AMAT: Memory holding up until foundry activity recovers

February 14, 2007 – Applied Materials Inc. delivered fiscal 1Q07 results that were down sequentially as expected. But an anticipated recovery by the foundry sector and sustained strength in NAND flash could help the company exceed overall projected industry capex growth, executives said in a conference call discussing the numbers.

Applied posted a $403 million profit in its fiscal 1Q07 on sales of $2.28 billion, both down 10% from the prior quarter, helped by strong demand from DRAM customers but hurt by a punishing 81% dropoff in orders for flat-panel equipment. New orders overall were down 6% from fiscal 4Q. The company’s silicon, display and fab solutions segments all reported quarter-over-quarter revenue declines, led by a >20% reduction in the display segment. Compared with a year ago, though, the numbers looked rosier: 23% higher sales and 24% growth in orders, and nearly triple the profits. Company CFO George Davis noted that “certain display and silicon customers pushed out shipment dates beyond our 12-month booking window,” but that only involved “about $25 million in cancellations,” split between the silicon business and fab solutions segment.

For its fiscal 2Q07, Applied projects orders to be up 2%-7%, with revenues flat to up 5%, and EPS also flat at $0.27-$0.28, not including costs absorbed as a result of shutting down its beamline implant business.

Orders in the company’s fab solutions segment rose 10% Q-Q to a record $686 million, driven by costumer renewals of annual service contracts, noted Davis in the conference call. That only partially offset an 81% dive in display equipment orders, to $288 million, with sales down 22% to $230 million as LCD panel makers continue to digest capacity added in 2006 and push out future capacity expansion plans due to excess inventory levels. “We do expect orders to be up slightly in Q2 with a more full recovery in orders by 3Q and in revenues by 4Q,” added president/CEO Splinter, projecting that the business would probably do better than an anticipated 25% slide for the entire display equipment market in 2007.

Splinter noted that memory orders continue to drive the company’s business, and projected this to “remain relatively strong and balanced” through the year. He also expects NAND flash customer demand to be more backend loaded with growth in 2H07, counting on “a few very big flash projects” from the top three big flash providers. Foundries, for now, “continue to hold back on capital investment and are very much in the bottom of the trough,” contributing only 11% of the company’s 1Q07 bookings vs. 16% in 4Q — “I don’t think it can get a whole lot lower,” he said. Foundry activity should strengthen again in 3Q07 with the beginning of high-volume production of 65nm RAMs, and product migrations to 65nm from firms including Qualcomm and Broadcom, he noted.

Analysts listening to the conference call picked up on Splinter’s optimism for memory investments, particularly the suggestion that NAND growth would be more backend-loaded into 2H07, and wondered how memory could remain strong across both sectors at this point with memory prices taking a bath in the first two months of 2007. “The way we see our revenue playing out here in our delivery discussions with [memory customers], we think that over the year, it’s going to be pretty balanced,” said Davis.

Splinter projected that Applied’s sales growth in fiscal 2007 will be better than the expected 6% for wafer-fab equipment spending, due in large part to share gains in the memory market (which is likely to contribute half of all WFE spending this year). “I don’t want to use the word dismal, but maybe it’s the best description” regarding the company’s 2005 memory market share, Splinter said, and Applied has made progress with both DRAM and especially NAND flash customers. Plus, having “maintained and even strengthened our position with the foundries a bit,” particularly with the IBM Common Platform Alliance members, TSMC, UMC, and SMIC, “if they come back in the second half of the year in a way we expect, it should be very positive for us.”

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