AMAT’s solar unit: Bookings strong, but future still cloudy

Comments made by execs and analysts during and after Applied Material’s fiscal 4Q09 results point to some increased optimism for the solar side of its business, though the outlook is still far from clear.

November 12, 2009 – Some observations on Applied Material’s fiscal 4Q09 (October quarter) results and comments made during its analyst/investor conference call:

Solar unit by the numbers. Financially speaking, AMAT’s EES group (i.e., solar) was nicely upbeat: sales up 25% Q/Q to $280M (signoff of a tandem-junction line offset a decline in c-Si sales), operating margin of 10.7%, and the group is “on track [for] breakeven or better operating results during this fiscal year” after according to AMAT CFO George Davis.

Even better, EES bookings surged 163% from fiscal 3Q09, growth attributed to the addition to the backlog of a Sunfab thin-film order from Chinese customer, “a surprise” that more than doubled the company’s bookings Q/Q, noted FBR Research’s Mehdi Hosseini. The order was revealed several quarters ago but projected to be longer than the company’s 12-mo. backlog duration, but now appears to be progressing to completion within that window. The solar backlog ($1.12B) actually grew about 5%, now representing 36% of total backlog, and is now more than double each of the other units (chips, displays, and services) which declined -12% to -15% sequentially. (Later in the call, Davis acknowledged that the EES group split about a $26M backlog cancellation with the services arm, mostly for c-Si.)

Restructuring was widely anticipated, and AMAT did say it would shave about $450M, including 10%-12% layoffs (1300-1500 positions) over the next year or so. But that includes plans to add jobs with its new solar technology center in China (with a full SunFab line) and other hires in Singapore, notes Deutsche Bank’s Stephen O’Rourke.

Looking ahead. Though acknowledging an “uncertain” outlook for 2010, AMAT president/CEO Mike Splinter pointed to capacity additions for cell equipment primarily in China, and worldwide PV solar installations (both c-Si and thin-film) are expected to surge >40% in 2010. He said the company wants to drive its cell equipment share from 50% to 80% over the next three years, helped by recent acquisition of Advent Solar and upgrade to its Baccini platform, and later in the call he hinted toward “a number of new products” on the way to help toward that end. Gains in efficiency and productivity with its SunFab line keep pace to achieve 10% efficiency and $1/W cost in 2010, he said.

(Speaking of Advent, Splinter responded to one analyst’s query with the prediction that a “real meaningful sales” boost won’t be until 2011, because “we need to finish up the development of the capability and get it into the marketplace.”)

In response to another question, Splinter also characterized Germany’s anticipated subsidy cuts “overblown,” predicting that that market “will be flat to up,” with increases in Italy, China, and the US “driv[ing] the rest of the upside.”

Bottom line? Uncertain. Asked in the call how the company sees itself growing share in 2010 when it projects EES to be flattish in 2010, Splinter noted there are concerns about the timing and extent of c-Si wafering expansions. “As wafering orders start to come in, we know that the cell orders aren’t far behind because those wafers have to go to a manufacturing line someplace,” he said. CFO Davis added that there are “three to four more factories to be signed off,” the largest of which will come “in the latter part of the year.”

Despite some positivity about AMAT’s solar business, “we remain cautious on overall solar-related bookings/revenues until the overall solar-related demand picture improves,”, probably in 2011 with “a more sustainable and policy-independent demand trend,” Hosseini wrote in a research note. I.e., less reliance on FITs and other incentives to reveal whether demand can stand on its own merits. Deutsche’s O’Rourke also expressed hesitation, noting “a challenged solar PV industry exacerbated by global macroeconomic uncertainty.”

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