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No respite for Applied Materials

Speculation about massive layoffs at the chip equipment maker illustrates that the semiconductor sector is hardly out of the woods yet.

    When Applied Materials reported its earnings this week, it became the latest reminder that the semiconductor industry is hardly out of the woods.

    Excluding charges related to a previously announced voluntary separation package, the company on Tuesday reported third-quarter earnings of $70.6 million, or 19 cents a share, compared with $145.2 million, or 38 cents a share, reported for the like quarter a year ago. Those numbers beat analysts' expectations, but only after the expectations had been revised downward.

    Applied Materials warned last month that its fiscal third-quarter earnings would fall short of expectations. The company said at that time that new orders had decreased significantly.

    The chip industry overall has been hit hard this year by the Asian economic woes, weaker-than-expected computer sales, oversupply problems, and the impact of the sub-$1,000 PC. Some analysts and executives are optimistic that the chip industry's funk is nearing an end, but semiconductor stocks largely are still reeling from an across-the-board downturn.

    With its revenue figures still ailing, Applied Materials will need to cut costs somewhere, and the company's chief executive, James Morgan, hinted this week that cost-reduction plans already are in the works.

    "At this time, we are unable to predict how long this cycle will last, and are therefore assessing the appropriate level of infrastructure necessary to support a lower business volume, while assuring our industry leadership position," Morgan said in a statement released Tuesday.

    Although Applied Materials has made no specific announcements alluding to staff reductions, sources say the company could lay off as many as 3,000 employees--more than 21 percent of its workforce--this quarter.

    "Because of the downturn in the industry, the company said on its conference call they would have to downsize their business," said Brett Hodess, an analyst at NationsBanc Montgomery Securities. "They had not yet decided on the size [of the cutback] or when it would happen."

    Speculation abounds that the world's largest semiconductor equipment maker will trim costs by imposing layoffs affecting anywhere from about 2,000 to as many as 3,000 employees. Some sources said the rumored downsizing could come as soon as Monday, while others said late August is more likely.

    "We've heard that rumor from several sources that the company will have a layoff in the next month," Hodess said.

    Company executives told analysts this week that they are planning to reduce costs, though layoffs were never mentioned.

    "They said they were setting certain measures to reduce costs. Clearly that's one of their options," said Min Pang, managing director at investment bank SG Cowan. "Generally speaking, one of the most obvious ways to cut costs is reductions in force. If they did cut back, I would imagine it would be fairly substantial."

    "It is widely expected that they will have a layoff and they aren't likely to be the only one," added Sue Billat, an analyst at BancAmerica Robertson Stephens. "If you look at the numbers, that's what makes sense."

    Meanwhile, power delivery systems manufacturer Advanced Energy Industries announced today that it will lay off 128 workers. Applied Materials is Advanced Energy's largest customer, Billat said.

    But the company remains tight-lipped about what its future holds.

    "We haven't announced any such plans," said spokesman Jeff Lettes. He declined to comment further on the layoff speculation.

    In May the company announced plans to cut its workforce from more than 15,000 to 14,000 as part of a voluntary buyout package.

    Since then, Applied Materials has attempted to reduce costs by resorting to occasional mandatory shutdowns for one-week increments. The next scheduled closure is planned for next week, heightening speculation about more severe cutbacks.

    Applied Materials is hardly alone in its troubles. Chipmakers such as Intel and National Semiconductor also have imposed layoffs this year, as have many of their peers in the semiconductor industry. (Intel is an investor in CNET: The Computer Network, which publishes News.com.)

    For the most part, analysts seem to think layoffs are a prudent measure.

    "I think it's absolutely necessary because the industry will be down about 30 percent this year and at best flat next year," Hodess said. "It would be a dereliction of responsibility not to cut back."

    Others industry-watchers agreed.

    "It's inevitable, given the reduced order rate, which is a harbinger of [Applied Material's] revenues," said Byron Walker, an analyst with BT Alex Brown. "You've got to size your business accordingly. All the equipment guys have cut back about 15 percent across the board, so it's everybody."

    Although layoffs would save Applied some money during the fourth quarter, the company must be careful not to cut too deep if it does decide to lay off workers, Walker warned.

    "They need to very carefully figure out how to restructure. You don't want to hand down an edict that one in five people in every department will be let go," he said. "There are some areas that you don't want to touch and some areas you will want to eliminate completely--where there are redundancies."

    Walker argued that the sooner Applied cuts back, the better.

    "They don't want to do this in September or October," he said. "The sooner you get it done, the more savings you have."