AMAT: 3Q was “trough,” but 2009 recovery still tenuous

August 18, 2008 – Semiconductor/FPD/solar equipment giant Applied Materials posted fiscal 3Q08 results (July-ended quarter) generally in line with expectations, with sales and profits dropping sharply in what CEO Mike Splinter called the “trough” of the industry’s current downcycle.

Here’s a quick bullet-point summary of highlights from the company’s quarterly conference call:

3Q was the trough (again), but momentum’s hazy. Applied Materials’ CEO Mike Splinter has called the market bottom before, to the point where one analyst has spawned a drinking game to pass the time until it actually happens. Splinter’s saying it again now, indicating the company’s just-completed fiscal 3Q08 was this cycle’s trough.

Silicon orders are seen surging 30% in fiscal 4Q (through October), particularly thanks to business from flash and DRAM sectors and some from the as-yet disappointing foundry sector. And business should gradually pick up again through early calendar 2009, with capital intensity (capex as a % of sales) rising back up to the typical range of 18%-22% over the next 1-2 years (it’s at 15%-16% now).

But put on the spot during the conference call Q&A, Splinter acknowledged that there’s a lot of unknown timing before the industry can plant its feet to take momentum from the bottom of the cycle into an upswing. “I think the big question is how sustainable is that into Q1,” he said, depending on what consumers do in the second half of this year during the peak buying season. Overall utilization rates are still very high, meaning capacity is tight, so if the macroeconomic scenario improves the industry should deliver in early 2009 and “the second half of 2009 will be good,” driven in part by the next wave of investment in NAND flash for solid-state drive applications. But he cautioned, though, that “if I thought the current trends would continue and inventories would continue down, I would be a lot more bullish than I currently am.”

Display taking a breather…. While the silicon segment has struggled, one of AMAT’s bright spots has been its flat-panel display business, reaching historic demand in its first two quarters of 2008. But that train is leaving the station — 3Q08 orders were down 25% sequentially, and 4Q looks like it’ll plunge 75%. “We believe this represents the end of the first phase of the GEN8.5 order cycle and we should expect orders in display to be down significantly for the next few quarters until the Gen 10 technology and capacity cycle begins,” Splinter said during the conference call. When prompted to offer a more specific timeline, he said Gen 10 orders might show up in 2H09 (and some G8.5 from smaller firms in the meantime).

Nevertheless he suggested major FPD capital projects are still on the boards with top panel makers continuing to expand capacity to meet demand for large TVs, and sales should stay high for a few quarters. And panel makers are willing to upgrade to Gen 10 when it’s ready, Splinter said. “I don’t think there’s any question in our mind now about the viability of a Gen 10, or a Gen 12 for that matter in the display business.”

…while solar’s stepping up. While preparing for a drop in displays, one sector being ramped up is solar, which with the rebounding silicon sector is expected to buoy orders in the coming quarter, as well as a 2%-10% overall revenue uptick, according to Applied CFO George Davis. Splinter also pointed to a “favorable” preliminary finding by a European patent court over tandem junction solar technology that’s at the heart of a suit against German customer Sunfilm by Switzerland’s U. of Neuchatel. AMAT’s solar buildout is still denting operating margins but that should ease “over time,” Davis said. An analyst during the Q&A pointed out that such vague comments about profitability seem to suggest breakeven later in 2009 rather than previous projections of early 2009, but Davis replied that more substantial 25%-35% operating margins in 2010 are “still very viable.”

Splinter added that expectations by solar customers’ creditors “have gone up dramatically” with “much more severe” scrutiny than six months ago, though “we haven’t seen anybody that can’t get money at this point.” — J.M.


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