Applied pulls SunFab plug; shifts to c-Si, LEDs

In a move that had been hinted at (if not openly called for) for some time, Applied Materials is pulling the plug on its SunFab turnkey thin-film solar production line, and will shift its focus to crystalline-silicon and other “energy technologies,” notably LEDs. (Updated: 7/23/2010)

by James Montgomery, news editor

July 21, 2010 – In a move that had been hinted at (if not openly called for) for some time, Applied Materials is pulling the plug on its SunFab turnkey thin-film (amorphous silicon/a-Si) solar production line, and will shift the focus of its Energy and Environmental Solutions (EES) business unit to crystalline-silicon (c-Si) solar systems, and other “energy technologies” notably LEDs.

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Mike Splinter, chairman/
CEO, Applied Materials

“The SunFab turnkey model requires a market with much greater scale to leverage its capital efficiency,” said Applied Materials chairman/CEO Mike Splinter, in a video blog posting on AMAT’s Web site. “Delays in utility-scale solar market adoption, and competitive pressure from crystalline silicon, have not allowed the market to take off.” In a press release he also blamed difficulty in solar panel makers (SunFab customers) to obtain capital, and “changes and uncertainty in government renewable energy policies.”

Going forward, the EES group will shift its focus to its c-Si solar interests, e.g. wafering (saws) and metallization (Baccini) products. (c-Si bookings spiked in AMAT’s fiscal 2Q10, and Splinter projects a 50% jump in 3Q10.) AMAT’s R&D in China will focus exclusively on c-Si technologies. Applied will still sell individual thin-film tools for CVD and PVD, he said, with R&D focusing on panel efficiency and high productivity. AMAT also will sell its low-emissivity architectural glass coating products, and keep developing emerging technologies such as “smart” electrochromic glass.

The numbers behind the SunFab shuttering: ~$375M-$425M restructuring charges ($0.18-$0.21 per share) on AMAT’s 3Q10 books, broken out thusly: $240M in inventory, $95M equipment/intangible asset impairment, $50M employee severance, and $40M “other obligations”. About 400-500 employees “will be affected,” though many will be shifted to Applied services arm to help support existing SunFab and glass customers. (Splinter said Mark Pinto will remain EVP/GM of the EES division, and CTO for all of AMAT.) As a result of the SunFab moves and charges, AMAT has cut its (non-GAAP) EPS outlook for 3Q10 by more than half to $0.10-$0.14. Applied also plans to reduce its operating expenses (opex) by $100M within the next six months.

Editor’s Take

AMAT’s SunFab had been under the microscope for some time. In the company’s most recent quarterly update (May), AMAT’s solar group was the clear underperformer, particularly its thin-film business which saw its backlog shrink (though c-Si demand was up substantially). That division had been hoped to be breakeven in the current year (estimated $1B), but it had become clear this would not happen; and Splinter said “decisive steps” were being taken to “realign the business with a lower market output.”

While cutting down its SunFab business will improve profitability in the EES segment, the overall division’s future is still unclear, notes Barclays’ CJ Muse, in a research note. “AMAT is late to the party in LEDs, c-Si revenues/margins are peaking out,” and the company’s still somewhat vague in specifics of its cost-cutting efforts, he writes.

Updated 7/23/2010:  “We believe deaccentuating SunFab and driving c-Si is the right move,” writes Deutsche Bank’s Steven O’Rourke. “It removes a drag component to the operating model and a persistent negative overhang.” Applied’s c-Si offerings, i.e. HCT and Baccini, “are market segment leaders, and further focus is a positive.” He expects that AMAT will likely maintain “ongoing, broader efforts in thin-film solar PV.”

Such a move has been foreseen by Wall Street analysts for months. Some comments after AMAT’s most recent quarterly results:

  • “We think that AMAT needs to go back to the drawing board and re-think its SunFab strategy with a preference (in our minds) for exiting the market.” — CJ Muse, Barclays

  • “Applied’s SunFab business has fallen well short of expectations, and has deteriorated further since the company’s analyst meeting in late March. […] We remain skeptical that SunFab can be made competitive in the near term.” — Stephen O’Rourke, Deutsche Bank

  • “AMAT should exit SunFab, and pro-actively resize c-Si to breakeven at < $500mm/year — which will be very difficult to achieve in the next 6 months.” — Satya Kumar, Credit Suisse

(It’s worth noting, though, that not everyone sees AMAT’s thin-film problems as an indictment of the technology’s potential.)

 

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