Applied Materials (Nasdaq: AMAT) had a good year in 2007, beating analyst estimates every single quarter. It started off 2008 singing a similar tune, posting another "beat" in February -- so will Q2 be "second verse, same as the first?"

What analysts say:

  • Buy, sell, or waffle? Applied Materials' ratings haven't changed a whit in three months. Twenty-five analysts still follow it. A dozen of them rate it a buy, and 11 more a hold; two say "sell."
  • Revenue. Analysts expect to see sales fall 16% to $2.14 billion.
  • Earnings. Profits are predicted to tumble further, down 35% to $0.22 per share.

What management says:
Fools can be forgiven for being upset that Applied Materials is "beating estimates" by posting double-digit declines. And they can take heart, too. No sooner had Applied Materials published its latest quarterly report than it announced that an unidentified "privately-held corporation based outside the United States" had placed an order for equipment to supply multiple factories with "Applied SunFab thin film tandem junction production equipment" to produce solar power modules. Total value: $1.9 billion -- nearly a full quarter's worth of revenue for Applied Materials.

So you can add this mysterious "John Doe, Inc." to the list of Applied Materials customers, which now includes LDK Solar (NYSE: LDK), for sure, and possibly related companies such as First Solar (Nasdaq: FSLR), Energy Conversion Devices (Nasdaq: ENER), or Suntech Power (NYSE: STP).

What management does:
Of course, the news isn't all good. There's a reason those profits you see above are dropping faster than revenues: margin erosion continues apace. The rolling gross, operating, and net numbers dropped again last quarter. Applied Materials is now earning slightly lower margins than competitors Lam Research (Nasdaq: LRCX) and KLA-Tencor (Nasdaq: KLAC).

Margins

10/06

1/07

4/07

7/07

10/07

1/08

Gross

46.8%

47.1%

47.2%

46.5%

46.7%

46.3%

Operating

24.5%

25.2%

25.6%

25.0%

25.3%

24.5%

Net

16.5%

18.5%

18.0%

17.6%

17.6%

16.4%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Once you consider the reason that margins are slipping, though, you may be willing to give Applied Materials a pass on this issue. As I wrote in last quarter's earnings review:

Thin-film solar is the real growth story at Applied Materials: Sales within this segment, which Applied now calls "Energy and Environmental Solutions," nearly quadrupled year over year (to $122 million). Even better, new orders (i.e., future sales) more than octupled. This suggests that within a year, we could see thin film comprise 10% of the company's business.

Actually, if Applied Materials manages to land another $2 billion supply contract or three, we could easily see even that 10% dream eclipsed by the progression of events. And the more solar business Applied Materials lands, of course, the greater its scale of production -- yielding better efficiencies of production, and higher margins on the solar business. If things keep going as they have, Applied Materials could soon be singing a different tune.

What did we expect out of Applied Materials last quarter, and what did we get? Find out in:

Fool contributor Rich Smith does not own shares of any company named above. Suntech Power is a Motley Fool Rule Breakers pick.  Why do we tell you this? Because The Motley Fool has a disclosure policy.