Novellus Beats, Guidance Strong

Novellus Systems’ (NVLS - Snapshot Report) third quarter earnings beat the Zacks Consensus Estimate by 1 cent. Revenue beat the consensus by 2.6%.

Earlier, ASML (ASML - Analyst Report), one of the largest semi equipment companies reported very strong results. Chip companies overall (INTC - Analyst Report, AMD - Analyst Report, TXN - Analyst Report and LLTC - Analyst Report, among others) have reported stronger sequential growth, indicating that the sector is exiting the recession. Novellus’ third quarter performance is further evidence of this trend.

Revenue

Revenue of $176.9 million was up 48.4% sequentially and down 29.3% year over year. This reflects stronger demand from foundries and increased expenditure on the memory side, driven by strengthening prices for NAND and DRAM. The end markets driving the current strength are computing and smart phones.



Asia was the largest contributor, generating 62% of total revenue. This represented 70.4% and 24.4% sequential and year-over-year increases, respectively. The greater China region accounted for the largest chunk, generating 36% of total revenue. This was followed by Korea at 20% and Japan at 6%.

Approximately 30% of revenue came from North America, up 39.1% sequentially and down 26.8% year over year. Europe contributed the remaining 8%, down 15.2% sequentially and 56.5% year over year.

Orders

Orders were up a whopping 54.2% in the last quarter, although they continued to decline on a year-over-year basis. We estimate that the backlog increased by around 3.7%. Management stated that lead times were not a hindrance to order fulfillment, although there were some constraints.

Operating Results

The pro forma gross margin for the quarter was 40.7%, up 773 basis points (bps) from the previous quarter’s 32.9%. The improvement in gross margin was on account of a lower cost structure as well as higher volumes that helped increase utilization rates and improve the absorption of fixed overhead costs.

Operating expenses of $72.2 million were flattish sequentially. The operating margin was -0.1%, up 2,751 bps from -27.6% recorded in the previous quarter. All the three components of cost -- R&D, SG&A and COGS -- decreased as a percentage of sales, resulting in the higher operating margin.



Excluding the impact of restructuring charges, the pro forma net loss was $2.5 million or 1.4% net loss margin, compared to -$30.8 million or -25.8% in the previous quarter and net income of $7.3 million or net income margin of 2.9% in the year-ago quarter. Including the special items, the GAAP EPS was -$0.04 compared to -$0.52 in the June 2009 quarter and $0.01 in the Sept. quarter of last year.

Balance Sheet

Inventories were down 8.5%, yielding inventory turns of 2.8x. Days sales outstanding (DSOs) went down from 74 to around 57. The company ended with cash of $483.6 million, up $292.9 million during the quarter. In the last quarter, the company generated $6.7 million in cash from operations and spent $10 million on share repurchases.

Guidance

The fourth quarter guidance is for bookings increase of 25%-50%, shipments and revenue in the $215-$245 million range, non GAAP gross margin of 44-47% and non GAAP EPS of 20-40 cents.