AMAT: PCs, Electronics Heart Of Weakness; Solar Recovering
By Tiernan Ray
blogs.barrons.com
Following better-than-expected fiscal Q3 results, but a weak outlook, Applied Materials ( AMAT) management this afternoon held a conference call with analysts to discuss parts of the chip business that are disappointing its expectations.
“Consumer electronics and PCs are at the heart of what’s causing the supply demand imbalance here,” said CEO Mike Splinter.
Broadly speaking, chip makers are responding to “a period of uncertainty in the global economy,” and fears about the developed economies and about growth in Asia, which are causing customers to “reassess their investment plans and push out orders.”
“Although we firmly believe that the fundamental growth drivers within our markets remain strong, today we are seeing a weaker and near term outlook across all of our businesses.”
More specifically, a disappointing back-to-school season has led to lower-than-expected results in the personal computer market, Splinter noted. As a result, investment in DRAM chip equipment won’t increase at all in this second half of the year, he said, as existing technology will be enough to accommodate 40% to 50% bit growth this year. Consumer electronics sales have also been “weak.”
Sales of smartphones have been “strong,” and sales of tablet computers are in line with the company’s estimate for full-year tablet sales of 65 million units. But they haven’t been enough to offset the weaker areas.
Contract chip makers, foundries such as Taiwan Semiconductor Manufacturing ( TSM) (Splinter didn’t actually mention them by name), are cutting their investment in equipment, said Splinter.
“We’ve seen demand from our foundry customers soften significantly in the past six weeks as low utilization at the trailing nodes leads them to re-use capacity at advanced nodes.” As a result, he said, wafer fab chip equipment spending for the whole industry will probably be a billion dollars less this year than Applied had previously expected, at $29 billion to $32 billion.
“Although we currently see at least two quarters of softness in wafer fab equipment, the fact that many clean room shelves are in place means the turnaround could happen quickly once consumer demand signals strengthen.”
Regarding television sets, sales have also been disappointing, prompting makers of LCD panels to delay until next year any new investment in equipment for panels tied to TV sets.
Splinter said the company is being “proactive” in managing operating expenses and curtailing variable spending to adjust to the slowdown. CFO George Davis said the company is being careful about hiring, noting that, “we expect to limit our hiring for the time being to critical positions and recent graduates.”
On the brighter side, Splinter said the outlook is good for mobile computing and the chips to enable it, such as “multi-core processors.” Display panels for mobile device screens, in contrast to TV set panels, are still a source of “robust” demand for equipment, said Splinter.
Although mobile DRAM memory in smartphones doesn’t come close to the 4 gigabytes standard in many PCs, “the numbers will start to get very, very large,” said Splinter, “and push bit growth.” Likewise, demand for NAND flash memory in tablet computers means that NAND is “the one market that is really staying quite strong.”
And within the solar energy field, where Applied’s tools are used to make photovoltaic modules, the drastic drop in orders in the quarter — down 48% — nevertheless presages an improving outlook for solar, said Splinter.
In solar, panel demand is now accelerating, following a slow start to the year. We maintain our view that installations will be in the 19-22 gigawatt range for the year, with roughly two thirds of these installations in the second half. Germany represents over 35% of this demand and the postponement of their mid year subsidy reductions means that installers continue to generate healthy returns. Earlier this month, China announced its national feed in tariff which should provide a meaningful upside to the market starting in 2012. While China is the global leader in sell-in module production, last year it represented less than 3% of worldwide panel demand. The feed in tariff combined with local incentives could result in China taking a leadership role in solar installations, with module spot prices moving to the $1.20 per Watt range, the economics for PV are becoming increasingly compelling, rein busing our bullish view on the growth of this market over the next few years.
During the Q&A, Splinter was pressed on the matter of European subsidy adjustments that will impact solar energy projects. He said that demand is already “recovering,” for photovoltaics, but that how things fare next year would hinge on how China’s subsidy plays out. At the same time, U.S. photovoltaic projects “will go up next year dramatically,” said Splinter.
In solar, we’re already seeing a recovery in end demand, so the key here I think is just how impactfull this China feed in tariff is going to be. Prices have come down. They’re at a very low level. You already hear the sell price is at a dollar a watt, below a dollar a watt, module prices, spot prices, $1.20, maybe the average is closer to $1.40, but these prices have gotten very low making the investment thesis quite good. So, if the China feed in tariff really comes in and creates a couple of gigawatts, two or three gigawatts of demand next year, I think we see a turnaround in capital additions especially by the major Chinese solar manufactures. I think we’re going to see a pretty dramatic growth in the US. I don’t think we’ll see a fall off in Europe. I think the Germans are committed. They are 35% of the market. Don’t think we’ll see a down year in Europe. I think we’ll see an up year, so even though the lowering of the incentives is helpful, it drives the price down. It improves the economic performance of the installations.
Applied shares are down 59 cents, or 5%, at $10.77. |
