"We believe this lack of visibility caused by the Sept. 11 terrorist attacks in the United States, added to an already slowing economy, has postponed a recovery in the semiconductor industry," said Joseph R. Bronson, executive vice president and chief financial officer of Applied Materials. Speaking to financial analysts during a conference call on Wednesday, Bronson said the company has downgraded its projections for chip industry revenues and capital spending because of greater uncertainty and weak conditions in the final months of 2001.

"This is the first downturn in history where both unit volumes and dollars have declined for both memory and logic chips," said Bronson in the conference call after Applied reported a 20% sequential drop in net sales to $1.26 billion in the last fiscal quarter, ended Oct. 28. "We now estimate capital spending for 2001 to be down by over 30% from a previous estimate of 27% and wafer fabrication equipment spending down close to 35% from a previous forecast of 30%.

"We expect capital spending to remain weak in the first half of 2002 due to continued wafer fab under utilization and poor customer profitability," added the CFO.

As a result of near-term weakness, Applied is expecting its own revenues to drop slightly more than 20% in the current fiscal quarter to around $1 billion from the prior three-month period. Bronson said bookings are expected to be flat to slightly lower than $1.1 billion in new orders received by the company in its fiscal fourth quarter, which ended Oct. 28. New orders fell 9% in the last quarter, which was greater than expected due to delays and cancellations of 300-mm tool purchases, Bronson said.

Applied's results were slightly lower than estimates on Wall Street, with the company posting a net loss of $82 million in the quarter, including pre-tax restructuring charges for layoffs announced two months ago. Excluding one-time charges and other items, Applied said its net income was $22 million, or $0.03 per diluted share, which was one cent per share less than Wall Street's consensus, according to First Call/Thomson Financial (see Nov. 14 story).

During Wednesday's conference call, Applied executives declined to give estimates on market growth for 2002. However, the company is currently expecting to see a recovery in tool-purchase "commitments" in the second half of next year as wafer fab utilization improves worldwide and demand for 300-mm production systems begins to grow again, Bronson said.

Currently, Applied is estimating that the chip industry will purchase about $6 billion worth of 300-mm systems in 2001, which is down from a forecast in the summer of $10.2 billion but in line with the outlook at the start of this year. Bronson said Applied expects chip makers to purchase $11 billion in 300-mm (12-inch) wafer tools in 2002.

"A number of 300-mm projects scheduled for early 2002 have been pushed out by those customers that have not been early adopters of 300-mm," Bronson told analysts. "We believe those customers that have 300-mm pilot lines are going ahead with production at the current time."

In another key technology segment, copper-deposition tool shipments are expected to grow 30% in 2002 to $1 billion, up from $700 million in 2001, according to Bronson.

Looking ahead, Bronson said Applied expects to "remain profitable or incur a small loss" with net sales of $1 billion in the current fiscal first quarter, which ends in late January.

"We will do what we need to do not to lose money, but we have to account for any revenue uncertainty," Bronson said when asked if the company was now willing to become unprofitable for one quarter in order to maintain its resources for the eventual upturn. "It was tough to get the breakeven level to $1.1 billion in sales, and we achieved that, and now we are trying to take the breakeven point lower than $1.1 billion, which I think we have achieved, but I think we have to hold some small probability of a loss."

Applied chairman and CEO James C. Morgan quickly added that the Santa Clara company will not compromise strategic investments in new technologies and tools while trying to reduce costs in the current fiscal quarter. "We have more opportunities than we can get our arms around," Morgan said. He added that continued investments in future concepts for wafer fabs will continue in order to make sure that Applied remains "the leader for the next decade," and "that may impact our profitability," said the chief executive.

A major problem facing the industry in the next year is the lack of leading-edge fab capacity and continued delays in investments as a result of uncertainty in the marketplace, Morgan warned. He said many chip manufacturers are now at the crossroads and must make decisions on adding new leading-edge capacity for 0.13-micron and below process generations.

Morgan estimated that only 4% of the industry's current capacity is capable of producing 0.13-micron and below devices. When demand finally takes off, the need for new fab equipment will "go vertical," Morgan warned, expressing concern about the industry's ability to make those investments in a timely fashion for the next growth cycle.

Semiconductor executives "are really at a cross point for decision-making," Morgan said. "The problem is we cannot get them to commit to when they will sign the purchase orders. There are a lot of potential purchase orders out there, but I think we won't know until the February timeframe or the early part of next year what they are going to do," he said.