Applied Materials warns of weak quarter, stock down

SAN FRANCISCO Tue May 24, 2011 6:55pm EDT

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SAN FRANCISCO (Reuters) - Applied Materials Inc (AMAT.O) forecast weak quarterly revenue, saying concerns about a tough economy have led chipmakers to delay spending to expand capacity, pushing down the company's shares.

Following Japan's earthquake and tsunami on March 11, investors have worried that robust chip equipment spending could slow despite soaring sales of Apple Inc's (AAPL.O) iPhones, iPads and a slew of competing mobile gadgets.

"We're seeing some pushouts," said RBC analyst Mahesh Sanganeria. "We're probably a bit ahead on capacity. We've had eight quarters of strong growth."

Applied Materials' stock fell 1.9 percent after hours, even though the world's top supplier of semiconductor manufacturing equipment beat expectations on its second-quarter results.

Chief Financial Officer George Davis warned analysts on a conference call that Applied Materials may not achieve its annual fiscal forecast of over $11 billion in revenue if its customers don't see signs of stronger consumer demand. Executives pointed to higher fuel costs and inflation in emerging markets.

"Achieving this outcome will depend on our customers seeing evidence of strengthening consumer demand over the next few months," Davis said of the annual revenue forecast.

Shares of chip equipment suppliers are trading at cheap multiples relative to many other technology companies, with Applied Materials at 9.3 times expected annual earnings, KLA-Tencor (KLAC.O) at 9.1, Lam Research (LRCX.O) at 9.0 and Novellus Systems NVLS.O at 10.2.

Some investors believe that chip companies may be spending too quickly on manufacturing expansion and could find themselves slashing capital expenditures next year.

Others say soaring growth in tablets and smartphones, along with healthy personal computer demand in emerging markets, justifies the additional capex and will fuel more investment next year.

"It comes down to whether or not you believe these pushouts are just one to two quarter pushouts or if they're going to ultimately be cancellations," said D.A. Davidson analyst Thomas Diffely, who recommends buying Applied Materials' stock.

Intel Corp (INTC.O), rushing to catch up in the mobile market where it so far has failed to find a foothold, has doubled its capital expenditure budget this year.

Taiwan's TSMC (2330.TW), the world's biggest contract chipmaker, has announced record capital expenditures for 2011 but its quarterly profits are declining as its customers' inventories accumulate.

LONG-TERM GROWTH

Underscoring its expectation that the industry is set for long-term growth, Applied Materials this month said it would buy Varian Semiconductor Equipment Associates VSEA.O for $4.9 billion to shore up its lead in the market for chip-making gear.

Applied Materials said it expects revenue in the fiscal third quarter to be down 3 percent to 10 percent sequentially, implying revenue of $2.574 billion to $2.774 billion.

Revenue in the fiscal second quarter was $2.86 billion.

Analysts on average forecast revenue of $2.766 billion for the second quarter and $2.789 billion for the current third quarter.

Applied Materials said net profit, excluding items, in the second quarter was $501 million, or 38 cents a share, compared with $292 million, or 22 cents, in the year-ago quarter.

Analysts on average had expected revenue of $2.77 billion in the second quarter ended May 1, according to Thomson Reuters I/B/E/S.

The company had been expected to post net profit of 37 cents a share in the second quarter.

Shares of Applied Materials fell 1.9 percent to $13.45 in extended trade after closing down 0.58 percent.

(Reporting by Noel Randewich; Editing by Richard Chang)

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