AMAT: One more sluggish quarter that’s seasonal — not cyclical

by James Montgomery, News Editor

Business will keep slowing down for the equipment segment’s 800-lb. gorilla and the overall industry, but it’s more of a seasonal trend than a worrisome cyclical downswing, and should only last another quarter or so before picking up steam again, according to Applied Materials execs, discussing their company’s fourth-quarter and year-end 2006 performance and 2007 projections.

After a “short-term order pause” in calendar 1Q07, Mike Splinter, president/CEO, expects to see full-year 2007 wafer fab equipment spending rising 6% from 2006, with foundries and logic company investments coming on strong in 2H07, and memory firms still making up >50% of AMAT’s orders. In the company’s quarterly results conference call, he projected 5%-10% overall industry growth in 2007, driven by DRAM bit growth, and a perceived shortage of supply ahead of the release of Microsoft’s Vista operating system, plus more demand for DRAMs in cell phones.

“There are really two things that are going on,” Splinter said during the analyst Q&A session. Foundries and logic producers are firmly fixed on a downslope — “in fact, I think they’re approaching the bottom of the downturn in spending,” he said, acknowledging that “six months or a year ago, we expected them to be running a lot more 65nm than they are today.” He added that that projected 1Q07 foundry utilization rates in the mid-80% range is “not a point where they’re going to be making aggressive investments.” Still, he pointed out that much of the anticipated big-volume 65nm line output will be filled up starting in 2Q, “and they’re going to make investments along with that.”

Meanwhile, memory producers have to keep increasing their investments to keep up with bit growth, Splinter noted. “When we look at their capex to revenue, we don’t think it’s particularly out of line, because revenue is expanding and bit growth is so dynamic,” he said. Memory makers’ decisions on 55nm and 50nm tool selections are also expected in the next six to nine months, he added.

In addition, NAND flash investments are nowhere near the outrageous pace that they were at in 1995 (~80% capex to revenues, and close to that in 2000), Splinter pointed out. Bit growth keeps rising and applications are boundless, and so far pricing declines have absorbed excess demand. One analyst suggested that last year’s cushion for NAND margins has been arbitraged away as chipmakers who were able to do so have slid back to DRAM where prices and margins have improved, but Splinter feels leading-edge memory makers are still maintaining good enough margins with low-enough costs/bit. “We’re still expecting memory to be strong for the foreseeable future,” he stated.

AMAT fell just shy of Wall Street expectations in its fiscal 4Q06 as revenues (-1%) and earnings (-12%) fell sequentially, though both were remarkably better compared with a year ago (profits +81% to $449 million, and sales +47% to $2.52 billion). Overall gross margins decreased to 47.1%, compared to 48.1% in 3Q06. For 1Q07, AMAT expects both orders and revenues to be down 5%-10%, with EPS down a few pennies from 4Q, to around $0.26-$0.27.

Business has been significantly slower in AMAT’s display segment, with one customer pushing back orders for a full year, according to execs speaking during the analyst conference call. The segment is expected to see declining investments through 1H07 (1Q07 FPD orders are projected to be down about $200 million) as customers rationalize current capacity vs. demand. There is “clearly a big drop” in display spending, noted Splinter, while AMAT’s silicon business is experiencing some minor softness, and its fab solutions business is enjoying a seasonal uptick.

Splinter highlighted where the company plans to focus its near-term growth: etch (“a very important area to us because of the size of the overall market, and the fact that we think that that market is going to continue to grow,” said Splinter), and process diagnostics/control. Also, services as a percentage of total sales have roughly doubled since 2004 (now about 12%), and its profitability “contributes very strongly to the bottom line,” noted EVP Nancy Handel, who is retiring at year’s end. — J.M.


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