Applied sees recovery but can't quite touch it yet

Applied sees recovery but can't quite touch it yet
The semiconductor equipment market seems to be stuck in a state of suspended animation. Most major chip makers have qualified next-generation production lines and processes, but CEOs are letting purchase orders sit on their desks until its completely clear that economic conditions and end-equipment demand are fully recovering, said the chairman and chief executive officer of Applied Materials Inc.

"The outlook has been the same for the past quarter or so," observed James C. Morgan during a conference call with analysts after Applied posted 21% sequential drop in sales during its last fiscal quarter but better-than-expected bookings in the current downturn. Applied recorded a net loss of $45 million on net sales of just $1.0 billion in the fiscal first quarter, ended Jan. 27 (see Feb. 12 story).

The world's largest supplier of semiconductor production tools now expects its bookings in the current fiscal quarter to sequentially grow 10-to-15% from $1.12 billion in the just-ended period. Applied's orders were up slightly from $1.10 billion in the prior quarter, marking the first sequential increase in bookings in four quarters, said Joseph R. Bronson, executive vice president and chief financial officer at the Santa Clara, Calif.-based company.

While Tuesday's conference call was upbeat, it was also covered with caution. Morgan told analysts that Applied was encouraged by a number of factors--including an increase in U.S. consumer confidence, rising DRAM prices, shrinking chip inventories, and extremely tight capacity in 0.15-micron and below process technologies--but he said it would still take a couple of quarters before it was clear that key semiconductor applications were in a sustainable recovery.

As a result of the uncertainty, Applied is now predicting that semiconductor capital spending will drop another 25% in 2002, and investments in wafer processing equipment will slip 20% this year.

"There is a lot of identified business in the leading-edge technologies," Morgan said, while fielding questions about new tool orders. "The customers--at the working level--are all determined and their plans are approved, but it is hard to get he CEOs to sign the purchase orders.

"The business you can see but you don't know exactly when it is going to come in, but what you do see is that the capacity in the 0.13-micron types of nodes is very small--about 5% of the world's capacity--and it is fully utilized from all practical purposes," Morgan added.

Applied's bookings in the fiscal first quarter were higher than expected partly because of tool orders from China. Last fall, Applied announced a $200 million order from silicon-foundry startup Grace Semiconductor Manufacturing Corp. in Shanghai on the day it also opened its new 90,000-square-foot technical training facility in the city (see Oct. 18 story).

Shipments of production tools are expected to begin as early as the company's fiscal third quarter of 2002 with the bulk of deliveries in the final quarter of the fiscal year, which ends in October. "We have been shipping products into the first phase of one of those Shanghai foundry fabs already," Bronson said, referring to the aggressive crop of startups in China.

But when will Applied's revenues bounce back up to the $3 billion range per quarter--as it was before the current downturn? That mostly likely won't happen until capacity "buys" start up again. As a rule of thumb, capacity tool purchases for volume production require a fab utilization rate at or above 80%, and most estimates now place the industry at around 60%.

Applied's attention, however, is mostly on bookings. "We would just like to get increased bookings first," said Morgan. In fact, Applied would not issue a specific guidance on revenues in the current fiscal quarter other than to say the company expects $1.0 billion or slightly higher sales in the period ending in late April.

"I don't see anything particularly different about this pending upturn, except that there has been a bigger technical shift than I've seen before," said Morgan, referring to a wide range of material and process changes at the next-generation node. "It probably has been a more extended period of time as far as the technology transition... We sort of miss 0.15-micron node and we are trying to get below 0.13-micron. So that is a big shift," he said, adding that the trends are placing more pressure on chip makers to upgrade fabs as soon as they are sure about the business.

"The difficulty they have had is getting their profitability up so they feel they can invest, but the pressure is clearly on," Morgan said.