Applied Materials Seeks Expansion into Solar

Continuing my discussion on the semiconductor manufacturing equipment sector, here is my analysis of Applied Materials (AMAT), the largest supplier of tools for making microchips.

In its recent Q2 earnings call, AMAT reported sequentially flat revenue of $2.1 billion, which was in line with the market’s expectations. However, revenue was 16% lower than the $2.5 billion reported a year ago. By segment, order composition was DRAM 40%, foundries 22%, flash memory 13%, logic and other 25%.

EPS of $0.24 beat the market’s expectations of $0.21 but was down 29% year on year.

During the quarter, AMAT repurchased 15 million shares at an average price of $19.97 per share and announced a dividend payout of $0.06 per share.

For Q3 the company expects revenues to be 10% to 18% lower due to a decrease in silicon, and EPS to be in the range of $0.10 to $0.14.

Management raised concerns about the uncertain market conditions. Based on its interactions with customers, the company expects to see a further slowdown in semiconductor capital expenditure. The company believes equipment spending in wafer fabs will be down 25% - 35%, in DRAM by 50%, in NAND Flash by more than 15%, and in logic by more than 20% in the calendar year 2008.

However, the company also believes that the market can only improve and is looking at three key enablers to improve growth:

1. In DRAM, the company expects price increases and industry consolidation to propel capacity growth.
2. The company expects capacity build out for NAND Flash.
3. The company is looking at ramping up capacity for 65 nm and increasing investment in the 45 nm space.

Meanwhile, AMAT continued with product innovation to address its customers’ tighter budgets. The company recently announced the launch of Applied E3, an advanced equipment and process control for improving productivity and reducing the costs of semiconductor, flat panel display and photovoltaic solar cell manufacturing. The Applied E3 system claims to be able to “boost process capability by greater than 30%, reduce unscheduled down time, and shorten cycle time to achieve up to a 20% increase in overall equipment effectiveness.”

In an earlier post I talked about the need for the industry to find adjacencies to merge with. AMAT is searching for these adjacencies, though more in complimentary markets than in complimentary industries.

Last year, the company acquired Italy’s Baccini SpA for $330 million. Baccini supplied test systems for manufacturing crystalline silicon photovoltaic cells and had the technology to produce cells less than 120 nm thick. With this acquisition, AMAT has a way to make its necessary expansion into the solar cell technology market, a high-growth opportunity for the next decade and more. I am very excited about this market.

AMAT also recently bid for the atomic layer deposition and plasma-enhanced chemical vapor deposition operations of the Dutch semiconductor equipment manufacturer, ASM International (ASMI). However, the bid was rejected.

AMAT’s stock is currently trading at $17.91 after falling 11% since the announcement of its results.

Comments

[Creative In...:]

AMAT is one of the best technology stock plays in the current environment. Demand for solar equipment, which they manufacture, is expected to stay strong; microchip manufacturing may slow down, but the demand for equipment that enables efficient and innovative manufacturing process is likely to stay strong. So, I agree with a sentiment mentioned by Applied Materials that from here on out they expect demand for their products to improve.

2008 Jul 15 03:37 PM