Transcript of Call between CNBC and James Morgan:
CNBC- SQUAWK BOX
APPLIED MATERIALS CEO JAMES MORGAN
JUNE 25, 1998
The president is not the only chief executive touring Asia. The head of Applied Materials is in Japan, getting a first hand look at how Asia's economic woes are affecting his company and the entire high-tech industry. Applied Materials supplies wafer fabrication systems and services to the global semi-conductor industry. A lot of its business is done in Asia. Recently, the company had to cut 1,000 jobs to reduce operating expenses, mostly due to sluggish worldwide chip sales. Yesterday, shares of A-Mat gained 1 3/8 to close at 30
3/4. That's toward the low end of its 12-month trading range. The high at 54 and change, the low down around 25. Joining us live from Tokyo to tell us what's going on, James Morgan. He is chairman and CEO at Applied Materials. Mr. Morgan, good to see you again. Can you tell us what you've learned and if any of it has surprised you?
Of course, we've had our board meeting here in Japan and global management meeting. And we talked to many of the customers and to people and I think there is a change taking place, in that they seem to be focused on trying to get the bank situation taken care of. But I think we'll just have to wait and see, with the elections and so forth. And what else will happen, whether we'll really see action or more talk.
Mark: What are you learning in terms of your own business prospects over there? Are your customers over there saying we can see the light at the end of the tunnel? Or are you bracing for more lean times here?
We always try to be cautious, but we've talked to some of our customers. We had our 30th anniversary party and meeting with most of them on Wednesday night here. And as a result, our impression is that they are beginning to make selective advanced technology investments. Clearly, the ones that want to participate in the next round of growth in the semi-conductor industry are going to have to make the move to the new technology equipment, which we've been introducing this past year.
Mark: Let me read to you from something just a few days ago, research, Electronic Times, that Morgan Stanley Dean Witter, doubling an earlier prediction for global downturn and capital spending on semi-conductor equipment. The firm now expects to see a 20 to 22% decline, compared with its original forecast of 12 to 14%. And Morgan Stanley says there isn't likely to be any recovery until the second half of '99. Do you agree with that assessment?
We just have to work today a quarter at a time, Mark, at this time. Clearly, the customers are looking for ways to improve their technology. We have a brand new set of products, which is just what they need for that technology. So we're out there trying to get every
order that's around and I would judge that if the economies don't go down, we'll see a pick up beginning early next year.
Mr. Morgan, this is John. I think that raises a larger question. How do you try and ration your capital spending? How do you plan ahead in an industry that's so volatile?
We've been at it for 30 years. Our strategy is to have a family of new products available as we enter a slowing period. We make sure we have a strong balance sheet. We manage our costs. And of course, the customers get freed up, in terms of their time and availability. And we're able to work on the new adaptation of that technology. Usually,
these are good times and we prepare ourselves in order to be able to really grow rapidly out of the downturn as we begin to move out of that.
Mark: One of the ways you are doing that is, of course, the new narrower width, .25 micron.
That accounts for about 1/2 of our business. Also, you see some new market development. For example, China, where I'm going tomorrow, represents about $70 million last quarter, which was a substantial increase in the run rate in that market place.
Mark: Is the fact that you do a lot of business in Taiwan a problem in China?
No, it doesn't seem to be a problem at all. I made my first trip to China in 1984, actually. Jung Ju Man had visited Applied Materials on one of his tours to the United States when he was the vice minister of electronics. It turned out he was my host. We began there early, and although it's been slow going, we believe we have a very strong position there and good relationships at all levels of the Chinese electronics industry.
Mark: Let me read you something you are quoted as saying and this is your own press release, so it's definitely attributable here. In May, you said, " Recently, cut backs in capital spending by most major North American chip manufacturers further limit our ability to determine the length and severity of the current downturn." Are things any clearer now?
No I don't think so. That's still accurate for the time being.
Mark: Now. In terms of new technology, you are aggressively going into this CMP?
Chemical Mechanical Polishing.
Mark: And that's a way to facilitate putting more layers on a semi-conductor, right?
That's right. And also a way to tighten the geometries, going to the smaller geometries.
Mark: That's a brand new market. What kind of growth do you expect in this particular segment?
It could grow at 50, 60% a year. And for us, more than that. That'll be a billion dollar market. Hopefully, if we can get a significant share of that, we could be a $500 million business, just in that alone.
Mark: Before we let you go, let's just do a quick survey here. How is business in Taiwan right now?
Taiwan I think is going to slow here over the next quarter. But these foundries are a real method of producing chips. So I think that's going to grow over the next 5 or 10 years, substantially.
Mark: How is the business in Korea right now?
Korea is limited, although they are going ahead with some selected movement to the next generation of DRAMs. And if they have more access to capital, they clearly move more rapidly.
Mark: That's one of the problems, isn't it? Access to capital?
Right.
Mark: How do you stand with your Korean customers vis- -vis receivables? Are they paying you?
Yeah, we've had no problem with that at all. We manage that very carefully.
Mark: How are things in Japan right now?
Japan, actually, the forecasts look like they might pick up al little bit. Part of that's due to the adaptation of the newer technology, so we're beginning to get business that maybe our better competitors aren't getting. There are signs that our Japanese customers are
selectively going to make purchases over the next couple of months.
Mark: This research from Merrill Lynch, it may be a couple months old, was indicating they expected fiscal year 1998, a 2% decline in earnings per share and in 1999, a 12 to 13% increase in earnings per share. Are you comfortable with those numbers?
It really all depends on how this market evolves. If the economies don't deteriorate, I think our industry is in pretty good shape towards the end of this year. So what happens is, it builds up a little like a sling-shot and then once two or three of the major companies start to adapt the new technologies, then you get a pretty strong rush of customers. So we have to drive our company with one foot on the accelerator and one foot on the brake. It's an interesting way to manage, but we've been able to capitalize on that over the last
couple of years.
Mark: Can you, in broad terms at least, characterize this slow down with the one that occurred in 1996? Is it as bad? Worse? Not as bad?
In '96 you didn't have the uncertainty of the economic situation. What happened in this is that we expected some uncertainty in Asia. What we didn't expect was the Japanese to become quite so cautious. That's really the only significant difference in our outlook. In the '96 time frame, everybody stopped fairly quickly, saw they were behind in their demand and start buying again. This time there's more uncertainty to the economic outlook.
Mark: Mr. Morgan, thank you very much. We appreciate your filling us in. James Morgan, Chairman and CEO at Applied Materials, live from Tokyo. |
