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Applied Materials Sales Pulled Down by Supply Chain Delays

May 20, 2020
Applied Materials in March said it was withdrawing its business outlook for the second quarter of 2020 as the virus ravaged its supply chain and manufacturing operations. It is also withholding its third-quarter forecast due to economic uncertainty.

Applied Materials said that it faced supply chain constraints in the second quarter related to the coronavirus crisis that weighed on its revenue and carved into its profits. But the company said it hopes to recover the revenue in the second half of the year as the supply chain rebounds and contract chip makers push ahead with plans to upgrade fabs.

The company's sales leaped to $3.96 billion from $3.54 billion a year ago, as demand from contract chip manufacturers offset its supply chain challenges. Profits totaled $755 million, or 82 cents per share, falling slightly short of analyst estimates of around 89 cents per share. Applied Materials said its profit margins improved to 44.2% from 43.2% in the first quarter last year, when it earned $666 million, or 70 cents per share, in net income.

“While the situation remains fluid, based on the visibility we have today, our supply chain is recovering and underlying demand for semiconductor equipment and services remains robust,” Gary Dickerson, Applied Materials' president and chief executive officer, said in a statement. “We still believe that our semiconductor business can deliver strong double digit growth for our fiscal year,” he said on a conference call with analysts last week.

Applied Materials is the world's largest seller of machinery used to manufacture chips and serves as a barometer for the global chip business, which has been dented by uncertainty and other fallout from the novel, lethal virus. The threat resulted in lockdowns that shut down factories in the United States, Southeast Asia, and China. The lockdown measures have also made moving goods and parts around the world more of a logistical challenge.

Dan Durn, the company's chief financial officer, said that it faced supply chain constraints in the second quarter of the year linked to lockdowns in the United States and Southeast Asia. He said that the shutdowns impeded the supply of critical parts used in its products and delayed shipments to its customers. Applied Materials said that constraints linked to the virus caused it to lose more than $650 million in sales in its semiconductor division.

Applied Materials said that it is also feeling the pain from transportation delays. The Santa Clara, California-based vendor transports most of its equipment in unassembled parts that travel in the bellies of passenger planes. But as American, European and Asia airlines have suspended service in recent months, the company has had to charter freight aircraft that charge expensive rates. The change has pressured its profits, Dickerson said.

"This is something that is going to be a long-term issue," he warned. "I think this one will be with us for the foreseeable future and we will likely have those increased logistics costs stick with us." He said, "We continue to work closely with our suppliers to make sure they can meet our needs. Our supply chain remains a critical focus as we enter the third quarter with a record backlog in the semiconductor and service businesses combined."

Applied Materials said in March that it was withdrawing its sales forecast for the second quarter as the disease disturbed its supply chain and manufacturing operations. It is also withholding its sales forecast for the current quarter because of the uncertainty about the economic fallout from the virus. It sells production tools for tens of millions of dollars, and its customers may want to save money by delaying upgrades to their production plants.

The Silicon Valley giant is hoping to recover lost revenue in the second half of 2020 as the supply chain recuperates and the memory chip market  improves. "Our suppliers have all been able to resume operations and they are recovering to normal output," the company said. Applied Materials said that it believes the semiconductor unit's sales in the current quarter could grow in the "high single digits" compared to the second quarter of 2020.

Applied Materials said its sales improved in the second quarter as more customers in the made-to-order chip business burn through billions of dollars to build out production lines. Major chip manufacturers, including TSMC, Intel and Samsung, are scrambling to roll out faster, smaller and cheaper chips on more advanced nodes. It also warned of "pockets of weakness" in the foundry market as a result of pullbacks in the global auto industry.

TSMC, the world's largest contract chip manufacturer, plans to bolster its capital spending by about $1 billion in 2020, bringing its total to more than $15 billion. TSMC, which builds chips for customers ranging from AMD and Qualcomm to Apple and Huawei, is upgrading its production lines to meet demand for chips based on its most advanced 7-nanometer node. It has also started building chips based on 5-nanometers for its customers to test.

Intel's capital spending soared to $16.2 billion in 2019 as it struggled to resolve its supply shortages and upgrade more of its production plants to its most advanced 10-nanometer production process, which has been bedeviled by long delays. Intel said last month that, in spite of the uncertainty surrounding the global economy, it plans to proceed with most of its long-term investments in the 10-nanometer node and other advanced nodes in 2020.

Applied Materials is also facing blowback from the escalating trade battle between China and the United States. The US government said on Friday that it would tighten its control on the supply of chips to Huawei, the world's second largest smartphone maker. Once the sanctions are imposed in late 2020, companies using U.S. software and tools to build chips  for Huawei or its affiliates would need licenses from the Commerce Department.

The rules could also strike TSMC, which builds chips to order based on Huawei's designs with tools from Applied Materials, Lam Research, KLA Tencor and other American firms. The sanctions place more pressure on Huawei, which the U.S. government last year added to a blacklist, requiring American firms to obtain licenses before selling chips or other parts to Huawei, which is reportedly TSMC's second largest customer behind Apple. 

"There are pluses and minuses at play in the market," Durn said. "While the situation remains fluid and macroeconomic impacts are still unknown, our customers remain committed to their technology roadmaps. We will remain vigilant, stay close to our customers and be ready to respond if the environment changes."

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