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Weak Forecast Knocks Applied Materials

The company sees sales down 5% to 10% sequentially.

Updated from 4:31 p.m. EDT

SAN FRANCISCO --

Applied Materials

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outpaced Wall Street's third-quarter profit expectations, but traders focused on the company's forecast of a spending slowdown for chipmaking equipment by third-party chip manufacturers and memory-chip firms.

"Overall, our view is that equipment spending will be slightly lower in the second half of year, primarily do to foundries," said CEO Mike Splinter in a postearnings conference call, referring to the third-party chip manufacturers.

While manufacturing capacity is running low at foundries, the companies are not investing in new chipmaking equipment, Splinter said. Most importantly, the foundries are holding off on investing in advanced tools that crank out chips with tiny, 65-nanometer circuits.

Shares of Santa Clara, Calif.-based Applied Materials slipped 3.5%, or 74 cents, to $20.50 in extended trading Tuesday.

Applied Materials said sales for its fourth fiscal quarter would decline 5% to 10% sequentially, suggesting a range of $2.31 billion to $2.43 billion, compared with the $2.46 billion expected by analysts. Earnings guidance also was weaker-than-expected, with Applied Materials projecting 26 cents to 29 cents vs. the Street's 30-cent estimate.

Applied Materials also said that orders in the current quarter will be flat to down 5% sequentially. That would mark the first time Applied Materials booked negative orders in its fiscal fourth quarter since 2002.

Spending on equipment to make computer memory chips, which has been particularly strong in the first half of the year, will cool off in the third and fourth quarters, according to Applied Materials.

Despite the memory slowdown, Splinter said he was confident that companies would continue to invest in manufacturing equipment as demand for memory in electronic devices continues to grow.

"In the memory market, bit growth is well ahead of expectations, and despite dramatic price reductions in NAND flash and DRAM during the first half of the year, customers still have the confidence to invest in advanced capacity," said Splinter.

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He pointed to the increased adoption of NAND flash chips in products such as

Apple's

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iPhone and in PC hard drives, as well as to the forthcoming pick-up in DRAM demand thanks to

Microsoft's

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memory-hungry Vista operating system as key demand drivers going forward.

Applied Materials shares have risen about 16% since the beginning of the year, hitting a 52-week high of $23 earlier this month.

In the recently ended fiscal third quarter, Applied Materials reported total revenue of $2.56 billion, slightly ahead of the average analyst expectation of $2.53 billion. At this time last year, Applied Materials had sales of $2.54 billion.

Net income slipped to $473.5 million from $512 million at this time a year ago.

Earnings, however, increased to 34 cents a share, from 33 cents last year. And Applied Materials beat Wall Street's EPS expectations by 2 cents.

The company's third-quarter gross margin was 47.5%, compared with the 44.9% level in the second quarter.

Applied Materials added three contracts in its nascent thin film solar production business. And the company raised its projections for initial contracts in the group from $400 million to $600 million.