Applied Materials makes capital equipment, which is equipment used to manufacturer further equipment or goods. In Applied Materials' case it manufactures the machines used to make semiconductors and related electronic equipment. It has four major segments: semiconductor; display; solar; and services.
Capital equipment can be a bad place to be in a down cycle. With demand slack, manufacturers don't need to expand their capacity. Even after the macroeconomic cycle has hit bottom it may take months or years for capacity to become constrained enough to force businesses to make significant investments in new capital equipment.
Each type of capital equipment, however, has its own quirks. The main quirk to be aware of in the semiconductor industry is that the expansion of capabilities of logic and memory chips is dependent on ever-shriking circuit elements. In the industry the vocabulary is in "process technologies" measured in nanometers (nm). For instance, not that long ago the cutting edge was 90 nm; today it is 45 nm; 33 nm is expected shortly.
So while the 2008-2009 recession left manufacturers with plenty of capacity, much of it is now the wrong capacity. For a specific NAND (Flash) memory chip, for instance, the oldest manufacturing capacity may no longer cost effective because the prices for the chips have dropped so dramatically. To keep up to pace, smaller process technologies must be used.
While semiconductor making equipment sales dropped sharply for AMAT during the recession, they did not drop to zero. Part of this was because orders had been made long in advance. Partly it was because some confident, well-funded manuacturers continued to buy the newest equipment in order to be set to have better profit margins than competitors.
When will the need for new equipment compensate for the decreased overall end demand? It has not happened yet. For Q2, semiconductor segment revenue ramped from Q1 to $498 million, but was down 34% from $756 million in Q2 2008, which itself was a soft quarter. Management said orders picked up significantly in the June.
The most likely scenario is that 2010 will be a good year for Applied Materials. Between the ongoing shift to smaller process technologies and the shift in computer memory to DDR3, a lot of new equipment is going to be required. Whether the ramp up will be strong in the second half of 2009, however, is an open question.
Applied Materials has also invested heavily to develop technologies for manufacturing solar cells. Several solar cell factories are now operating that use Applied equipment. Financing restraints have cut back planned equipment purchases, but this is likely to be a temporary effect. When the global economy revives and oil prices start heading up again, there will be another rush to solar. This time Applied Materials will be ready with perfected manufacturing processes.
In display, which is flat panel displays, demand in the China market is breathing life back into the market. There was plentiful capacity in mid 2008, so most manufacturers paused their equipment purchases. Now, while prices are still low, unit sales globally have ramped to the point that factories are nearing their capacity constraints. So expect new equipment orders, especially in 2010.
Applied Materials did a pretty good job cutting back on expenses during the difficult times. As a result, in Q2 GAAP its GAAP loss was $55 million, but cash flow from operations was $194 million.
Applied Materials is predicting to at least break even on a GAAP basis in Q3.
The usual business risks from competition and shifting demand patterns remain present.
So keep diversified!
Applied Materials main page
Applied Materials Investor Relations page
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Showing posts with label memory. Show all posts
Showing posts with label memory. Show all posts
Thursday, September 3, 2009
Wednesday, May 13, 2009
Applied Materials Segment Performance Varies
Applied Materials (AMAT) is on the ropes. Fortunately it has large cash reserves. It is still paying a dividend (about 2% at this stock price). And it should bounce back when (or if) the global economy starts to recover.
The main take away for me from the AMAT analyst conference on May 12, 2009 was that there is a great deal of variance between the four major segments that make up the company. Let's take a look.
Traditionally Applied Materials makes the machines that make semiconductor chips. Broadly, the chips can be further divided into memory chips and logic IC's, although of course many systems now integrate both on a single chip. AMAT calls this it Silicon Segment. It had $260 million in revenue in the quarter. A year ago, the Silicon Segment had $1.27 billion in orders.
There is the cyclical problem with being a capital equipment manufacturer for you in a nutshell. Demand for end products like cell phones and computers is down. So demand for the chips that make them work is down. The chip manufacturing companies have plenty of capacity right now. Even as demand ramps up (if it does), they can go a bit before adding new capacity.
