Applied cuts 1,800 jobs as capital equipment industry preps for harsh 2009

Analysts suggest utilization rates at logic and foundry-type customers could drop well below 70% in the first half of 2009 and even visit the lows of 2002, causing semiconductor capex to decline by as much as 30%, if not more, in the coming year.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 11/13/2008

As analysts suggest the capital equipment market could face a bleak 2009, Applied Materials Inc released plans for a 12% workforce reduction as it reported fiscal Q4 and 2008 revenues down substantially on a year-over-year basis Wednesday afternoon.

Q4 sales were $2.04 billion, down from $2.37 billion for the year-ago quarter, and up from $1.85 billion in the company's fiscal Q3. Gross margin was 39.1%, down from 45.5% for Q4 fiscal 2007, and down from 40.2% for Q3. Income was $231 million, down from income of $422 million for the year-ago quarter, and up from income of $165 million for Q3.

Applied's Q4 new orders of $2.21 billion were comparable to Q4 2007, and increased from $2.03 billion for Q3, Applied reported. Backlog at the end of the quarter was $4.85 billion, up from $4.74 billion at the end of Q3 and up from $3.65 billion at the end of Q4 2007.

For the full fiscal year, Applied reported 2008 sales of $8.13 billion, down from $9.73 billion for fiscal 2007. Gross margin was 42.4%, down from 46.1% for 2007. Income for fiscal 2008 was $961 million, down from net income of $1.71 billion for 2007. New orders of $9.16 billion for 2008 decreased from $9.68 billion for 2007.

Applied noted strength in its display business and its expansions in the solar market. For the year ended October 28, Applied saw its display business' sales climb to $976 million from $705 million in fiscal 2007. 2008 new orders for the unit increased from 2007's $273 million to $1.48 billion. The just-closed year also saw Applied's first SunFab thin film solar line begin volume production.

However, Applied's silicon business saw new orders of $4 billion decline for the year, down from 2007's $6.65 billion. 2008 sales for the unit were just more than $4 billion compared to 2007's $6.51 billion. Applied's global services unit saw 2008 new orders of $2.24 billion compare to 2007's $2.5 billion. Full-year sales for the business also declined to $2.32 billion from 2007's $2.35 billion.

“As Applied moves into fiscal 2009, we will implement further cost-reduction actions due to declining market conditions, and we will invest in strategic priorities,” said Mike Splinter, president and CEO, in a statement Wednesday.

As such, Applied reported it will implement a restructuring program beginning in the first quarter of fiscal 2009, ending in January. The program is expected to drive annualized cost savings of approximately $400 million and will see the company cut approximately 1,800 positions by the end of fiscal 2009 through a combination of attrition, voluntary separation, and other workforce reduction programs.

Analysts had suggested in October that Applied would feel the impact of cutbacks in foundry loading and that demand at the company's silicon business was continuing to deteriorate. Indeed, 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.

"We believe utilization rates at logic and foundry-type customers could drop well below 70% in [the first half of 2009] and even visit the lows of 2002, causing semiconductor capex to decline by as much as 30%, if not more, in CY09 [calendar year 2009], following a 25% decline in CY08 [calendar year 2008]," FBR Capital Markets Analysts Mehdi Hosseini and Rafi Hassan said in a research note this morning. "Falling utilization rates are also not so good for AMAT's global services group, as this unit's business model is directly driven by fab utilization rates."

The two analysts pointed out that many of Applied's Q4 numbers beat FBR estimates, but said the company's new guidance implies that overall bookings and revenues will decline by 30% or more in its January quarter.

"After revising our estimates, we now expect silicon business revenues (40% to 45% of total in CY08) to decline by 47% in CY08 and by 31% in CY09 (accounting for 35% to 40% of total revenues in CY09); display (8% to 10% of total in CY09) declines by 62% in CY09, services (or fab solutions, accounting for 20% of total) declines by 30% in CY09, and solar (accounting for 15% in CY08 but 30%-plus in CY09) increases by more than 80% in CY09," Hosseini and Hassan said.

Adding to that, Bill Ong, a semiconductor market analyst at AmTech Research, said: "Guidance is clearly dismal with Q1 break-even risk not seen since Q1 fiscal year 2003 and Q1 fiscal year 1991. We would note that unless macroeconomics takes another staircase drop, [Applied] would cut cost and implement shut-downs to avoid earnings per share losses.

"We believe peak-to-trough semi orders are now at historic record levels of down 64% (excluding the Internet bust) and at baseline spending levels for the industry. [Applied] has $2 billion in net cash, has stopped share re-purchase to preserve cash and a dividend yield of 6% with a six-year low on the stock. The stock could mark a bottom and when the fog of uncertainty lifts, we believe the stock will be higher."

Ong reiterate AmTech Research's "buy" rating on AMAT, Applied Materials' stock. AMAT was trading at $10.40 as of 11am eastern today. The stock closed at $9.95 on Wednesday, marking a new 52-week low.