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Applied Materials Signals Sluggish Times Ahead

Chip-making equipment company sees sales and profits fall in quarter.

Updated from 4:38 p.m. EST

SAN FRANCISCO -- Citing tough business conditions in the chip industry,

Applied Materials

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offered a financial forecast for the start of its fiscal year that was below Wall Street expectations.

"We see the first part of fiscal '08 as challenging, particularly in the silicon business," said Applied Materials CEO Mike Splinter in a post-earnings conference call. "It's a dynamic environment and cautious signals form customers reflect uncertainty."

With the DRAM market in the dumps, memory chipmakers are not expected to purchase as much of the manufacturing tools and equipment offered by Applied Materials.

And third-party semiconductor manufacturers, or foundries, are also showing restraint in buying more equipment to expand capacity.

Applied Materials said revenue in the current quarter will be down 13% to 18% sequentially, suggesting a range of $1.94 billion to $2.06 billion. Analysts polled by Thomson Financial were looking for $2.31 billion in revenue.

The company forecast EPS between 16 cents and 20 cents vs. the 27 cents expected by analysts.

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Shares of Applied Materials were off as much as 5% in extended trading at one point, before bouncing back to gain 1.7%, 32 cents, at $19.13.

Despite the slow business conditions, Splinter said Applied Materials would outperform the overall market in its fiscal 2008 as it did in its recently completed fiscal 2007.

Company executives also pointed to a recovery in the flat panel display business, and said the nascent solar panel equipment business is beating the company's targets.

Applied Materials has more than $700 million in contracts in its solar power group, above the $600 million level it had estimated for this time. Most of that business won't turn into revenue until early 2009 however.

In the three months ended Oct. 28 Applied materials posted sales of $2.37 billion, the midpoint of its guidance and a hair below the average analyst expectation of $2.38 billion.

At this time last year, Applied Materials had revenue of $2.52 billion.

Applied Materials earned $422 million, or 30 cents a share, vs. $449 million, or 30 cents a share, in the year ago period.

Analysts polled by Thomson Financial were looking for EPS of 29 cents.

New orders in the fiscal fourth quarter fell 3% sequentially, within the range of flat to negative 5% orders that Applied Materials had forecast three months ago. Still, the bookings represent the first time since 2002 that Applied Materials' order book has declined at this time of year.

"We met our financial targets for the fourth quarter in a softening semiconductor and a challenging display environment," CEO Splinter said in a statement.