So far this year, Applied Materials (NASDAQ:AMAT) is two-for-two in earnings beats, but only by virtue of doing slightly less badly than expected. Tomorrow will be no different. Applied Materials' Q3 numbers will be scored on the velocity of their descent.

What analysts say:

  • Buy, sell, or waffle? Twenty-seven analysts give the stock a dozen buy ratings, 14 holds, and a sell.
  • Revenue. These analysts expect to see sales tumble 28% to $1.84 billion.
  • Earnings. Profits are predicted to plummet 60% to $0.14 per share.

What management says:
CEO Mike Splinter can't have been happy reporting back-to-back quarters of declining profits this year. But he put a brave face on things regardless, highlighting the company's "focus on operational execution and prudent cost controls" last quarter.

What management does:
Me, I don't see it. Don't get me wrong -- I'm dumbfounded at the fact that Applied Materials managed to eke out a small increase in gross margins last quarter, despite sales falling 15%. But the company didn't do a great job of matching operating costs to the slower flow of revenue; as a result, its rolling operating and net margins are still falling.

On the plus side, rivals like LAM Research (NASDAQ:LRCX) are earning lower operating margins. So call it a relative victory.

Margins

1/07

4/07

7/07

10/07

1/08

4/08

Gross

47.1%

46.7%

46.5%

46.7%

46.3%

46.4%

Operating

25.2%

25.1%

25.0%

25.3%

24.5%

23.5%

Net

18.5%

18.0%

17.6%

17.6%

16.4%

15.9%

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:
Where is Applied Materials going wrong? Scrolling down the income statement, we see that selling, general, and administrative costs rose 4% last quarter, even as sales plummeted. Applied Materials cut some costs, but in the worst place possible: research and development spending. Seeing as Applied Materials is trying to carve out a niche supplying cutting-edge tech to the booming market for solar power, where potential sales to LDK Solar (NYSE:LDK), First Solar (NASDAQ:FSLR), or Suntech Power (NYSE:STP) beckon, this seems imprudent.

Sure, with R&D spending down less than 2% versus the 15% slide in revenues, it's apparent that Applied Materials did its best to keep the paring here to a bare minimum. Still, down is down. We'd much rather see the cuts coming out of administrative overhead.

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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.