Can Applied's success breed more success?

Electronic News, March 14, 1994 by Jeff Dorsch

SANTA CLARA, CALIF.--Applied Materials, having established itself as the top semiconductor equipment vendor in the world and the first to achieve $1 billion in annual revenues, is setting a course to remain atop the pile.

James C. Morgan, chairman and CEO of Applied, addressed the subject of Applied's future at the recent annual meeting of shareholders here. "By the year 2000, Applied Materials' annual revenues from the semiconductor equipment business alone should range between 3 and 4 billion dollars," he said. "And our revenues from our flat panel display equipment business could range between $500 million and $1 billion.

"Except for a strong number two company, probably Japanese, the global landscape will be clear-cut of scale competitors...In the absence of scale competitors, we are looking inward to maintain a sense of urgency...We will reach our year 2000 potential by being obsessed with problem-solving."

Applied's recent success was attributed by Mr. Morgan to its "global culture and architecture" and capital investment in R&D, among other factors.

What goes up in the semiconductor equipment business has often followed the laws of gravity and come down, as once-domain companies have been overtaken and the traditional boom-and-bust cycle of the semiconductor industry has humbled many high-fliers. While many observers of the semiconductor industry now say the inevitable slowdown or downturn will be "softer" than historical examples, the thesis remains unproven.

"Can Applied Beat the Cycle?" was the question posed by Smith Barney Shearson in its latest take-out on Applied Materials. While the investment firm referred to cycles of earnings and stock purchases, semiconductor business cycles help drive those considerations.

"We think that there are four areas hat should be examined to determine whether they might potentially provide upward push in a shrinking equipment market: flat panel display equipment, chemical vapor deposition, sputtering and etch," wrote analyst Robert Stern. "The company also sells epitaxy and ion implant equipment, but those are relatively small businesses for Applied. In the area of ion implant, Applied has shown little dynamism lately, in our view. There is some hope for epitaxial equipment due to the transition oto eight-inch wafers, but so far we believe that it has been relatively small."

In the area of flat panel display fabrication equipment, Applied last year formed a joint venture with Komatsu of Japan. Komatsu agreed to invest $35 million in the venture, now known as Applied Komatsu Technology (AKT). Over the years, Applied invested $6.6 million in the venture, previously known as Applied Display Technology, according to the 1993 annual report. Applied is to receive royalties of 7 percent on the sale of AKT equipment.

"The joint venture is now losing money and our projected FY94 loss is $7.1 million," Mr. Stern wrote. AKT has "considerable potential" for growth, however, and may achieve $200 million in revenues in 1996, he added.

Smith Barney says it "seems likely...that Applied will lose market share in chemical vapor deposition over the next five years. Currently, there are only two large players: Applied and Novellus Systems. Novellus has been unable to make significant progress in gaining market share in recent years because it has been unable to penetrate the top-tier semiconductor makers...In addition, there is an equipment generation shift underway and, currently both Applied and Novellus appear to be two years behind Lam Research in the new high-density plasma generation." Watkins-Johnson also is developing high-density plasma technology.

In sputtering, also known as physical vapor deposition, "Applied has substantial momentum in the sputtering area and we expect its market share gains to continue," Smith Barney reported. "While no new competitors in sputtering have emerged, we think Varian/Tokyo Electron Ltd. (TEL) has become better." Varian/TEL's MB2 "seems to have addressed a sweet spot in the market, and Applied has quickly followed with a small-footprint machine of its own."

(See related story on Applied Materials, page 18.)