Analysts lower Applied Materials estimates after Lam reports on downturn

"This is the second worst downturn, in terms of size and scale and scope, that I've had the opportunity to witness," Steve Newberry, Lam's president and CEO, says.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 10/23/2008

The effects of Lam Research Corp's less than encouraging call with analysts Wednesday are rippling through the manufacturing equipment industry, with analysts today cautioning on Applied Materials. 

"This is the second worst downturn, in terms of size and scale and scope, that I've had the opportunity to witness," Steve Newberry, Lam's president and CEO, said on the company's Q3 call with analysts Wednesday.

Newberry made the comment after the provider of wafer fabrication equipment and services reported revenue for the September quarter of $440.4 million, compared to revenue of $566.2 million for the June quarter. Lam's income for the quarter, the company's fiscal Q2 2009, was $8.9 million and was down significantly compared to income of $72.2 million in its fiscal Q1. Fiscal Q2 gross margin was $183.1 million and was also down sequentially from gross margin of $234.7 million. Lam reported that shipments for the September quarter were $345 million, down compared to $495 million during the June quarter.

"Consistent with what AMAT's [Applied Materials'] competitors have reported/commented (ie, Lam Research from last night), as well as our own commentaries from the past few months on cutbacks in foundry loading, we believe that demand at AMAT's silicon business has continued to deteriorate, something that competitors like Lam Research have characterized as 'unprecedented in 20 years,'" FBR Research Analysts Mehdi Hosseini and Rafi Hassan wrote in a research note this morning.

"We believe such dramatic changes in management's tone/guidance (only a quarter after calling a bottom in equipment bookings) reflect the sudden and unexpected drop-off in bookings and actual, material push outs in deliveries," the analysts continued.

Issues with manufacturing equipment makers' financial and product positions in the turbulent economic situation have been well acknowledged. The growing number of fab closures, sales, and cutbacks, as well as floundering equipment sales, have encouraged many analysts to state that a sustained recovery may not be possible near term for the semiconductor manufacturing equipment players and that the group will likely lag the overall technology space if and when a recovery does emerge.

Lam is being frank about the situation. Newberry further conceded in a statement on Lam's results that the company's September quarter results reflect "the challenging environment for semiconductor equipment and the worsening conditions throughout the global economy," and said that "the length and volatility of this downturn are unpredictable at this time."

FBR noted that based on historical patterns and a contrarian approach, Lam management's "capitulation" has actually been considered a positive flag. "But, given the uncertainties associated with the macro picture and the fact that the current slowdown is end-market-demand-driven (as opposed to inventory correction), we await an incremental conviction that the worst of the cycle will occur in mid calendar year 2009. To that end, despite AMAT's revenue diversification, the weakness in the silicon business is significant enough to lower the overall earnings prospects for calendar year 2009," Hosseini and Hassan said in the note.

On that, FBR lowered its price target from AMAT $25 to $16.

AMAT stock dipped in early afternoon trading to $11.40 as of 12:10pm eastern from its Wednesday close of $11.64. Applied Materials is scheduled to report on its fiscal Q2 on November 12.

Meanwhile, Lam's stock, LRCX, was up slightly in early afternoon trading. Priced at $19.22 as of 12:10pm eastern, the stock was up one cent from its Wednesday close of $19.21.