What silicon semiconductor equipment that was sold did not really go to increase unit capacity. A few companies are continuing to forge ahead on their technology roadmaps during the downturn. This means, in this industry, smaller process technologies. Applied Materials is selling the next generation of machines that can produce chips with smaller gates.
New orders in the Silicon Segment were $259 million. You can't tell exactly what the next quarter's revenues will be from new orders. The lag for this type of equipment is typically more than a quarter. Applied Materials had a backlog of $3.16 billion in orders at the end of the quarter (including all segments), so it could run for some time just filling older orders.
The global services segment is more steady. It had $319 million in revenue and $236 million in new orders, compared to $599 million in revenues year-earlier. That is still quite a drop off. Equipment needs to be maintained, but with utilization low the need for services drops off too.
The best news was in the environmental technology segment, which I prefer to refer to as Solar. Again, AMAT does not make solar cells, it makes the equipment to make solar cells. These are of two major types, crystalline silicon and thin-film. A year ago this quarter, revenues in solar were only $85 million. This quarter the revenue came in at $357 million, though new orders were only $141 million. Demand was very high a year ago - you remember the energy price bubble? - and now while there is plenty of long-term demand, new factories of any kind are considered a risky business.
The fourth segment is Display, which you can think of as equipment to make flat LCD screens for TVs. Results here were dismal: $84 million in sales and $13 million in new orders. Year-earlier revenues were $198 million. Again, a lot of capacity was built in 2007 and 2008, then demand slumped in the fall of 2008. Applied Materials management believes that flat-screen tvs continue to win market share, so some time in late 2009 manufacturers will have to start increasing capacity again for the presumed sunnier days of 2010.
The silicon segment is expected to recover gradually as demand re-ramps and older process technologies are scrapped for newer ones. Solar will ramp again as soon as energy prices go back up and financing becomes more generally available. Services will ramp as utilization of current equipment increases.
Of course, all of these trends assume that the economy will improve in the second half of 2009 and show something like sustained growth in 2010. In the meantime, if you own some AMAT stock (I do), sit back and enjoy your dividends. Applied Materials has $3.1 billion in cash and equivalents in the bank, and even in this dismal quarter was better than break even on cash flow (but non-GAAP net loss was $136 million, and GAAP net loss was $255 million). Some day demand for semiconductor equipment will return, and with its new solar business on top of that, Applied Materials will be even more impressive than it was back in 2007.
The main take away for me from the AMAT analyst conference on May 12, 2009 was that there is a great deal of variance between the four major segments that make up the company. Let's take a look.
Traditionally Applied Materials makes the machines that make semiconductor chips. Broadly, the chips can be further divided into memory chips and logic IC's, although of course many systems now integrate both on a single chip. AMAT calls this it Silicon Segment. It had $260 million in revenue in the quarter. A year ago, the Silicon Segment had $1.27 billion in orders.
There is the cyclical problem with being a capital equipment manufacturer for you in a nutshell. Demand for end products like cell phones and computers is down. So demand for the chips that make them work is down. The chip manufacturing companies have plenty of capacity right now. Even as demand ramps up (if it does), they can go a bit before adding new capacity.
What silicon semiconductor equipment that was sold did not really go to increase unit capacity. A few companies are continuing to forge ahead on their technology roadmaps during the downturn. This means, in this industry, smaller process technologies. Applied Materials is selling the next generation of machines that can produce chips with smaller gates.
New orders in the Silicon Segment were $259 million. You can't tell exactly what the next quarter's revenues will be from new orders. The lag for this type of equipment is typically more than a quarter. Applied Materials had a backlog of $3.16 billion in orders at the end of the quarter (including all segments), so it could run for some time just filling older orders.
The global services segment is more steady. It had $319 million in revenue and $236 million in new orders, compared to $599 million in revenues year-earlier. That is still quite a drop off. Equipment needs to be maintained, but with utilization low the need for services drops off too.
The best news was in the environmental technology segment, which I prefer to refer to as Solar. Again, AMAT does not make solar cells, it makes the equipment to make solar cells. These are of two major types, crystalline silicon and thin-film. A year ago this quarter, revenues in solar were only $85 million. This quarter the revenue came in at $357 million, though new orders were only $141 million. Demand was very high a year ago - you remember the energy price bubble? - and now while there is plenty of long-term demand, new factories of any kind are considered a risky business.
