August 26, 2011 - Slowing foundry demand, lower utilizations and "an awful lot" of equipment reuse at 28nm, DRAM going nowhere, and debate about how long into 2011 it'll all last -- all these were top of mind among AMAT executives and industry watchers after the company released its fiscal 3Q11 (July quarter) results and commentary.

"Although we firmly believe that the fundamental growth drivers within our markets remain strong, today, we are seeing a weaker near-term outlook across all of our businesses," said president/CEO Mike Splinter, during the analyst conference call. Added CFO George Davis: "I think we'll have another down quarter for orders pretty much across the board for the company [...] it's too early to call our fiscal Q4 at the bottom." In response to the protracted industry caution, AMAT will implement "selective factory shutdowns" over the next 2-3 months, with "more broad-based shutdowns" at year's end and early 2012, noted Davis; hiring also will be limited, he added.

A quick breakdown of AMAT's 3Q11 numbers and 4Q11 (Oct. quarter) outlook:

- 3Q11 net sales: $2.79B (+2.4% Q/Q, +10.7% Y/Y)
- Net income: $476M (-2.6% Q/Q, nearly quadruple Y/Y which included lots of EES unit restructuring charges/inventory writedowns)
- Orders: $2.39B (-25% Q/Q, -12% Y/Y)
- Backlog decreased by $637M
- Gross margins improved by a full point (to 42.5%)

Breakdown by business:
- Silicon: Sales down -4% to $1.4B; orders down -28% to $1.24B, mainly due to weak foundry demand.
- Energy (i.e. solar): Sales down -12% to $563M; orders down -48% to $318M, attributed to "digestion" of purchases from the past few quarters.
- Display: Sales up +41% to $223M, orders down -14% to $220M on LCD demand softness.
- Services: Sales down -2% to $603M, orders up +2% to $613M.

For the current quarter, AMAT sees sales slipping 15%-30%, and EPS cut in half ($0.16-$0.24). By segment: Silicon sales down -20% to -35% (foundry and NAND softness), EES sales -30% (tied to pullback in 3Q11 orders), Services sales -5% to -10% (lower fab utilizations and lower 200mm spending), and display sales flat.


New orders and net sales by geography. (Source: Company Data)

What do AMAT execs think?

With back-to-school PC sales "disappointing," DRAM investments won't recover in 2H11 from early-year low levels as had been expected, and technology upgrades (vs. capacity purchases) should now be sufficient to meet projected need of 40%-50% DRAM bit growth this year (above 50% would likely drive new capacity purchases), Splinter said. DRAM spending is still "well below $5 billion for the year, which is as low a level as I can remember." NAND, meanwhile, "is the one market that is really staying quite strong," Splinter said -- Davis clarified that NAND sales and orders will be down in 4Q11 but that "there is a much more confident tone around the customer base in terms of spending plans for the next year."

Smartphone growth has been strong in recent weeks and tablet sales are on track for 65M units, but these won't be enough to offset slowing PC demand and overall weak consumer electronics -- which is causing foundries to be tentative. "We've seen demand from our foundry customers soften significantly in the past 6 weeks as low utilization at the trailing nodes leads them to reuse capacity at advanced nodes." In the confereence call, he clarified the utilization dropoff at ~3%, into the "high 80s," and mostly affected at the 65nm node. Later in the call he noted that customers are reusing "an awful lot of equipment" at 28nm thanks to 65nm underutilization, but the leading-edge customers (20-14nm) aren't slowing down. (And what hurts the silicon group -- lower utilization rates and fewer wafer starts -- helps AMAT's services arm, which has "another strong quarter" helped by 200mm equipment biz.)

Altogether, AMAT now sees 2011 WFE spending at $29B-$32B, or about $1B lower than it thought just six weeks ago at SEMICON West. (To be fair, a lot's happened on the global macroeconomic stage since then). "We currently see at least two quarters of softness in wafer fab equipment," he said, though expressed optimism that cleanroom capacity is sitting around waiting for a turnaround in consumer spending.

Despite the current soft market, Splinter still thinks we're in a "pretty healthy" environment -- he likened it to 2005, where there was two down quarters followed a recovery.

Specifically addressing AMAT's solar business (EES), solar panel demand "is accelerating," Splinter said, with maybe two-thirds of projected 19GW-22GW in worldwide installations likely to happen in 2H11. Splinter noted relentlessly low module prices, and hope that China's new FiT will generate "two or three gigawatts of demand next year," which would spur "a turnaround in capital additions, especially by the major Chinese solar manufacturers."

What do Wall Street watchers think?

- No big surprises. Citi's Tim Arcuri says revenue guidance for fiscal 4Q11 (Oct. quarter) is generally in-line with peers, and EPS is maybe a little better than expected. Barclays' CJ Muse agreed that the lower numbers for both the July and Oct. quarters were "largely expected."

- Don't wait for DRAM. That 40%-50% bit growth (and 50% trigger for capacity expansions) won't happen soon... if ever. "“We believe that the DRAM market is likely permanently impaired as PC unit growth falls and content per PC stagnates," writes Gus Richard from Piper Jaffray. The historic pattern of DRAM content/box going up as prices fall hasn't happened this time, and going forward bit growth will sink to 20%-30%. "We can find no compelling reason to assume that DRAM capital spending will accelerate over the next couple of years," he writes.

- Maybe some hidden optimism? Despite near-term caution with lingering macro concerns, "under the sheets our checks indicate some brewing optimism around CQ4 orders for both some NAND expansion in Korea and, now, some renewed hope in a foundry turnaround," Arcuri writes.

Not everyone feels the love, though. Speaking particularly about the solar sector, "we think the industry is likely to see declining volume shipments next year as subsidies in Germany and Italy are reduced," wrote JP Morgan's Christopher Blansett.

- Extra softness now means extra strength later. Arcuri puts WFE runrate at $21B-$22B/year, which he emphasizes is only $5-$6B above maintenance levels. That's so clearly troughed and unsustainable, that if it drags on very long we're in for a "very severe" snapback in orders. Goldman Sachs' Jim Covello also sees a possible "spike back up in any one quarter" for semicap orders. (Not everyone buys into this, though: Susquehanna analyst Mehdi Hosseini thinks the current downturn will extend "through the first half of next year," and "it's not going to be a snapback." And assuming we're in a "multiquarter correction," Covello suggests what's best is a "prolonged period" of below-average order shipments in response to 2H10/1H11's exuberance among foundries and logic.)