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Applied Materials Gaining Traction in Solar Sector

Chip equipment makers, like most of their customers, have to weather turbulent shifts from boom times to lean ones. Applied Materials (AMAT), which is near the bottom of one such chip cycle, decided a few years ago it would build a buffer by moving into the growing market for solar photovoltaic equipment.

The results so far have been mixed but encouraging. This afternoon, Applied Materials reported its earnings for the quarter ended July 27, 2008. Overall revenue dropped 14 percent in the quarter from the previous one, thanks to a 40 percent slide in revenue for its silicon segment, the company’s largest business division. Slack demand for memory and flash chips caused the decline.

Solar revenue, however, was up 105 percent, helped by Applied’s recent acquisitions, including solar equipment maker Baccini. But solar only made up 9 percent of total sales, and the $30 million in M&A charges related to Baccini and other deals led to an operating loss of $85 million in the solar division and erased two cents a share from the company’s overall per-share net profit of 91 cents.

On a conference call, the company said that without the M&A charges, the solar division would have posted a slight profit in the quarter. Asked when the unit would be expected to turn fully profitable, executives would only reiterate a previous forecast of operating margins for solar equipment coming in between 25 percent and 30 percent in 2010.

The chart above, taken from a slide prepared from Applied’s earnings call, shows the company’s revenue and operating loss from its solar business over the past three quarters. Both are growing, but revenue is accelerating a lot faster.

All told, investors liked the news. AMAT’s stock was up 4.7 percent to $19.33 in after-hours trading Tuesday; this also after the CEO said the dismal quarter represented a “trough” in the semiconductor business and that solar equipment remains an ace up the company’s sleeve.

Solar equipment may one day rival semiconductors as a contributor to the company’s profits, although by then the boom-and-bust semiconductor cycle may be heading into another boom period.

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