Applied Materials Defers Revenue as It Grapples With Parts Shortages

The challenges facing Applied Materials and other chip-equipment makers underscore the various ways industries are struggling with inventory management two years into the pandemic. Retailers in recent weeks have said they are looking to dispose of excess inventory after failing to anticipate rapid changes in consumers’ pandemic spending habits.

Applied Materials lost out on about $150 million in sales during the quarter ended May 1, because of pandemic restrictions in Shanghai that affected its suppliers for silicon components and other parts. The company reported $6.25 billion in revenue for the quarter, or 12% more than a year earlier. It expects to recognize the revenue it missed out on during the quarter later in the year once it receives delayed parts and completes its orders.

“We have the capacity to increase and go, but we have these supply issues,” said

Brice Hill,

the company’s chief financial officer, referring to the company’s ability to meet demand.

Applied Materials typically recognizes revenue once the company ships its tools. But in the current environment, it is shipping some tools to customers before they have all of the parts. In those cases, the company recognizes revenue once the delayed parts are installed.

Applied Materials had about $5 billion in inventory on its balance sheet as of May 1, compared with about $4 billion a year earlier. The company, which hasn’t disclosed the exact parts that have been affected by lockdown measures in China, said it is working closely with its suppliers to expedite production and delivery. So far, that has meant identifying new shipping lines, procuring different subcomponents and, in one particular case, physically moving parts from one manufacturing facility to another to finish production, Mr. Hill said.

Competitor

Lam Research Corp.

had just over $2 billion in deferred revenue—generally referring to sales of equipment that has been delivered to customers but is missing some parts—during the quarter ended March 27. Lam during the quarter generated just over $4 billion in revenue, or roughly 6% more than a year earlier. The Fremont, Calif.-based company had about $1.5 billion in deferred revenue as of December.

Lam has struggled to secure semiconductors that are used in the tools that it produces for the semiconductor industry,

Douglas Bettinger,

the company’s CFO, said at a June 7 industry conference. “The industry needs more equipment. We can’t get semiconductors that go into the equipment. It’s a weird circular conversation, frankly.” Mr. Bettinger said.

“It’s been a little bit of whack-a-mole,” said

Krish Sankar,

an analyst at investment firm

Cowen Inc.,

describing the continuing component shortages and supply-chain delays facing chip-equipment manufacturers.

Manufacturers had 1.47 times inventory to sales as of March, down from 1.60 two years ago, according to data from research firm Oxford Economics. By comparison, that figure for retailers stood at 1.16 in March, down from 1.53 two years earlier, Oxford said.

“If they’re holding us back, then we do work at the detailed level with them to find alternatives. That’s the best we can do,” Mr. Hill said, referring to the company’s work with its suppliers. Applied Materials expects to generate about $6.25 billion in revenue in the current quarter, which ends in July. That is about flat from its latest quarter ended May 1.

The company could miss out on about $500 million in sales during the July quarter, mostly stemming from the lockdowns in China, according to

Craig Ellis,

an analyst at the financial firm

B. Riley Financial Inc.,

noting that they had a bigger impact on the current quarter.

The company has a detailed understanding of how quickly its suppliers in China are ramping up production, as well as their shipping and delivery schedules, Mr. Hill said. Assuming those plans stay on track, the company this fall expects to begin incrementally increasing revenue as it receives supplies and delivers customer orders, he said.

“After that, we think we can start growing much more quickly, once we get a healthy inventory position,” Mr. Hill said.

Write to Kristin Broughton at [email protected]