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Applied Materials Sags on Weak Demand

The company posts a 25% drop in profits as demand for its chip equipment slows.


Applied Materials'

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bottom line fell more than 25% in its fiscal second quarter, as demand for the company's semiconductor manufacturing equipment continues to stagnate.

The company said the market for chipmaking tools had weakened considerably from its previous expectations, and it projected financial results for the current quarter that were sharply below analysts' expectations.

Customer spending on the equipment made by Applied and other companies will be "down considerably" from earlier expectations, CEO Mike Splinter said in a post-earnings conference call, citing weaker-than-expected demand for flash memory chips as the main culprit.

"We had expected flash memory to have a pretty strong second half. In fact that's not going to happen," Splinter said.

The company said sales in the current quarter will be down 10% to 18% sequentially, suggesting a range of $1.76 billion to $1.93 billion, compared with the $2.24 billion expected by analysts. Applied Materials said EPS will range between 10 cents and 14 cents, well below the 25 cents average analyst expectation, according to Thomson Financial.

Applied Materials said it expected the downturn in the chip business to reach a bottom in the current quarter, with sales expected to begin growing again after that. But Splinter cautioned that real growth won't be possible until prices of DRAM memory chips begin to rise.

"While average DRAM contract prices increased more than 15% in last 30 days, that is still well below levels necessary to support meaningful investment," Splinter said.

Shares of Applied Materials were up 1.5%, or 30 cents, at $20.16 in extended trading Tuesday.

Applied Materials' stock price has risen about 23% since January amid bullish expectations for the company's nascent business developing tools and factories to produce solar energy panels. In March, Applied announced a $1.9 billion contract to build a massive solar panel fabrication facility for an unnamed customer.

The bulk of the revenue from Applied's solar business won't show up until 2009, however. In the meantime, the company's solar group is posting an operating loss as it pours resources into the business.

"Right now we're in the investment phase," CFO George Davis said in an interview with

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. "We have eight major factories under construction around the world that we're supporting,"

Applied Materials has said it expects to the solar business to at least break even by 2009.

The Santa Clara, Calif., company said sales in the three months ended April 27 totaled $2.15 billion, vs. $2.51 billion at this time last year. The average analyst expectation called for sales of $2.13 billion, according to Thomson Reuters.

Applied Materials earned net income of $303 million, or 22 cents a share, during the quarter, meeting the average analyst expectation. In the second quarter of 2007, Applied Materials had net income of $411 million, or 29 cents a share.

Applied Materials, along with other chip equipment makers such as





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, have been stung by the glut of memory chips currently flooding the market. The oversupply has depressed prices for the chips, and caused chipmakers to scale back plans to expand their manufacturing capacity.

"We see 10 factories in total that have pushed out or lowered their capacity goals for their factories," Splinter said.

New orders during the fiscal second quarter decreased 3% sequentially. And Applied said it expected orders for its chip making business, which accounts for roughly 60% of the company's total revenue, to decline 40% sequentially in the current quarter.