter and ratchets down predictions for the current one.

Applied Materials beat lowered expectations for its fiscal first quarter Tuesday, but warned that the next few months are going to be grim.

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Will Applied Materials see rise in sales?
Jim Morgan, CEO, Applied Materials
Excluding one-time items, the company earned $558 million, or 66 cents per share, for the quarter that ended Jan. 28. That's an increase of 71 percent over earnings of $327 million, or 39 cents per share, for the same period a year earlier.

Revenue for the quarter grew 59 percent to $2.73 billion, compared with $1.72 billion in the year-earlier period. According to First Call, a consensus of analysts expected Applied to earn 62 cents per share on revenue of $2.69 billion.

However, Applied's revenue and profit figures represent a decline from its fiscal fourth quarter. And the short-term outlook for chip equipment sales isn't promising.

In a conference call with analysts, Applied ratcheted down projections for the current quarter, stating that revenue will come in at $1.9 billion to $2 billion. Earnings will be 32 cents to 37 cents per share.

Those figures are well below analyst expectations for the current quarter, according to First Call. Analysts had called for Applied to post revenue of $2.4 billion and earnings of 49 cents per share.

Orders for chipmaking equipment began to slow in mid-January, Applied executives said. The slowing U.S. economy caused chipmakers, especially in North America, Taiwan and Korean, to rethink their plans.

"Customer rescheduling activity in January caused more softness than expected," said Joseph Bronson, chief financial officer.

Santa Clara, Calif.-based Applied lost about $150 million in order cancellations, he said.

"Some customers are re-evaluating the timing of proposed capital expenditures," Bronson said.

In January, Applied warned that its first-quarter revenue would fall 7 percent to 10 percent below the $2.9 billion that the company previously expected.

The company expects the slowing economy to continue to affect its customers' capital spending. Chipmakers' capital budgets are used to purchase chip-manufacturing equipment.

"The business turned in January in most industries, including ours, and now we're responding to that situation," CEO James Morgan said in an interview.

Applied Materials relies on spending of large customers, such as Taiwan Semiconductor Manufacturing Co.

TSMC, the world's largest chip foundry recently announced a much lower capital budget than had been expected. However, the chipmaker is forging ahead with plans to move its manufacturing plants to larger 300-millimeter wafers, which makes Applied executives feel hopeful about its long-term growth.

The company expects to gain the lion's share of the market when it comes to the installation of the equipment needed to make chips from 300-millimeter wafers. The larger wafers increase chip manufacturing capacity by about 60 percent, while reducing costs by about 30 percent.

Most large chipmakers, such as Intel, Texas Instruments and TSMC, have already begun the transition to 300-mm wafers and are moving ahead. Applied believes that most of these chipmakers plan to begin pilot manufacturing with 300-mm wafers this year.

Confirming recent reports, Applied Material is taking a number of actions to trim costs. The company has reduced its number of temporary workers. It has also deferred merit salary increases and has instituted a 10 percent salary reduction for executives at and above the level of vice president.

Additionally, it will reduce travel expenses in the current quarter and will dictate that employees take five mandatory "shutdown days" this quarter. These days will be either vacation days or days taken without pay.

Morgan said it's unlikely that the company will take other measures. "This is what we see as needed for our expected business activities," he said.

In the long term, Morgan sees a better picture. Basically, Morgan said, there will be more chips in a greater number of products, which is good for the company.

"For semiconductors?the amount of chips that are in a product as a percentage in dollars is increasing. For us?not only are the customers having to put in more process steps and put in new technologies (for manufacturing chips), they're also outsourcing more" to Applied, Morgan said.

The outsourcing business alone could be worth $3 to $5 billion in the next few years, he said.

In regular trading, Applied shares fell $2.75, or 6 percent, to $41.25. In after-hours trading, the shares dropped to $40.62, according to Island ECN.