The significant collapse in sales within Applied Materials’ Energy and Environmental Solutions (EES) division - which houses its solar equipment product range – is being questioned by financial analysts as the company continues to absorb losses rather than exit the sector altogether.
Applied Materials said in its FYQ4 2012 conference call that it took a goodwill impairment charge associated with the EES segment of US$421 million in the quarter. Management said that this was due to the solar equipment sectors deteriorating market conditions that included customers financial health and ‘reduced market valuations.’
Applied Materials also absorbed EES restructuring charges of US$124 million, which were previously announced, though these costs were also said to be related to the previous acquisition of ion implant firm, Varian Semiconductor.
Mike Splinter Chairman and Chief Executive Officer of Applied Materials said in the call: “Conditions for our customers are extremely challenging, and investment in new capacity remains very low. Until we see clearer signs that solar equipment demand is recovering, we will take additional steps to reduce our cost structure and associated losses.”
Although Splinter did not expand on his prepared comments in the call, recently appointed President, Gary Dickerson said the company would, “reduce our operating expenses, going significantly beyond our previously announced plans for this [ESS] business. Additionally, we are restructuring our workforce through a voluntary retirement program, as well as reduction in [work] force.
Applied Materials reported EES sales in FYQ4 of US$62 million, down 19% from the previous quarter. EES had a non-GAAP operating loss of US$46 million and a GAAP operating loss of US$480 million in the quarter.
ESS sales for the full-year were US$425 million, down 79% y-on-y.
The company reported FYQ4 EES orders of US$65 million, up 86% from the previous quarter but were driven by demand for roll-to-roll deposition equipment, not related to the solar segment within its EES division.
The full-year order intake stood at US$195 million, down 88% when compared to the previous year. Applied said that it made a non-GAAP operating loss of US$184 million and a GAAP operating loss of US$668 million for the EES division in FY2012.
However, management also warned that sales would be down greater than 30% in the next quarter for its EES division.
“We expect losses to narrow throughout the fiscal year, as we reduce the combined OpEx run rate for the solar and ‘WEB’ businesses to below US$30 million per quarter by the second half of fiscal 2013,” commented George Davis, Chief Financial Officer in the conference call. “This new OpEx level reflects a nearly 50% reduction from where we started in 2012, while absorbing the solar implant spend, which had remained at SSG [Silicon Systems Group] for the first year of integration, but now will be reported in EES.”
Those comments did not dispel questions from financial analysts on the call over whether Applied should consider exiting the PV equipment sector altogether.
James Covello, semiconductor analyst at Goldman Sachs said, “On the Solar piece, what's the difference between what you're doing and sort of getting out of the business entirely? It seems like there's a very significant scaling back of the effort here. I mean, what's left?
“We certainly anticipate that end market demand is going to continue to increase over time,” responded Dickerson. “And we can add about US$100 million per gigawatt of new capacity, given a reasonable market. This can be a good business for Applied Materials. We have a strong position in technology to enable higher cell efficiency, enabling lower cost per watt, and a real advantage in products that are important to making this happen."
“We clearly understand that we need to reduce the drag on earnings, impact on the company overall. But we also want to be investing when this market returns. We have a very strong position, and we still think this can be a good business for us.”
According to financial analyst, Timothy Arcuri, recently joined Cowen Group from Citi, Applied’s EES division operating expenses would be around US$30 million per quarter, after restructuring but estimated that was around US$120 million per annum, that required annual sales of US$500 million, just to breakeven!
In response, Davis said, “We've taken a significant reduction in our costs in that area over the last 2-years accelerating this year. And so the spending that you're seeing that is really for our core leadership positions in a very select set of technologies that we think are going to be the most leveraging to our customers' technology roadmaps going forward. We think it's a growth market that's important. We think it's something that will ultimately differentiate Applied in its ability to grow. And so, I think, at US$30 million [OpEx per quarter], we're pretty much where we think we need to be, given our outlook for the market and what we need to sustain our capabilities.”
With the inclusion of the former Varian Semiconductor solar implant tool segment coming under the EES division, Applied would seem to have two key technology platforms that fit Davis’ description of ‘select technologies,’ ion implant and screen printing.
However, Applied may well argue that this core technology base also includes the former HCT wire saw equipment. But there remains significant overcapacity in the wafering sector as well as lack of real technical innovation required that would include sawing in the future.
This suggests that Applied may de-emphasise wafering or offload the technology in the future as a rebound in capacity additions could take several more years to materialise, long after a new technology buy-cycle for equipment and materials needed to boost cell and module efficiencies is in full-swing.