Applied posts sluggish 2Q, blames foundries

May 18, 2005 – Not even the industry’s 800-lb. gorilla can withstand the irresistible force of sluggish market demand. Applied Materials Inc. reported orders for its chipmaking equipment in its fiscal 2Q05 (ended May 1) fell 30% year-on-year to $1.55 billion, while sales fell 8% to $1.86 billion. Sequentially, orders were down 7%, while sales were up 5% from fiscal 1Q05. The company posted a profit of $305 million (EPS $0.18), up from $289 million in 1Q05 but down from $373 million in 2Q04. Analysts had been braced for worse news, expecting sales of $1.8 billion and EPS of $0.17.

In a conference call with analysts, CEO Mike Splinter placed the blame for the company’s demand falloff squarely on foundries, which did not increase their capital spending in 2Q as hoped. “We were expecting foundries would come back but they have not,” he said, adding that there have been a number of revenue pushouts from foundries. Splinter acknowledged weak spending from foundries is continuing in the company’s current fiscal 3Q05 ending in August.

Splinter also confirmed that overall industry capital spending has slowed and is expected to remain slow through the next quarter, and would have to “pick up quite rapidly” to reach projected targets for the year. Nevertheless, he was optimistic that the industry will see increased investments and “will do fine” in the second half of the calendar year. “We think utilization is starting to move up at most factories, especially in foundries. We expect this [quarter] to be the bottom,” he said.

On a bright note, business in Japan, which accounted for one-third of Applied’s new orders in 2Q05, has been brisk. Splinter noted that Japan’s economy is projected to be moving at a 5% GDP clip, and consumer spending also is up — “two very positive signs [since] almost all of Japan’s semiconductor companies are consumer-oriented. We think that Japan semiconductor companies are seeing a turnaround.”

Splinter also pointed to strong overall demand from memory makers, particularly those ramping up flash capacity. “They’re keeping most of their 300mm investments in DRAM to move to the next generation,” he said, “but they’re moving their old 200mm to flash.” He acknowledged that business from DRAM manufacturers has continued to be strong but orders have dipped somewhat.

For the current quarter ending in August, Applied projects continued slides in orders (-5% to -10%) and revenues (-10% to -15%) from 2Q05 levels, with a projected EPS of $0.12-$0.14. Applied also plans to repurchase $300-$500 million in shares in 3Q. — J.M.


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