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Updated from 4:39 p.m. EDT


Applied Materials

(AMAT) - Get Applied Materials, Inc. Report

bested Wall Street's revenue and earnings forecasts for its fiscal third quarter. But that's not likely to give investors much comfort, since the company's bookings came in below expectations and it warned that orders could fall as much as 15% for the quarter underway.

In after-hours trading, shares of the leading chip equipment concern fell 3.5%, or 49 cents, to $12.97. Earlier, the stock closed down 4.5%, or 51 cents.

Applied said it expects new bookings to fall 5% to 15% sequentially in its fiscal fourth quarter. While disappointing, that's not a huge surprise, given that competitors




Lam Research

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said orders could fall in the 10% range. This morning another equipment concern,

Kulicke & Soffa

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warned that revenues for the quarter underway could come up as much as 20% short.

The Street was expecting AMAT to lower bookings guidance for the fourth quarter, but it was unsettled when the company reported lower-than-expected bookings for the quarter just ended. Applied said its orders increased a mere 5% sequentially for the July quarter, less than its guidance for growth of 10% to 15%. The rate of bookings was also sharply below the previous quarter's robust sequential order growth of 51%.

That was "a little unexpected," said Morgan Stanley analyst Steve Pelayo. "We were expecting them to guide

bookings down, but they're guiding 10% down off a lower number. Remember, we were all thinking they were ending with bookings up 10%. But they were only up 5%, so they're guiding down off a lower number."

In a conference call, CEO James Morgan said, "We didn't miss by much. It's a question of some things slipping into the next quarter."

For the quarter underway, AMAT said it expects flat-to-modest revenue growth and sequential earnings gains.

Morgan acknowledged that in the past few weeks, the company's customers had clearly grown more concerned about the state of the economy. "They're now taking a more cautious stance as they evaluate when the economy will pick up and when to expand production," he said.

Over the last month, leading chipmakers such as


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Taiwan Semiconductor




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have each said they will spend less than they'd anticipated on new equipment. Together, those three alone have acknowledged spending cutbacks amounting to about $1.3 billion over the past month alone. Many analysts expect further cuts in capital expenditures later in the year, assuming business doesn't improve much.

An industry trade group has forecast that sales of semiconductor capital equipment will drop for the second year in a row in 2002, with an expected decline of nearly 20% following on last year's revenue slide of 41%.

Morgan Stanley's Pelayo's take: though there's plenty of bad news factored into the current stock price, AMAT shares are likely "stuck in somewhat of a trading range, between around $12 to $14," he said. "Until end market demand picks up, I think there's no chance of a sustainable rally."

Though investors are already fixated on the quarter underway, results for the just-ended quarter were respectable. Applied posted sales of $1.46 billion for its fiscal third quarter, well ahead of analyst estimates for $1.29 billion. Sales were up 26% sequentially but still 7% below the same quarter last year.

Earnings per share calculated by generally accepted accounting principles came in at 7 cents, above expectations for a nickel per share. Net income of $115 million was up 121% from the second quarter and flat with last year's levels.

Gross margins of 41.5% were up slightly from 40% in the prior quarter.

Despite the current crunch, Morgan maintained that long-term trends are promising. In the conference call, he talked up new technologies that can produce chips with finer geometries. "Less than 6% of the world's

semiconductor capacity is at 130 nanometers and below, leading edge capacity. When business spending resumes, there's a real possibility of a shortage in some of those strategic areas," he said. When that happens, AMAT's R&D investments will give it an edge over competitors, he suggested.