Applied Materials Sales Pulled Down by Supply Chain Delays

May 26, 2020 // By James Morra, Electronic Design
Applied Materials Sales Pulled Down by Supply Chain Delays
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.

Next: sales due to improve in second half of 2020

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