Applied Materials Declines After Report of US Criminal Probe


(Bloomberg) — Applied Materials Inc., the largest US maker of chipmaking machinery, slid in late trading following a report that it faces a US criminal investigation for allegedly violating export restrictions to China.

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The company is being probed by the Justice Department over dealings with China’s biggest chipmaker, Semiconductor Manufacturing International Corp., according to Reuters. The department is looking at whether Applied Materials sold hundreds of millions of dollars of equipment without the proper licenses, the news outlet reported, citing unidentified people familiar with the situation.

The Justice Department declined to comment. Applied Materials declined to discuss details of the case but noted that it previously disclosed a federal review of China deliveries.

“Applied Materials first disclosed in October 2022 that it received a subpoena from the US Attorney’s Office for the District of Massachusetts requesting information relating to certain China customer shipments,” the company said in an emailed statement. “The company is cooperating with the government and remains committed to compliance with global laws, including export controls and trade regulations.”

The report overshadowed generally upbeat quarterly results from Applied Materials, which topped analysts’ estimates with its earnings and forecast.

Shares of Applied Materials, based in Santa Clara, California, fell as much as 7% in extended trading. KLA Corp. and Lam Research Corp., two other US chip-equipment makers, also fell. KLA was down 3.4%, while Lam dropped 1.6%.

The company and its peers are operating under increasingly strict rules imposed by Washington on exports of chip technology to China. The US has argued such rules are needed to protect national security and requires companies to seek licenses to send certain types of machines or have dealings with particular companies in the Asian nation.

According to Reuters, Applied Materials produced chipmaking gear in Gloucester, Massachusetts, and then shipped it to a subsidiary in South Korea. It then went to China’s SMIC, the people familiar with the investigation said.

SMIC was placed on a so-called entity list in December 2020 by the Department of Commerce, which cited alleged links between the chipmaker and China’s military. That means US companies need special permission to sell to the company.

Applied Materials’ fourth-quarter report coincided with publication of the Reuters story. Earnings in the period amounted to $2.12 a share, excluding some items, the company said. Sales were little changed in the quarter, which ended Oct. 29, at $6.72 billion. Analysts estimated earnings of $1.99 a share and revenue of $6.54 billion.

Fiscal first-quarter sales will be about $6.47 billion, the company said. That compares with an average analyst estimate of $6.34 billion. Excluding some items, profit will be $1.72 to $2.08 a share in the period, which ends in January. The average projection was $1.84 a share.

Semiconductor manufacturers order machinery from Applied Materials and its peers well ahead of opening new factories, which can take more than a year to build and equip. That makes the company’s guidance a key indicator of the industry’s confidence in future demand.

Though the chip industry has been contending with a slowdown in personal computers and smartphones — two of the biggest traditional consumers of semiconductors — Applied Materials Chief Executive Officer Gary Dickerson has argued that artificial intelligence computing will fuel a new surge in demand.

Semiconductor equipment companies have been hurt by weak demand from memory-chip makers, which are enduring an industry glut that’s wiped out profits and slowed factory expansions. But that’s been offset, to an extent, by the ongoing race to make high-end processors — particularly for AI work.

China had been one of the fastest-growing markets for chip equipment. But the US restrictions have begun to take a toll on sales. Analysts and investors are still trying to gauge the full impact of the new rules — and how they’re likely to be enforced.

A recent tightening of the export restrictions won’t have an incremental impact on Applied Materials’ results, the company said Thursday.

In the fourth quarter, that market provided 44% of overall sales and will remain at an “elevated level” in the current period because of some large shipments to a computer memory customer, the company said. Over time, China will shrink back down to around 30% of sales — its historical level.

Dickerson said he remains bullish on the outlook for demand for his products overtime.

“Longer term, the setup is really great,” he said in an interview.

(Updates with more on results in eighth paragraph.)

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