Transcript of Morgan's Interview:|
APPLIED MATERIALS (AMAT) CHAIRMAN AND CEO JAMES MORGAN ON THE COMPANY'S Q3 NUMBERS
AUGUST 18, 1999
SUMMARY: Morgan thinks PC demand is stronger than people think. Morgan sees next year as a stronger year than this year.
Mark: Applied Materials, the world's largest semiconductor chip equipment maker, is out with some surprising third-quarter numbers. AMAT posted a per share profit of 61 cents a share, eight cents higher than consensus estimates. However, the closely watched "order number" is causing some concern on the street, and pushing shares down in pre-market trading. Ahead of the news, AMAT closed at 71. The 52-week range is 21 to 79. Here with a closer look at his company is James Morgan, Chairman and CEO at Applied Materials. And as usual, I will disclose that I own some shares of Applied Materials. Mr. Morgan, good to see you.
Good morning, Mark.
Mark: Let's talk about the orders, because that's what's bothering everybody. Never mind the bottom line, which looks terrific and everything else, which looks great. Everyone seems to be focused on the fact that orders were only up about 5% sequentially, so, what's the story there?
Well, I think you have to -- you do have to take a minute and recognize the great job Applied Materials did around the world. They beat every item that they were focused on, and did a good job of getting the orders that the customers were ready to place. So, clearly we're well positioned as we move ahead. What you see is we're in an early phase of the upturn in this industry. Clearly the customers have done sort of the easy investment. And now they're trying to sass and decide which of the major new factors they'll begin to put in place. We think with this increase in PC demand, that would seem to be stronger than people thought, clearly telecommunications is exploding, the Internet and the consumer application of silicone will drive a good bookings flow into next year. And we see next year as a stronger year than this year, because there's this activity we talked about when we were at the trade show, the first one, the move to .18.
Mark: That's an interesting choice of words you had there a moment ago when you said your people got the orders that customers were ready to place. And I'm getting a sense from what you said that you are encountering customers who are a little hesitant to place orders. Am I correct? And if so, what is holding things up? What is keeping your customers tentative?
Well, I think, you know, they've been through a tough two or three years. And, so, they've been pretty cautious in this upturn. If you look at all our orders, they've only been for sort of the leading-edge technology and primarily where they could upgrades in the lines that they had existing. Now they're into the decision process to expand new lines which, of course, will create a broad demand for equipment.
Mark: Okay. So, you are right now going through a period where the comparisons are relatively easy, because we're comparing to a real bad time in the business, no matter what company, Novellus, yourself, everybody suffered, but with order growth at 5% sequentially, that suggests that things are not going to be looking good maybe six, nine months from now.
Well, what I would think is that really it's just a period where they're assessing their long-term plans. If you continue to believe that the demand from the Internet, from all the other applications that are taking place, they clearly had to buy more equipment. And for us, you know, we've kind of gotten back to this level with products that have been the broad base of what we currently have in the line. And we're also introducing areas which will expand very rapidly, the chemical mechanical policy, which you know is a new marketing area that's opening up. There's a movement in a single wafer for thermo processing, which us a whole new market for us. Process diagnostics and control, that should grow a lot in the next couple years. We have -- we've introduced electrochemical plater in April. So, there's just a lot of things that we believe will add to our business during the next couple years.
Mark: Let me ask you this, Mr. Morgan. Forgive my ignorance, but those things you mentioned, are they new technologies entirely or are they an invasion of someone else's market space?
They are both. Mostly markets that we haven't had a strong position in.
Mark: Okay. You have said in the press release that you expect the semiconductor industry as a whole to double in the next five years, I believe.
Mark: Okay. It would only take about a 15% growth per year to double in five years, which suggests that you're going to have to either be able to raise prices or take market share in order to grow faster than 15%.
Right. Well, I think if you look over the years, Mark, we've compounded it over 25%. And so, ever since I've been there. So what you find is that if you take the base product of the industry growing at about 17% and then you add gains which we have in some of the new -- the technology areas, and you add the new businesses on top of that, plus there's a whole new market that's expanding in what we call toll service solutions, which we introduced at the trade show, which could add several billion dollars to our general revenue. So, we have plenty of opportunities to grow $10 to $12 billion company.
Mark: Okay, Mr. Morgan. Take good care of my money.
Mark: That was Jim Morgan, Chairman and CEO of Applied Materials.