01:26am EDT 26-Aug-98 BancAmerica ROBERTSON STEPHENS (Billat, Susan 415-676-28
AMAT: Workforce Reduction in Line with Guidance; Portends Extended ...
August 26, 1998
A P P L I E D M A T E R I A L S , I N C .
Workforce Reduction in Line with Guidance; Portends Extended
Downturn, in Our View; Maintaining Estimates & LTA Rating
Summary:
** Applied announced a 15% workforce reduction, in line with guidance, that
should lower the company's breakeven rate by 10-15%.
** We view extent of the restructuring as a further sign that the downturn
will persist longer than is believed by many on the Street.
** We are maintaining estimates and our LTA rating on the stock.
Key Points:
** Yesterday after the close, Applied announced a workforce reduction of 15%,
in line with the guidance given on the 8/11/98 Q3:F98 (July) conference
call. This will lower headcount by about 2,000 to the 12,000 level and is
part of a plan to bring the company's breakeven revenue level down to $600
million per quarter from the $700 million that we estimate to be the current
breakeven rate.
** We believe that this latest round of layoffs is sufficient and probably
the last for this downcycle. We have noticed that large layoffs often
experience an aftershock of attrition that could potentially trim the
organization further.
** The industry, in general, and Applied, in particular, are adjusting to a
newer lower level of business precipitated by the "unprecedented"
convergence of three key factors: continued economic difficulties in
Asia, chipmaking overcapacity, and the advent of the sub $1,000 PC.
** Applied steadily reduced its workforce from 16,300 at the end of Q1:F98
(January) to about 14,000 at the end of July. The severity of the latest
layoff and that it is hitting an already downsized organization is, in
our view, another sign that the downturn will persist for at least
several more quarters.
** Applied remains, in our view, a franchise equipment company and a
technology leader. Moreover, we believe that the restructuring program,
while cutting deep into the organization, will not weaken its technology
muscle. Should industry conditions continue to deteriorate, we would not
expect Applied to downsize further, even if revenues drop below $600
million per quarter and force the company to post a modest operating
loss.
** We note that the stock has been trading mainly in a $27-$36 range since
the company reported FQ2 results in May and we expect this to continue
for the foreseeable future. Should the stock come under increased
pressure (i.e., to the $23-$26 range) from speculation that the company
may post an operating loss in FQ4, we would view that as an exceptional
value.
ACTION NOW: In our view, layoffs are always a difficult decision, particularly
when advanced engineering skills have been in relatively short supply. However,
Applied's management has considerable experience in managing industry
cyclicality and is, we believe, responding appropriately to a protracted
industry downturn. In particular, we believe that the decision to lower
breakeven to a $600 million per quarter rate is sound and that the company will
be able to contain costs while maintaining key R&D programs and effectively
servicing its global customer base despite the reduced size of the overall
organization. We reiterate our belief that the stock would present a compelling
value should it come under increased pressure as a result of yesterday's
announcement.
Applied Materials is the franchise player in the equipment industry and is, we
believe, well positioned to extend its franchise despite a very difficult
operating environment. We expect initial pressure on the stock as investors
recalibrate their expectations, but that the stock will likely continue to
trade in $27 to $36 range until visibility on industry fundamentals improves.
Accordingly, we are maintaining estimates and our rating of Long Term
Attractive (LTA).
INVESTMENT THESIS: Applied is the leading equipment manufacturer and, in our
view, should continue to outperform the equipment sector primarily on the
strength of its technology leadership, product line breadth, and strong
management. However, uncertainties surrounding 1998 capital spending and the
welfare of certain Asian economies lead us to a cautious stance on the
industry.
Applied's management team has a proven track record of gaining market share and
executing well during industry downturns. While Applied is not immune to the
industry's cycles, the company's ability to deliver complete process solutions
should help mitigate the impact of industry cycles on the company's
performance. We believe Applied is particularly well positioned to navigate
through the uncertainties currently facing the industry.
THE COMPANY: Applied Materials is the world's leading supplier of semiconductor
wafer fab equipment with a strong position in the PVD, CVD, RTP, etch and ion
implant markets and an emerging position in the CMP as well as the metrology
and inspection markets. The company is located in Santa Clara, CA.
INVESTMENT RISKS: Among the risks are that the company sells its products to
the semiconductor industry, which has experienced periodic cyclicality. There
can be no assurance that this cyclicality will not recur in the future. With
operations located worldwide, the company is also subject to exchange rate
fluctuations and political events |
