Applied Materials warns

May 15, 2001: 6:11 p.m. ET

Chip equipment leader misses estimates, lowers quarterly target

NEW YORK (CNNfn) - Applied Materials on Tuesday logged a fiscal second-quarter profit that was on the low end of the range it told investors to expect, as orders for its products slipped 54 percent from the same period last year.

Executives at the No. 1 supplier of equipment used to manufacture semiconductors also said they see signs of an upturn in their business, but at the same time warned of a substantial shortfall in revenue and earnings for the current quarter, which ends in July.

"We have significant short-term challenges to face," Joseph Bronson, Applied Materials' chief financial officer, told analysts during a teleconference Tuesday evening.

Based on a projection that revenue growth in the semiconductor industry will decline by 13 percent in the quarter and capital spending will be as much as 30 percent below last year's levels, Bronson said the company is expecting fiscal third-quarter earnings per share to be "break-even to slightly above break-even" on revenue ranging between $1.2 billion and $1.3 billion.

The most recent consensus estimate of analysts polled by earnings tracker First Call was for the company to log a fiscal third-quarter profit of 22 cents per share on sales of $1.5 billion.

Shares of Applied Materials (AMAT: Research, Estimates) rose 20 cents to $49.89 on Nasdaq ahead of the earnings news, which was released after the closing bell. They fell 29 cents to $49.60 in extended-hours trade.

The earnings warning came in conjunction with an earnings report for the fiscal second-quarter which ended April 29 that had some mixed messages.

Applied Materials said it earned $269 million, or 32 cents per share, during the quarter ended April 29. That excluded a restructuring charge of $58 million, or 5 cents per share, and was at the bottom of the range of 32 cents per share to 37 cents per share executives said they were aiming for in mid-February.

During the same quarter a year ago, Applied Materials reported a profit of 53 cents per share.

At $1.9 billion, Applied Materials' second-quarter revenue also came in on the low end of the range executives said they were aiming for and compares with $2.2 billion in sales it reported during the same period a year earlier.

But at the same time, the company said it took $1.4 billion of new orders during the quarter. Although that was down from $2.4 billion during the prior quarter and 54 percent below the $2.9 billion in orders it logged for the fiscal second-quarter of 2000, it was at the high end of some analysts' expectations.

The company's ordering patterns are key indicators for analysts, who use them to gauge the broader conditions in the semiconductor industry. For the most part, industry observers had expected Applied Materials' fiscal second-quarter orders to be between $1 billion and $1.3 billion.

Earlier Tuesday, Bear Stearns analyst Robert Maire told his clients that "a number over $1 billion will likely keep Wall Street satisfied."

Prior to the revised financial guidance executives provided in February, Applied Materials had been expecting to log a second-quarter profit nearer 49 cents per share on sales of roughly $2.4 billion.

Faced with a sharp drop in demand, most chipmakers have pared back their spending in an effort to maintain profitability, and many have either deferred or cancelled their capital-equipment orders.

The semiconductor industry historically has been characterized by boom-and-bust cycles, with periods of undersupply and high prices followed by spells of overcapacity and slumping profitability. On the down slope of that cycle, chipmakers will move quickly to decrease their manufacturing capacity, which in turn weighs on chip-equipment makers' profits.

That's been the situation in the industry for at least two quarters. However, some analysts recently have become convinced that the worst is over, and the industry is poised for a rebound.

Just last week, Morgan Stanley Dean Witter analyst Jay Deahna upgraded his firm's investment ratings on six of the top-tier chip-equipment makers, including Applied Materials, to "strong buy" from "outperform."

Deahna advised investors to start buying chip-equipment stocks ahead of the beginning of the cyclical uptrend, which he predicts will begin in September or October as the year-over-year growth rate for chip-industry revenues begins to re-accelerate.

Despite the reduced financial targets the company provided for the current quarter, James Morgan, Applied Materials' chairman and chief executive, also said he expects a stronger second half of the year.

"This downturn is, in my recollection, the steepest and the sharpest cutback in equipment spending we've seen," Morgan said. "I believe we're now in the bottom of this cycle, and are waiting for the tipping point to recover."

He said he is expecting the semiconductor cycle to start turning upward in the next two quarters, with chips related to personal computers likely to lead the way.

As have most of its competitors, Applied Materials has implemented a range of cost-cutting measures in an effort to maintain profitability in a sluggish market. These include: trimming its temporary work force and deferring all salary increases; reducing salaries for all executives at the corporate vice president level and above, including members of the company's board, by 10 percent; implementing five mandatory "shutdown days" in the second quarter; and reducing travel and other discretionary expenses.

Given the continued difficult market conditions, Bronson said Applied Materials will continue to "aggressively cut costs in line with expected levels of revenue," adding that the company has recently implemented additional cost-cutting measures including more salary reductions and additional shutdowns.