Applied aims to use this downturn to increase market share, says Morgan
Contingency operating plans, emphasis on 'technology buys' will position company for big gains in recovery, predict executives
By J. Robert Lineback
Semiconductor Business News
(02/16/01 07:19 a.m. PST)
SANTA CLARA, Calif. -- Applied Materials Inc. -- the 11-ton, $11 billion chip equipment gorilla -- is hunkering for yet another sharp downturn in semiconductor production systems. But instead of fighting for survival, like so many other wafer-fab gear suppliers, Applied Materials is aiming to leap on to more market share when the inevitable upturn occurs.
To jump on the recovery--whenever it happens--Applied Materials has shifted into "a flexible series of contingency operating plans," and it's trying to be ready for nearly anything in times of great uncertainty, said executives in this week's conference call with analysts after releasing lower results for the last fiscal quarter.
"We just know no one can predict the future accurately, and it changes rapidly," said James C. Morgan, CEO and chairman of Applied. "So that means for planning purposes we focus on having a series of scenarios that we can respond to. That is how we run the business," said Morgan, responding to a question about the uncertainty of business conditions in 2001.
During the conference call, Morgan and other top executives said Applied was increasing its emphasis on capturing "technology buys" as major semiconductor manufacturers begin to shift a greater percentage of their reduced capital spending plans to advanced processing tools and pilot fabs--in particular 300-mm lines.
While the 2001 downturn is as sharp and as difficult to forecast as the last bad year--1998--Applied does see some bright spots in the market. Executives said industry spending on copper-processing systems will grow by about 40% to $700 million in 2001 from $500 million in 2000. Applied is also holding its forecast for industry shipments of 300-mm systems at $6-to-$8 billion in 2001, about double the revenues last year, as chip makers place greater emphasis on preparing larger diameter, 12-inch wafers for fabs in the next recovery.
Applied adjusted its huge backlog of tool orders down by just $190 million to $3.9 billion in the fiscal quarter, ended Jan. 31. But, "no cancellations resulted from any loss of business to competitors," said Joseph R. Bronson, executive vice president and chief financial officer at the Santa Clara-based equipment giant.
Currently, Applied has no plans to take extraordinary charges in the current fiscal quarter--presumably meaning no large layoffs are pending. Applied's Bronson did confirm news reports last week that the company has cut back on its use of contract labor, deferred merit raises for all salary employees, lowered pay of top executives by 10%, and implemented five mandatory shutdown days in the current quarter.
This comes after sharper than expected cutbacks in semiconductor capital spending became apparent in January, said Morgan. Applied's first fiscal quarter, ended Jan. 31, got clipped at the end by the downturn in late 2000 and early 2001. New orders dropped 33% to $2.43 billion, and revenue fell sequentially 6% to $2.73 billion in the quarter from the prior period. Applied still beat Wall Street's revised earnings estimates with a net income of $558 million (see Jan. 13 story).
Applied downgraded its industry outlook down for 2001 to a 20% decline in semiconductor capital spending and worldwide chip revenue growth of 10-12%. Three months earlier, Applied was predicting 20% growth in industry capital spending and stronger chip sales.
But while the outlook is down, Applied isn't taking time out. It believes the silver lining in the 2001 slump will be an increase of market share for its tools and integrated systems and a major step towards a goal of doubling its annual revenues to the $20 billion mark in several years.
"Coming out of 1998-when the industry experienced a similar sharp decline, the company saw the steepest ramp in its history and grew 10 [percentage] points in market share in 1999 and 2000 as the industry moved to 0.18-micron technology," Morgan told analyst in the conference call.
Copper, low-k dielectrics, 300-mm, ion implantation, integrated metrology, and process modules are all high on Applied's list of growth candidates, said Sasson Somekh, executive vice president and a member of the Office of President.
In copper processing--a segment that Applied Materials admits it was late in launching several key tools--the company now figures its has a dominate position. Applied's executives claimed the company has 65% market share in physical vapor deposition (PVD) systems for copper. About 15 months after entering late with copper electroplating systems, Applied says it now has over 30% of the sales of those tools worldwide. In chemical mechanical planarization (CMP), Applied has shipped over 60 tools to copper fab lines at 20 of the top 25 chip makers, according to managers.
Recently, Applied shipped its first dual reflection 300-mm CMP system, which is capable of both conventional polishing using slurry as well as fixed-abrasive technology, Somekh said.
"What we are seeing is that this year is going to be driven primarily by 'technology buys,' and the question isn't whether there is a need to make the technology investments [at Applied's customers] but the question is whether the customers have the courage to make technology investments," said Morgan during Tuesday's conference call.
Morgan believes most major chip makers are now in better financial shape than the last severe downturn, which lasted for several years. And on top of that, the pressure is greater on those customers to move to next-generation tools and processes in the wafer fab.
"The technology transformation in this downturn is even more significant than the past downturn," Morgan said, referring to the 1998 recession, in which chip makers shelved their 300-mm plans and extended existing technologies one or two more generations. Applied--and other technology experts--believe chip makers have little choice but to switch to new thin-film materials, such as low-k dielectrics, and extend other processes to high-volume ICs.
Applied executive said 300-mm investment projects and new production lines moving ahead at a half dozen major chip makers--Infineon, Intel, Taiwan Semiconductor Manufacturing Co., Texas Instruments, United Microelectronics Corp., and Trecenti Technologies (the UMC-Hitachi Ltd. joint venture in Japan). Others are still proposed, but more pilot lines are expected.
"Our estimates for 300-mm revenue for the quarter [ended Jan. 31] were on target," declared CFO Bronson. While some plans have been deferred--especially in South Korea where one major customer (Hyundai Electronics Industries) is attempting to deal with financial issues--others are recasting 200-mm plans as 300-mm fabs. Chartered Semiconductor Manufacturing Pte. Ltd. in Singapore, for example, has delayed its Fab 7 to turn it into a $3.5 billion 300-mm facility instead of a 200-mm plant (see Feb. 15 story).
Applied's biggest challenge in 2001 is predicting whether more chip makers will make the move to next-generation tools and processes in preparation for the upturn. "I can assure you that the ones that will be successful during the rest of the decade ... are going to have to make the investment sometime pretty quickly," Morgan said.
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