The fourth segment is Display, which you can think of as equipment to make flat LCD screens for TVs. Results here were dismal: $84 million in sales and $13 million in new orders. Year-earlier revenues were $198 million. Again, a lot of capacity was built in 2007 and 2008, then demand slumped in the fall of 2008. Applied Materials management believes that flat-screen tvs continue to win market share, so some time in late 2009 manufacturers will have to start increasing capacity again for the presumed sunnier days of 2010.
The silicon segment is expected to recover gradually as demand re-ramps and older process technologies are scrapped for newer ones. Solar will ramp again as soon as energy prices go back up and financing becomes more generally available. Services will ramp as utilization of current equipment increases.
Of course, all of these trends assume that the economy will improve in the second half of 2009 and show something like sustained growth in 2010. In the meantime, if you own some AMAT stock (I do), sit back and enjoy your dividends. Applied Materials has $3.1 billion in cash and equivalents in the bank, and even in this dismal quarter was better than break even on cash flow (but non-GAAP net loss was $136 million, and GAAP net loss was $255 million). Some day demand for semiconductor equipment will return, and with its new solar business on top of that, Applied Materials will be even more impressive than it was back in 2007.
Wednesday, August 15, 2007
Applied Materials and Technology Business Insights
Applied Materials (AMAT) reported its results for the quarter ending July 29, 2007 (their 3rd quarter fiscal 2007) yesterday. With revenues essentially flat both sequentially and year-over-year, this is not a company that investors are likely to get excited about at the moment.
Yet if you are investing in technology stocks Applied Materials is an important company to watch for insights into technology and its economics. Applied Materials is one of a small group of companies that makes a broad range of equipment for manufacturing semiconductor circuits. In the July quarter revenues were $2.56 billion. KLA Tencor (KLAC) is a competitor with $736 million in revenues last quarter; companies like Samsung and IBM make semiconductor equipment, but that is a relatively small part of their overall business; and there are a variety of smaller specialty competitors. It is reasonable to look at Applied Materials as a single-company proxy for the industry.
With Cisco reporting strong growth in the router and switch market I have to wonder if the slump we have seen this last year in revenues at semiconductor chip companies is hiding a trend towards stronger long-term growth. Cisco believes the transition to Internet telephony and video-over Internet are propelling its growth. Internet trunk line capacity was overbuilt in the late 1990's, but now we are seeing fiber optic cable being run all the way into people's homes. Certainly the bandwidth requirements of video are far higher than those of text and picture Web pages.
You might think that Applied Materials would be seeing demand for new semiconductor manufacturing equipment leading demand for chips, but that is not the case so far. Chip makers, including the increasingly important companies that run fabs for fabless and fab-light chip companies, are buying as slowly as possible. The only area where demand was characterized by Applied Materials as good was RAM or memory production. The increased use of memory in cell phones and other devices is a clear trend people are willing to bet on; no one wants to risk losing a supply contract with a cell-phone maker because they did not buy enough equipment six months ago to get it up and running and ready for next-month's demand.
But in non-memory silicon their has been caution. Demand hit 95% of capacity in 2006, then slumped, and is not back up to 95% quite yet. Discussions with customers indicate that, whereas a few years ago hitting 85% of capacity was a signal to start expanding plant, today manufacturers are delaying their costs by waiting until the 95% mark is reached.
In flat-panel display manufacturing Applied Materials management believes they are in the bottom of a short-term cycle that should end soon. In contrast to chip manufacturers, display manufacturers bought a lot of equipment in 2005-2006 and still have reasonable capacity. However, consumer demand for flat panels is exploding as prices fall, so soon more manufacturing capacity will be needed.
Applied Materials is also into creating the equipment to make both traditional solar cells and the new thin film cells; revenues in the area are growing and should be a larger percentage of revenues in 2008.
Another trend to not is the shift from 200 mm silicon wafers to 300 mm. Much is still done with 200 mm wafers, but Applied Materials believes the cost advantages of 300 mm are such that in the 2008 - 2009 time frame 200 mm wafers will no longer be cost-competitive, so those who have delayed shifting will have to buy 300 mm equipment.
