Applied hits 4Q targets, but sees big dropoff ahead

Applied Materials Inc.’s fiscal 4Q04 numbers were better than many other equipment suppliers’ recent results, but the company indicated that while customers are still spending on 300mm, the current market pause “could last a long time” and likely will hinge on the year-end holiday push.

The San Jose, CA-based firm posted a profit of $455 million on $2.20 billion in sales in 4Q, compared with earnings of $15 million and revenues of $1.22 billion a year ago. Revenues were down 1% from the prior quarter, while profits rose 3%. New orders rose 6.5% sequentially to $2.46 billion, better than the 5% the company forecasted and more than double the orders from fiscal 4Q03. For the fiscal year, Applied’s revenues grew 108% from fiscal 2003, with a net income of $1.35 billion compared with a loss of $149 million.

But even a giant like Applied is not immune to market forces, which in recent weeks have indicated a swing toward a slowdown. “As the fourth quarter progressed, some customers became more cautious in response to inventory concerns, slowing their 200mm investments,” said president and CEO Mike Splinter in a conference call with analysts, adding that 300mm spending is steady but has not picked up as expected. Although the company still expects to benefit from customer momentum toward advanced process technologies, and the 300mm tools that account for 84% of Applied’s business, Splinter acknowledged an “across-the-board cautiousness” in the past month will cause a significant dropoff in demand for the next quarter — as much as a 35% dip in orders. “Companies are really trying to decide what the market is going to be like before they decide what their capex will be next year,” he said.

“We’re acting like this is serious and could last a long time,” Splinter explained. “If it comes back in the first half, that’d be nice.”

Despite the gloomy near-term forecast, Applied execs indicated hope is not lost. New CFO Nancy Handel, who is stepping in for longtime Applied exec Joseph Bronson, said she expected about two-thirds of the company’s $3.37 billion backlog would be realized in the first two fiscal quarters of 2005. Splinter pointed to recent new fab announcements by Spansion, Trecenti, Powerchip, and Elpida, as well as encouraging signs in the past week from Dell and Hewlett-Packard about enterprise spending.

In the end, the direction the industry takes in 2005 could depend on the year-end holiday push, particularly sales of consumer-oriented products. “The next four- to six-week period will see a lot of reassessment to see what the industry will look like next year,” said Splinter. — J.M.


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