Applied Materials Cuts Jobs on Whiff of Trouble in Semi Market

Applied Materials (Nasdaq: AMAT) announced plans to reduce its workforce by 1,000 as part of a global cost-cutting move.

The company, one of the largest suppliers of semiconductor equipment, said the year-long reductions would come through job elimination and attrition. It will take a US$20 million charge for the reductions but expects an annualized savings of $150 million from its 2007 fiscal spending.

"We are focused on improving operational efficiencies and the cost structure of our business, as well as enhancing our ability to pursue growth opportunities," said CEO Mike Splinter.

Not Unexpected

The reductions -- while deep -- weren't entirely unexpected. At Applied's analyst day in November, executives announced they were bracing for semiconductor manufacturers to reduce orders for DRAM memory chips, which are used for personal computing memory. Chip production is one of the primary indicators that supplier companies such as Applied Materials use for their economic forecasts.

The order reduction was based both on the uncertainty of the U.S. economic market and the increased chip production costs.

Normally, these reductions indicate a larger market downturn. Coupled with news that the extent of Applied's cuts weren't part of its initial cost-reduction plan, some analysts were given pause.

The cuts could indicate spending from the memory chip industry may stay down for several quarters, said Suresh Balaraman, a research analyst with San Francisco-based ThinkEquity Partners.

That could spell bad news for the U.S. economy. Many of Applied's reductions are likely to affect its North America workforce, Balaraman observed, since it typically is the most expensive.

The semiconductor industry -- which employs approximately 232,000 workers -- is the nation's second largest exporter, according to the Semiconductor Industry Association.

Applied Stands Alone

However, it's risky to predict the overall health of the semiconductor industry through Applied Materials, said Balaraman, since the company is adamant about maintaining profitability on a quarter-to-quarter basis. That fiscal philosophy pushes the management team to err on the cautious side, preferring to scale back its workforce more quickly than other companies.

"Applied has always tried to stay profitable," said Balaraman. "They go out of their way to be profitable all the time."

While the company will likely continue its quarter-to-quarter profitability streak, the cuts do point toward a longer downturn for Applied Materials, Balaraman said.

"In the last six to eight weeks, the fundamental forecast for their business has gotten worse," he noted. "Applied is preparing for a fairly lukewarm two to three quarters."

However, he concluded, the company should expect to increase its orders sometime in the fourth quarter -- just as the last of the workforce reductions goes into effect.