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Laptop and Mobile Phone (Mikael Damkier/Getty Images/Hemera)
Laptop and Mobile Phone (Mikael Damkier/Getty Images/Hemera)

Chip makers rushing to add capacity: Applied Materials Add to ...

Top chip-gear maker Applied Materials Inc. ’s CEO said contract manufacturers are rushing to add capacity after underestimating demand for leading-edge semiconductors for smartphones.

Driven by the need for more chips for mobile devices, spending by leading foundry TSMC and smaller rivals on chip gear has recovered from a slump last year as they implement new technology to keep up with Intel Corp. Major TSMC-customer Qualcomm Inc. in April warned it could not get enough 28 nanometre chips for smartphones and said it would look for other contract manufacturers to meet demand.

“Demand on 28-nanometres is very high and there’s still constrained supply,” Applied Materials chief executive officer Mike Splinter told analysts on a conference call.

“We think 28-nanometre’s going to be strong through the year. It’s going to be strong into 2013. Assuming that our customers can find a place to put equipment, they will continue to add equipment as quickly as they can,” Mr. Splinter said.

With TSMC placing the bulk of its orders early in the year, Applied Materials said equipment spending was peaking and that spending by foundries on its equipment in the second half of 2012 would be distributed more among smaller customers – like GlobalFoundries and UMC.

“That growth trend is decelerating. It’s not like we’re rolling over, but at the same things are not continuing to grow,” said Needham analyst Edwin Mok.

Nvidia Corp. says it has also lost business selling advanced graphics chips for PCs due to 28 nm production constraints at TSMC.

Twenty-eight nanometre chips have features measuring 28 nanometres, or billionths of a metre, and are contract manufacturers’ newest technology.

Mr. Splinter estimated tablet sales would grow 60 per cent this year to more than 100 million units, and that smartphone sales would top 660 million units.

To meet demand, TSMC in April raised its 2012 capital expenditures estimate to between $8-billion and $8.5-billion, compared to $6-billion at the start of the year. Other big players in mobile chips are also spending more.

But with investment in equipment to make DRAM chips used in PCs still weak, Mr. Splinter said worldwide wafer fab equipment spending this year would be between $32-billion and $35-billion, or flat to down 10 per cent from last year.

Strength in chip gear spending has help offset weakness in Applied Materials’ solar cell and display manufacturing businesses, which have been damaged by oversupply and weak pricing. Subsidy cuts in Europe have triggered a global glut of solar panels and driven down prices sharply.

The company’s stock has fallen 16 per cent since the end of March when it forecast fiscal 2012 results below expectations. It now trades at the equivalent of 11 times expected earnings.

Applied Materials said revenue in the second quarter ending in April was $2.54-billion, down from $2.86-billion in the year-ago period.

It said it expects current-quarter net sales to be flat to down 10 per cent sequentially. The midpoint of that range is equivalent to $2.413-billion.

Analysts had expected revenue of $2.399-billion for the quarter ending in April and $2.443-billion for the quarter ending in July, according to Thomson Reuters I/B/E/S.

Net earnings fell to $289-million, or 22 cents a share, from $489-million, or 37 cents a share, in the year-ago period.

Non-GAAP earnings per share for the quarter were 27 cents, better than the 24 cents expected by analysts.

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