AMAT alarm: Capex sliding back to “like 2003”

May 14, 2008 – Industry projections of a soft 2008 aren’t nearly soft enough, according to AMAT president/CEO Mike Splinter — he projects capex could be down 35% or more this year. “There’s not a good story” being told in any chipmaking sector, he told listeners in a quarterly results conference call, adding that capex levels will be similar to those from 2003.

First, a quick summary of AMAT’s fiscal 2Q08 results:

– Net sales $2.15B, +3% Q-Q, -15% Y-Y
– Net income: ~$303M (EPS $0.22), +15% Q-Q, -26% Y-Y
– New orders: $2.41B, -3% Q-Q, -9% Y-Y

From a high-level view, the company’s display and solar businesses are doing well, while its silicon/semiconductor business is mired in weakness. Results were actually a little better than what analysts had been expecting ($2.12B sales, EPS $0.21).

The quarterly call offered more color and analysis for the quarterly numbers — and it kicked off with fireworks as Splinter projected WFE spending would be down 25%-35% this year, much more severe than the 15%-25% cuts some analysts have been forecasting. He pegged DRAM investments decreasing a whopping 50% in 2008, NAND flash down >15%, and foundries/logic down >20%, with little recovery in 2H08 as had been hoped.

The DRAM sector’s woes are well known, but the biggest disappointment is the NAND flash sector, where a highly anticipated rebound in 2H08 is simply “not going to happen,” Splinter warned. “We see 50,000 wafers being pushed out.” The foundry segment isn’t helping either, with “only one company investing …very incrementally at a pretty low level,” and logic manufacturers are still cautious, Splinter noted. “There’s not a good story in the total,” he said. “We see 10 factories in total that have pushed out or lowered their capacity goals for their factories.”

Splinter projected that 3Q will be “the bottom” of the downcycle (CFO George Davis later clarified this to mean a trough in revenue, though orders are similarly slumping). To pull up from the bottom will require sustained DRAM ASPs to generate profits and fuel future investments. “While average DRAM contract prices increased more than 15% in the last 30 days it’s still well below levels necessary to support meaningful investment,” he said. Supply/demand should be in better balance in 2H08 led by growth in PCs and DDR3 adoption.

Growth also needs to come from a NAND flash capacity buildout, partly to meet anticipated demand for solid-state drives in PCs and enterprise systems. Splinter forecast a ramp of 3M-4M 300mm (4Xnm) wafers/year over the next several years. Meanwhile, the foundry segment is being watched closely for an anticipated 65nm capacity ramp and beginnings of 45nm leading-edge investments.

Reviewing the company’s latest quarterly performance, Splinter noted that AMAT’s solar biz is “facing the challenges of the start-up of multiple factories simultaneously” while pushing R&D to boost cell efficiency and reduce costs. The company’s thin-film SunFab line currently supports four factories in startup mode (two of which “are already depositing silicon on glass”), and soon AMAT will have eight lines in start-up, he said.

On the display side, AMAT is striving to match “an unprecedented ramp,” Splinter said, citing projections of >50% capex for 2008. Display orders in fiscal 1H08 have already topped FY06 totals, and FY08 sales are expected to continue on pace and through 2009 as well.

Splinter also mentioned that there is “strength” in the 200mm sector for the next six months, for aftermarket upgrades and refurbished tools.

George Davis, AMAT CFO, noted that AMAT’s overall backlog “is at the highest level it has been in many years” due to display and solar growth, and is “relatively evenly distributed.”

Looking ahead, AMAT is projecting fiscal 3Q08 orders to be down 15%-25% sequentially, following a -3% decline in 2Q08, due to “very weak” demand and a lull in display business. Sales are expected to dip 10%-18% with “strong pullback” from the memory sector, and an EPS of $0.10-$0.14 — barely half the $0.25 that Wall Street is anticipating. — J.M.


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