Applied sees slower growth in 2001, but says 300-mm will become new driver

Applied sees slower growth in 2001, but says 300-mm will become new driver
SANTA CLARA, Calif. -- Applied Materials Inc. here has lowered growth projections for overall chip industry capital spending in 2001 to about 20% from its previous forecast of 30%, but the company expects its own revenues to outpace the rest of the market as device makers finally begin to increase spending on 300-mm wafer fabs.

"We have no 300-mm projects shifting out," said Joseph R. Bronson, senior vice president and chief financial officer at Applied Materials, during a conference call with financial analysts on Wednesday afternoon. "If anything, customers want 300-mm products faster," he added during the question-and-answer session following Applied's release of record results in its fiscal fourth quarter.

Applied Materials on Wednesday posted net sales of $2.9 billion for the fiscal quarter, ended Oct. 29, and a net income of $664 million--both revenues and earnings were records. Sales were up 7% sequentially from $2.73 billion in Applied's third fiscal quarter, and 81% higher than $1.61 billion in the period last year. New orders in the fiscal fourth quarter also hit a record $3.6 billion, which was 10% higher than $3.28 billion in the previous three-month period (see Nov. 15 story.

But Applied's top managers were cautious in talking about the outlook for business in the current fiscal quarter, which ends in late February, as well as overall market conditions for 2001. Chief financial officer Bronson and CEO James C. Morgan both hedged their responses to analysts' questions about the overall outlook for wafer fab spending next year. They were particularly careful in making predictions about the fickle DRAM segment, which continues to be plagued with price erosion despite projections of shortages. Question also exist about the now-booming silicon foundry business, which is likely to slowdown because of inventory adjustments and slipping profits in key telecommunications applications,they suggested.

Bronson issued what he admitted was a cautious guidance for Applied's revenues and earnings in the current first fiscal quarter. He said the "official guidance" for the quarter was sales in the $2.9 billion-to-$2.95 billion range and earnings-per-share between $0.75 to $0.78--essentially flat with the just-ended quarter. The CFO also said Applied's book-to-bill ratio in the current fiscal quarter would likely come in at slightly more than 1.1--causing some analysts to predict at least a 10% sequential decline in tool orders during the period from Applied's record bookings in the fourth fiscal quarter.

"I think it is clear that the impact of the telecommunications segment has slowed Taiwan and that part of the world," said Bronson, who added that Applied expects to see a revenue increase in the region due to new 300-mm investments being made by foundry rivals Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) and United Microelectronics Corp. (UMC). He said the current projects for a relatively flat fiscal first quarter was a guidance "floor," which could be below the actual results.

"I think it is a time to be careful and cautious. And we want to be able to put something up that we think we can do," he admitted.

But Applied remains extremely confident in the 300-mm wafer movement, which has been delayed since the late 1990s by an industry recession and chip makers' use of lithography to shrink devices on current 200-mm substrates. Applied's managers predicted that about $6-to-8 billion of next year's wafer fab systems will be 300-mm tools worldwide, and officials did not dispute one analyst's estimate that the company would probably pull in about $1.8-to-$2.5 billion in 300-mm revenues in 2001. Some estimates for worldwide wafer fab tools have placed industry revenues at around $37 billion to $39 billion in 2001,.

Applied's 300-mm revenues in the just-ended fiscal fourth quarter was just about "nil," said Bronson, in response to one analyst's question. Earlier this year, Applied Materials decided not to recognize 300-mm shipments in revenues while customers continued their evaluations of tool sets (see Aug. 11 story).

Bronson said 300-mm tools represented a little less than 10% of Applied's $3.6 billion orders in the fiscal fourth quarter. And Applied chairman and CEO Morgan said the company now has 22 systems capable of processing 300-mm (12-inch) diameter wafers in over 90 fab applications.

Applied's 300-mm revenues will slowly begin to take off in the current fiscal quarter. "Revenues for 300-mm in Q1 will not be that much, probably less than $100 million," Bronson told analysts. But Applied Materials sees 300-mm becoming the main driver for capital equipment sales later in 2001.

"I believe the strongest portion of growth, we can see next year, is significant growth in 300-mm because we have done the $6-to-8 billion numbers in projections a number of different ways. We think copper and materials--low-k dielectrics-will also increase," said the CFO. He said Applied Materials was confident that those projections will be reached because they are based on input from the top semiconductor companies.

"We are well engaged with them and cane see the commitments," Bronson assured the Wall Street analysts.

But Applied remains cautious about nearly all other aspects of semiconductor capital spending next year for a variety of reasons, including the undecided U.S. presidential election, the world's economic growth outlook, the still-troubled DRAM segment, and slowing in demand for telecommunications ICs.

Applied's lower estimate for 20% growth in capital spending is partly based on the Semiconductor Industry Association's new consensus forecast, which calls for a 22% increase in chip sales worldwide to $249 billion (see Nov. 1 story). Applied officials estimated that semiconductor capital spending will end up growing 78% this year over 1999. Industry analysts have predicted that capital spending will most likely reach $55 billion to $59 billion this year.

Chief executive Morgan told analysts that he believes the industry is now being driven by two main factors--one being new technologies in the fabs, such as 300-mm and copper processing, and the other being the need for extra capacity. "You have a two-pronged driver encouraging them to step up to the plate and participate in investments," said Applied's chief executive.

However, some segments will still have to overcome hurdles to make those investments. In DRAMs, for example, chip makers are still holding back until they see stronger profits and the awaited rise in average selling prices. In South Korea, the problem has been securing financing for new fab investments, Bronson noted.

"We have moved out our projections for DRAM shortages towards the second half of '01," he said. For more than a year, industry analysts had predicted shortages of DRAMs would hit the market in the second half of 2000, but that has not materialized partly because of inventory adjustments and slower-than-expected PC sales.

During the telephone conference on Wednesday, financial analysts expressed concerns about Taiwan's capital spending--one of the hot spots in the industry during the past 18 months.

"There is no question that there is some easing because the slower demand for telecommunications and earnings shortfalls. That is going to have some near-term impact on the backlogs of Taiwan companies," Bronson cautioned. "My sense is that their rate of capital spending will slow a bit but it still looks sequentially up for us because of the technology investments they are making in 300-mm.... Going forward, it depends upon how these economic scenarios play out," he added.