Applied's Quarter About as Grim as Expected

The company matched analysts' less-than-rosy expectations and said orders will continue to drop.
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Updated from 6:13 p.m. EST

Semiconductor equipment manufacturer

Applied Materials

(AMAT) - Get Report

swung to a profit from a loss in the year-ago quarter. But in a reflection of the negative near-term outlook, it said orders for new equipment suffered a double-digit slide in its fiscal fourth quarter -- and bookings will see an even steeper drop-off in the quarter now underway.

The company reported net sales of $1.45 billion, down 1% sequentially but up 14% from last year's levels for the same period. Analysts were expecting revenue of $1.47 billion, according to Thomson Financial/First Call.

Net income was $147 million, or 9 cents a share, a penny above the consensus outlook. That represents a reversal from last year's net loss of $82 million, or a nickel a share. But that figure includes a benefit of about 1.6 cents related to taxes, which wasn't anticipated in the company's original guidance.

In other words, after stripping out the unexpected benefit, AMAT's earnings were actually closer to around 7.4 cents. While still a slight improvement over the prior quarter's 7-cent profit, closer examination suggests the company didn't beat the Street estimate after all. "We're splitting hairs here, but it tells you how tough a quarter it was," points out Byron Walker, an analyst at UBS Warburg, characterizing the AMAT's results and commentary as a "slight disappointment, but within the bounds of expectations."

AMAT said new orders for the quarter totaled $1.56 billion, down 12% sequentially, within the range of guidance given by the company. Many analysts had expected an even steeper drop.

But though things could have been worse, the company's bleak assessment of the near-term outlook for chips will hardly soothe investors in the sector. Given the lower-than-expected outlook for PC sales, plus plans for new capacity to come online, CFO Joseph Bronson said he expects capacity utilization at foundries to drop below 55% in the quarter underway -- a precipitous slide from the third quarter's 69% and second quarter's 74%.

"With lower visibility in overall electronics demand over the next six to nine months, we expect only moderate growth for both the chip industry and chip equipment industry," said Bronson on the conference call. "We expect order capacity in the near term to be weak as capital spending plans are deferred."

In the first quarter, AMAT expects both orders and revenues to fall off 20% sequentially. The company says it should remain profitable operationally, but will incur a small loss after taking a restructuring charge related to layoffs. Earlier this month, bowing to the steep drop-off in equipment demand, it announced a layoff of 11% of staff, which will leave it with a payroll of around 14,000.

The forecast for a 20% decline in orders is slightly worse than what some of AMAT's peers have predicted (though it's worth noting they have slightly different quarterly schedules).

KLAC-Tencor

(KLAC) - Get Report

says bookings should be flat, while

Novellus

(NVLS)

predicts orders will be flat to down 10% for its December quarter and

Lam Research

(LRCX) - Get Report

expects orders to drop 15%.

At UBS Warburg, Walker says AMAT's downward guidance could be on the aggressive side. In other words, management wants to be sure not to disappoint. "The debate will now move to exactly what orders will be -- whether they're really closer to 15% down -- and whether that's the order bottom," he says. "The bottom could occur in the December/January time frame, but it may stretch out beyond." Walker has a hold on the stock; his firm has no banking relations with AMAT.

AMAT management refused to speculate on when a bottom might be reached. "If I could answer that, I'd have a different job. I can only say what we have visibility to," said Bronson, in response to an analyst question.

But in a further bearish comment on demand, CEO James Morgan said on the call, "The environment isn't going to get easier any time soon," citing "geopolitical and macroeconomic uncertainties." "Despite rising DRAM prices and reduced inventories, we continue to wait for an inflection point," he said. "Business investment and productivity needs to accelerate before real growth can gain traction."

For the just-ended quarter, gross margin was 41.7%, compared to 37.1% a year ago. Gross margin grew 20 basis points from the last quarter. But in response to an analyst question, Bronson admitted, "With the drop in revenues, we will be hard-pressed to keep margins where they are."