You can tweek your models however you like, but no one is sure when video demand is going to help anyone much besides Cisco. Older personal computers don't do a good job with video; there are always people who (wisely) change computers only when they get a major performance benefit out of doing so. High-end cell phones are becoming more popular, driving demand for low-energy, high-capacity digital and analog chips. Increases in overall demand will show up eventually in semiconductor equipment maker revenues. Macroeconomics aside, I expect demand to be healthy as display screen sizes, memory requirments, and processing capacity for video all continue to attract end consumers (including businesses who want to save money by using telepresence technology).
More Data:
My summary of the Applied Materials analyst conference (August 14, 2007)
Applied Materials home page
KLA-Tencor home page
Yet if you are investing in technology stocks Applied Materials is an important company to watch for insights into technology and its economics. Applied Materials is one of a small group of companies that makes a broad range of equipment for manufacturing semiconductor circuits. In the July quarter revenues were $2.56 billion. KLA Tencor (KLAC) is a competitor with $736 million in revenues last quarter; companies like Samsung and IBM make semiconductor equipment, but that is a relatively small part of their overall business; and there are a variety of smaller specialty competitors. It is reasonable to look at Applied Materials as a single-company proxy for the industry.
With Cisco reporting strong growth in the router and switch market I have to wonder if the slump we have seen this last year in revenues at semiconductor chip companies is hiding a trend towards stronger long-term growth. Cisco believes the transition to Internet telephony and video-over Internet are propelling its growth. Internet trunk line capacity was overbuilt in the late 1990's, but now we are seeing fiber optic cable being run all the way into people's homes. Certainly the bandwidth requirements of video are far higher than those of text and picture Web pages.
You might think that Applied Materials would be seeing demand for new semiconductor manufacturing equipment leading demand for chips, but that is not the case so far. Chip makers, including the increasingly important companies that run fabs for fabless and fab-light chip companies, are buying as slowly as possible. The only area where demand was characterized by Applied Materials as good was RAM or memory production. The increased use of memory in cell phones and other devices is a clear trend people are willing to bet on; no one wants to risk losing a supply contract with a cell-phone maker because they did not buy enough equipment six months ago to get it up and running and ready for next-month's demand.
But in non-memory silicon their has been caution. Demand hit 95% of capacity in 2006, then slumped, and is not back up to 95% quite yet. Discussions with customers indicate that, whereas a few years ago hitting 85% of capacity was a signal to start expanding plant, today manufacturers are delaying their costs by waiting until the 95% mark is reached.
In flat-panel display manufacturing Applied Materials management believes they are in the bottom of a short-term cycle that should end soon. In contrast to chip manufacturers, display manufacturers bought a lot of equipment in 2005-2006 and still have reasonable capacity. However, consumer demand for flat panels is exploding as prices fall, so soon more manufacturing capacity will be needed.
Applied Materials is also into creating the equipment to make both traditional solar cells and the new thin film cells; revenues in the area are growing and should be a larger percentage of revenues in 2008.
Another trend to not is the shift from 200 mm silicon wafers to 300 mm. Much is still done with 200 mm wafers, but Applied Materials believes the cost advantages of 300 mm are such that in the 2008 - 2009 time frame 200 mm wafers will no longer be cost-competitive, so those who have delayed shifting will have to buy 300 mm equipment.
You can tweek your models however you like, but no one is sure when video demand is going to help anyone much besides Cisco. Older personal computers don't do a good job with video; there are always people who (wisely) change computers only when they get a major performance benefit out of doing so. High-end cell phones are becoming more popular, driving demand for low-energy, high-capacity digital and analog chips. Increases in overall demand will show up eventually in semiconductor equipment maker revenues. Macroeconomics aside, I expect demand to be healthy as display screen sizes, memory requirments, and processing capacity for video all continue to attract end consumers (including businesses who want to save money by using telepresence technology).
More Data:
My summary of the Applied Materials analyst conference (August 14, 2007)
Applied Materials home page
KLA-Tencor home page
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