Applied Looks to Service for Rev Growth
Online Staff -- 3/24/2005
Electronic News
Applied Materials Inc. said Wednesday that capital expenditures as a percentage of chip revenue will remain below historical norms going forward, and that its services business is going to be a principal driver of its own revenue.
Advertisement
Applied held its annual financial analyst meeting Wednesday in San Francisco. Echoing what other large capital equipment vendors have been saying, notably rival Novellus Systems Inc., Applied suggested that long-term capex as a percentage of semiconductor revenues for the industry is now 20 percent to 22 percent, according to a research note from Goldman Sachs analyst Jim Covello. Novellus has suggested that long-term rate capex rate will be 18 percent to 22 percent.
"This is in stark contrast to recent views echoed by bullish analysts who are suggesting that capital intensity is increasing as device geometries shrink," Covello stated in his research noted. "As Applied suggested, the increasing process steps required by shrinking line widths have to date been more than offset by the capital efficiency of 300mm.
"While some are arguing that the negative effects of 300mm capital efficiency are behind the industry, we would highlight that only about 10 percent to 15 percent of the global installed base of capacity is currently on 300mm," Covello continued. "As the installed base moves to an estimated 50 percent of capacity on 300mm, we would expect capital efficiency from larger wafer sizes to continue to offset the increasing process steps required by shrinking line widths."
Applied, the largest capital equipment vendor in the world with some $7.6 billion in revenue last year, also continued to highlight services as the main growth driver for the company going forward, according to the Goldman Sachs report. Services represented 20 percent of total revenues in 2004, compared to just 12 percent in 2000, Applied said. The company has expanded into such areas as abatement systems, refurbished systems, spare parts, facilities materials, training and wafer reclaim services.
"While management suggested that the services model is not having a negative impact on its margin structure, we believe the numbers suggest otherwise given that Applied had a significantly better operating expense structure this cycle as compared to last and yet the company still experienced significant margin deterioration," Covello said.
Applied's management apparently said that it was happy with its operating performance in the most recent upturn.
"We were a bit surprised that management was so content with its operating performance considering the fact that the company had significantly lower operating margins this cycle compared to last cycle, while both KLA and Lam were able to achieve higher operating margins this cycle compared to last in the absence of revenue growth," Covello said. "We would have expected a company with the strong financial history that Applied has achieved not to be happy with significant margin erosion when others in the industry achieved margin expansion."
Applied offered the following quarterly margin target model based on revenue:
Revenue ($ billion)
$1.5
$1.7
$2.0
$2.2
$2.5
$3.0
Operating Margin
18%
22%
25%
27%
29%
31%
Net Margin
13.5%
16%
18%
20%
22%
23%
Applied Issues Dividend, Buys Back More Stock
In other Applied news, the company announced earlier this week that it will provide a 3 cent per share quarterly cash dividend. It also said it was implementing a $4 billion share buyback program through 2008, and terminating the earlier $3 billion program, under which it had purchased some $950 million in stock over the past five years.
"We view the implementation of a dividend very favorably, as we believe that it has been obvious for some time that slowing industry growth rates make Applied's $6 billion cash balance excessive given that it is highly unlikely that the company would ever have the need to use such significant cash levels," Covello said.
|
