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July 13, 2010
Share ThisRevenue
Revenue of $321.4 million was up 16.3% sequentially and 169.6% year over year, coming in at the high end of the revised guidance range of $300-320 million. Revenue from foundries came in stronger than expected, and demand from memory customers also improved. The stronger results are a reflection of continued demand from foundries and increased expenditure on the memory side, helped by stable pricing for NAND and DRAM, for which supply remains constrained.
Management stated that there were no signs of weakening in the PC, smart phone and other consumer electronics markets. We bellieve that the launch of a large number of mobile Internet devices (“MIDs") this year ensures continued growth through the rest of the year.
Revenue by Geography
Asia remained the largest contributor in the last quarter, with a 68% revenue share, growing 16.3% sequentially and 239.5% year over year. Revenue from Asia have been increasing at a triple-digit clip in each of the past three quarters.
The greater China region accounted for the largest chunk, generating 44% of total revenue. This was followed by Korea at 21% and Japan at 3%. The greater China region grew 106.8% sequentially, while Korea grew 34.7%. Management stated that many new fabs were coming up in China and technology purchases were fast spreading from the low end to the high end. The strengthening of the Chinese currency is helping the process.
Approximately 24% of revenue came from the U.S., increasing 7.4% sequentially and 102.2% year over year, reflecting the increased spending on semiconductor manufacturing in the country.
Europe also swung to growth in the last quarter, with the 8% contribution reprsenting a 55.1% sequential and a 54.0% year-over-year increase for Novellus.
Orders
Orders jumped 19.8% during the quarter to $385 million. The order strength was fueled by existing foundry and memory customers, as well as wins at several new customers.
The December quarter was the first since the recession started that orders also grew from the year-ago period. The year-over-year growth of 246.2% was the third straight quarter that orders grew triple digits on a year-over-year basis.
We estimate that backlog increased by nearly 24%, evidence that end-demand continues to strengthen. Lead times are at 12-16 weeks, slightly ahead of the normal 12-week range. However, management stated that there were no order pushouts in the last quarter. Moreover, Novellus has not lost any business on account of inability to fulfill orders.
Margins
The pro forma gross margin for the quarter was 48.8%, down 17 basis points (bps) from the previous quarter’s 49.0%. Gross margins in the last quarter were impacted by the mix of business. However, as volumes increase further, we could see the company moving toward its 52-54% target.
Operating expenses of $83.8 million were up 4.4% sequentially and 4.7% year over year. The operating margin was 22.8%, up 282 bps from 19.9% recorded in the previous quarter and up 5,753 bps from -34.8% reported in the year-ago quarter. In the last quarter, both R&D and SG&A declined sequentially as a percentage of sales, while COGS was flattish.
Net Income
Excluding the impact of restructuring charges, the pro forma net income was $63.5 million or 19.8% of sales, compared to a net profit of of $45.5 million or 16.5% of sales in the previous quarter and net loss of $39.3 million or 32.9% of sales in the year-ago quarter.
Including restructuring charges, the GAAP net income was $63.3 million ($0.66 per share) compared to income of $41.3 million ($0.43 per share) in the March 2010 quarter and loss of $50.0 million ($0.52 per share) in the June quarter of last year.
Balance Sheet
Inventories increased 11.1%, with inventory turns increasing slightly from 3.2X to 3.3X. Days sales outstanding (DSOs) went down from 51 to around 43. Novellus ended with cash and short-term investments of $555.0 million ($5.78 per share), up $2.0 million during the quarter.
In the last quarter, the company generated $104 million in cash from operations (nearly double the amount generated in the first quarter) and spent $107 million on the repurchase of 4.4 million shares. The company has $681 million left under the current authorization plan to expire in October 2011.
Guidance
The fourth quarter guidance is for bookings increase of 0-10%, shipments in the $345-375 million range, revenues in the $335-365 million range, gross margin of 50% (+/- 1%) and earnings of 72 to 90 cents a share.
Our Take
Novellus Systems is a beneficiary of the ongoing strength in the semiconductor market, which is being driven by the PC refresh cycle, as well as very strong growth in smartphones and other MIDs. This is pushing up demand and thus pricing for DRAM and NAND components, helping fab buildouts and capacity expansion by memory customers. Management comments indicate that foundries continue to generate growth, with utilization rates staying over 90% for the second straight quarter and expected to remain over 90% in the next quarter as well.
Both Gartner and SEMI expect the semiconductor equipment sector to grow very strongly this year and Gartner recently raised estimates for the year and now expects the sector to grow triple digits. Novellus’ second quarter results and third quarter guidance indicate that the company is on track to deliver triple-digit growth (as projected by Gartner).
Analysts polled by Zacks are also positive about Novellus, as witnessed by the estimate revisions in the 7 days prior to the earnings announcement. Overall, estimates for the September quarter increased 2 cents, while estimates for fiscal 2010 increased 5 cents. The 3-cent reduction to 2011 estimates is the result of Gartner’s new growth projection of 6% for the sector in 2011.
Given the strong outlook over the next few months, we have assigned a Zacks rank of #1 (Strong Buy) to Novellus shares, similar to other equipment makers, such as KLA-Tencor Corp (KLAC) and Lam Research Corporation (LRCX).
Read the full analyst report on "NVLS"
Read the full analyst report on "KLAC"
Read the full analyst report on "LRCX"
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