Top chip gear maker Applied Materials Inc slashed its full year targets due to a sudden drop in orders in its biggest market towards the end of the current quarter, underscoring fears of a downturn in global technology spending.
The company, which generates over half of its total revenue from its Silicon Systems Group business - the unit that caters to chipmakers and foundries - was hit by an extraordinary cutback in orders amid weak spending and floundering PC sales.
"Even though we anticipated there would be some seasonal pullback, we really didn't expect anything on the order of magnitude," Chief Financial Officer George Davis said on Tuesday at industry conference Semicon in San Francisco.
"I would say clearly the macro environment has been far more difficult this year, so the seasonality relative to last year is stronger."
Chief Executive Mike Splinter said foundry operators - including manufacturers such as TSMC that make chips under contract for many companies, as well as industry bellwethers such as Intel Corp that fabricate their own chips - pulled back towards the end of the third quarter.
Davis said the company has seen as much as a $500 million pullback in orders since the beginning of June by foundry customers who build chips for other companies, as chipmakers delay spending in a weak economy. And the worst may be yet to come.
Splinter said most of the shift in full year outlook is due to the expected slowdown in the next quarter.
The company said full-year profitability would be down by about 15 cents to 20 cents per share, compared with previous estimates.
As a result, it said it will not meet its targets of full-year net sales of $9.1 billion to $9.5 billion or adjusted profits of 85 cents to 95 cents per share.
Nevertheless, Splinter expressed confidence about the coming year.
"Our view of 2013 is still quite positive," he said.
Applied Materials said it will provide a more detailed outlook on August 15 when it reports on its third quarter.
Investors often look to Applied Materials and other suppliers of semiconductor manufacturing equipment as early indicators for global microchip demand, because they supply the machines that Intel, Samsung Electronics and other chipmakers need to expand capacity.
The warning came less than two months after it assured investors that sales of 28 nanometer chips, for which Applied Materials provides manufacturing equipment, reflected increased demand after a prolonged slowdown.
Twenty-eight nanometer chips have transistor features measuring 28 nanometers, or billionths of a meter, and are critical for the small but fast chips used in cellphones and tablets.
Randhir Thakur, executive vice president and general manager of Applied's Silicon Systems Group, conceded there were operational and factory issues with 28 nanometer chips, but promised better times.
"As those (issues) get resolved, we hear that the peak and best days of 28 nanometers are still ahead," he said.
Applied Materials' update followed chipmaker Advanced Micro Devices Inc, which cut its outlook on Monday, citing weaker-than-expected sales in China, Europe and weak demand.
Qlik Technologies Inc and Informatica Corp also issued forecasts far below market estimates - an early indication of potentially weak earnings from tech companies this earnings season.
Analysts said the warnings do not come as a total surprise in light of the continued European financial crisis, an ongoing decline in personal computer sales and warnings from other companies.
Manesh Sanganeria, an analyst at RBC Capital Markets, noted that rival Tokyo Electron Ltd said in June that orders were 28 percent below expectations.
"It's not specific to Applied Materials," Sanganeria said. "PCs have been weak and Europe has been weak. Since the overall demand has gone down they're adjusting."
Ben Pang, an analyst at Caris and Co, said spending plans at larger companies such as Intel Corp, Samsung Electronics Co Ltd and TSMC were still intact.
"The market share leaders (in foundries) are probably okay. But the market share laggards are having more difficulty right now," Pang said. "It's pretty clear that a company like Intel - which announced the ASML investment yesterday - has a long-term plan on how they want to build capacity."
Dutch chip equipment maker ASML Holding NV said on Monday it had signed up Intel to bankroll its research into costly next-generation chip making technology.
"But some of the smaller companies - the ones which plan for more short-term demand - are the ones cutting down spending," Pang added.
Applied Materials also expects third-quarter revenue at the low end of its previously projected range. It had forecast third-quarter net sales would be flat to down 10 percent sequentially.
The company forecast adjusted profit in the lower half of its previous outlook of 21 cents to 29 cents per share.
Applied Material shares close down 2.7 percent at $10.71 after touching a low of $10.40 on the Nasdaq. Advanced Micro closed down 11 percent at $4.99, while Intel was 2.3 percent lower at $25.56.
(Reporting by Himank Sharma in Bangalore, Nicola Leske and Sinead Carew in New York; editing by Joyjeet Das, Jeffrey Benkoe and Andre Grenon)