Updated: AMAT plans 12% layoffs as industry environment sours

Nov. 12, 2008 – Semiconductor equipment bellwether Applied Materials slightly beat analysts expectations for its fiscal year-end quarter ended Oct. 26, but things are still bad enough now and looking ahead that the company is following many others in restructuring efforts, laying off about 1800 positions (12% of its workforce) in the coming fiscal year in order to shave $400M off annual operating costs.

“As Applied moves into fiscal 2009, we will implement further cost-reduction actions due to declining market conditions, and we will invest in strategic priorities,” said AMAT president/CEO Mike Splinter, in a statement. The personnel moves will involve a combination of attrition, voluntary separation and other workforce reduction programs.

The company’s latest financials (fiscal 4Q08) weren’t great, but not as bad as some had feared: sales of $2.04B and EPS of $0.17, which beat Wall Street expectations of $1.94B and $0.14. That compares with sales of $1.85B in fiscal 3Q08 and $2.37B a year ago, while net income of $231M was down 45% Q-Q but up 40% Y-Y. Bookings during the quarter of $2.21B were up about 9% sequentially and flat year-on-year. Gross margins slipped to 39.1% from 40.2% in the prior quarter and 45.5% a year ago.

By reporting segment, AMAT’s silicon orders ($1.162B) rose 46% Q-Q but were down -13% Y-Y; display orders, which had buoyed the company with record levels earlier in the year, sunk to $65M vs. $374M in fiscal 3Q and $120M a year ago. The “energy and environmental” group, which includes solar, soared to $490M vs. $21M in 3Q and $98M a year ago.

In a conference call discussing the results, Splinter suggested wafer fab spending will sink >25% in the coming year, with flat-panel display investments plummeting >40%. And while there have been some issues with solar customers delaying projects due to funding difficulties, 2009 should see “significant growth.”

UPDATE: Some insights from the conference call:

– President/CEO Mike Splinter expects the current downturn will eliminate two or three companies in the DRAM sector, with an eye toward Taiwan “I think initially in this last year we expected consolidation, this kind of global recession is going to pretty much ensure it happens.” As to whether fewer DRAM makers (and equipment purchasers) is bad news for equipment firms, “I think if there’s fewer suppliers the market will be a little more orderly and I think that, in the long run is a positive.”

– Several analysts expressed concern (phrased differently) about the financial stability of AMAT’s solar customers, whether they had solid enough financing, say, in case they were to receive tool shipments but then fail to have funding to do anything with them. Of the seven SunFab customers that have already received shipments (and an eighth in progress), Splinter noted that “are all secured by letters of credit, that customers are moving ahead. They had to have their financing in place to be at this stage so they’re moving ahead on schedule.” And later: “We have a policy of being fully covered as we ship in and all of our eight factories where we’ve shipped equipment so far were fully secured for all of the equipment and the sign off value for the factories. Then it’s been a practice on the crystalline silicon side to take deposits and to secure credit where credit is necessary.”

From AmTech Research analyst Bill Ong (a former AMAT employee himself, 1988-1996):

– Pushouts from prior quarters beefed up orders in fiscal 4Q08: up 9% overall Q/Q and +47% in the silicon sector, vs. expectations of 5%-10% and 30%, respectively.

– Sales could fall 25%-35% in fiscal 1Q09 (January quarter), to ~$1.43B vs. Wall Street expectations of $1.94B, and EPS evaporating to just $0.02 (vs. the Street’s $0.16 outlook). Revenue breakeven could be lowered 11%-15% ($150M-$200M from current $1.3M) by the end of FY09.

– Checks indicate AMAT will close down for a week during the Thanksgiving holiday, and three weeks spanning Christmas/New Year, to save additional costs, beyond its announced 1800 layoffs. AMAT also is halting its stock repurchase program to preserve cash (now at $2B net). Any further moves would require “another staircase drop” in the macroeconomic environment.

Takeaways from FBR analysts Mehdi Hosseini and Rafi Hassan:

– Utilization rates could drop “well below 70%” in the first two quarters of 2009, approaching the lows from 2002; if this happens, look for a -30% plunge in capex if not more, on the heels of this year’s -25% decline.

– Crystalline-based solar PV customers are likely to slow their capacity ramps due to weak demand and ASPs, and in some cases take capacity offline (something echoed by JA Solar in its quarterly discussions). Thus, look for declines in AMAT’s solar bookings/sales “for several quarters.”

– Meanwhile, five thin-film solar customers are making panels, with bookings from a new customer recognized in the October quarter. Despite warnings of a difficult finance environment for some thin-film customers, AMAT’s customer mix is diverse enough to mitigate that risk.

– Given AMAT’s guidance (overall bookings and sales to decline -30% in 1Q09), FBR anticipates a -47% drop in silicon biz sales (representing 40%-45% of AMAT’s total sales), followed by a 31% drop in CY09 (35%-40% of total). Display (-62%) and services (-30%) are also seen with big drops in the next year — but the solar biz should pop with 80% growth, to go from 15% of total sales to >30%.

From Deutsche Bank’s Stephen O’Rourke:

– AMAT is prepping for a long downturn, and a slowing PV biz means backlog risk. Restructuring will help, but look for further weakening in the company’s semiconductor equipment, solar PV, and flat-panel businesses, and near-term seasonal weakness in its services unit.

– “It is still not time to own SCE [semiconductor capital equipment] stocks.” Broader SCE industry outlook: Bottoming out in 1H09, “but a mild recovery may not emerge until 2010.”


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