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Applied Materials Applies Good News

The company's strong orders and lower costs in the second quarter should extend into the third.

SAN FRANCISCO -- Semiconductor-equipment leader Applied Materials (AMAT) - Get Applied Materials Inc. Report said the strong orders and cost-cutting that helped it beat analysts' second-quarter estimates by 9 cents a share will also help it post a strong third quarter.

Applied produced net income of $141.6 million, or 36 cents a share, in the quarter ended May 2, up from a profit of 11 cents in the first quarter and down from a profit of 37 cents in the second quarter of last year. The

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consensus estimate called for a profit of 27 cents. Revenue totaled $1.12 billion, up 51% from the first quarter and down 5% from the same quarter last year.

Orders for new equipment grew to a record $1.39 billion, a 35% increase both sequentially and year-over-year. Despite industry concerns about declining orders from makers of dynamic random-access memory chips, or DRAM chips, CEO James Morgan said in conference call Tuesday he's seen no slowdown and expects instead to see increasing demand as the market for advanced DRAM chips pick up. CFO Joseph Bronson added that compared to the last upturn in the chip market in 1997, demand from DRAM manufacturers will make up a smaller percentage of total demand.

Bronson said that Applied is also seeing a significant increase in orders from contract manufacturers because of higher demand for communication and consumer devices such as the new


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game player.

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Also spurring demand was a changeover taking place in the chip industry to smaller die sizes. "Most customers have held off most purchasing for the past year or so in advance of the technology change" and have just started to place new orders, said Morgan.

Applied Materials has decreased its backlog from a historical 4-4 1/2 months to 3-3 1/2 months through more efficient manufacturing. If Applied can get the backlog to three months, the company will have a nice advantage in the market over rivals such as


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. "We will be able to respond very quickly to customer demands," Bronson said.

Income increased faster than revenue because of asset management, higher productivity and cutting material costs through outsourcing and standardized designs -- all of which should continue into the third quarter, the company said. "We are making progress but it takes a long time to harvest improvements," Bronson said.

Applied predicted revenue this quarter will rise to about $1.3 billion and that income should grow to between 50 cents and 54 cents a share with gross margins above 45%. The goal is to get quarterly revenue to $1.5 billion with a gross margin of 50%, Bronson said.

Gerry Fleming, an analyst for

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, says he still sees signs of a summer slowdown as declining prices for DRAMs prompt companies to delay equipment purchases. Still, Fleming is surprised at the company's strong profits this quarter. Fleming is now estimating the company will report third-quarter earnings per share of 54 cents and is revising his 1999 earnings from to $1.58 from $1.10 per share. (Van Kasper is not an underwriter for Applied Materials.)

For now, at least, holders of Applied's stock should be happy, he says. "I will guess it's up a good 10% tomorrow."