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Flat-Panel Pain Hits Applied

The stock drops more than 2% in early trading.

Applied Materials'

(AMAT) - Get Applied Materials, Inc. Report

profit surged 81% in its fiscal fourth quarter, but the results came up short of Wall Street expectations.

Because of that, the stock was dropping 2.4% to $18.29 in premarket trading Thursday.

And in a subsequent conference call with analysts, the world's No. 1 vendor of chipmaking equipment said its fiscal 2007 year would get off to a slow start.

CFO George Davis singled out flat-panel-display manufacturing as the prime culprit for the slowdown. According to Davis, orders from flat-panel makers will decline $200 million sequentially in the fiscal first quarter.

Meanwhile, orders for semiconductor-making equipment will be driven by memory makers, as logic vendors and contract chip manufacturers, or foundries, hold off on capital spending.

Even so, executives said they expect 2007 to be a year of positive growth, suggesting that the chip-equipment industry may be experiencing more of a hiccup than a full-fledged downturn.

The company said sales for the three months ended Oct. 29 totaled $2.54 billion, down 1% sequentially, but up 47% from this time last year.

Applied posted $449 million in net income, or 30 cents a share, compared with $247 million in net income, or 15 cents a share, in the year-ago period.

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The company was a penny shy of Wall Street earnings expectations, which called for EPS of 31 cents on sales of $2.55 billion.

On the heels of a string of acquisitions, Applied said it had reorganized its internal financial reporting structure during the quarter, dividing the company into four main businesses: chipmaking equipment, semiconductor-factory services, flat-panel-display-making tools and "adjacent technologies" -- a category that includes Applied's nascent solar-cell business.

Applied spent $2.64 billion to repurchase 154 million shares of stock during the quarter, reducing outstanding shares by 10%. The company said it would not repurchase any shares during the current quarter, but will resume its stock repurchasing in Q2.

Orders in the fourth quarter were $2.69 billion, up 1% sequentially. Applied had projected that orders would be flat, plus or minus 2%, from the third quarter. DRAM and flash-memory orders accounted for 53% of the bookings in the quarter.

Executives said that ratio was not likely to change anytime soon, given industry conditions. CEO Mike Splinter said the chip industry was experiencing separate trends, with the foundry and logic companies in a downturn and memory makers increasing investment in response to fast bit growth.

And while some analysts questioned the industry's increasing investments in flash-memory chip-manufacturing capacity, Splinter said he was not overly concerned about it. "The key here is, do the

new flash applications and do the bit growth continue?" he asked. "So far they have, and excess demand has been able to be absorbed by pricing declines."

Splinter said he expects Applied's silicon business to grow by more than 10% in fiscal 2007, outpacing the broader industry.

But executives warned of a "modest pullback" among customers in the current quarter.

Applied projected that sales will decline 5% to 10% sequentially in its fiscal first quarter. That suggests a revenue range of $2.41 billion to $2.28 billion, below the average analyst expectation of $2.46 billion.

Applied pegged EPS between 26 cents and 27 cents, including 3 cents in stock-compensation and acquisition-related charges. Analysts were looking for 29 cents a share, although it was unclear whether that included any of the charges.