Novellus Reports In-Line

Novellus Systems (NVLS) reported first quarter earnings that were in line with the Zacks Consensus Estimate. It was overall a good quarter for the company, with orders, revenue and margins all looking up after three quarters of decline. The tax rate also dropped, helping results.

Novellus did not host a conference call or provide guidance for the next quarter, given that this is likely its last earnings report before the merger with Lam Research (LRCX - Snapshot Report). The company received appoval from all countries except China, and shareholders will vote on May 10.

Revenue

Novellus reported revenue of $326.7 million, up 15.6% sequentially and 20.9% year over year, better than management’s guidance range of $300-330 million and street expectations of $316 million. Further revenue details based on segment and geography were also not provided.

Orders

Orders were up 26.1% sequentially and down 12.9% year over year. In the last quarter, Novellus saw its orders touch $361.7 million. Backlog increased 17.8%. Novellus did not mention the lead time, so we assume that it remained at 12-16 weeks, slightly higher than the normal 12-week range.

Margins

The pro forma gross margin for the quarter was 47.3%, up 52 basis points (bps) from the previous quarter’s 46.8% and at the higher end of the guided range of 47% (+/- 1%). Novellus’ long-term target of 52-54% seems very far away right now although continued strong spending on semi capex, particularly by Intel (INTC - Analyst Report), Samsung and Taiwan Semiconductor Manufacturing Company (TSM - Snapshot Report) indicates that 2012 will be a good year.

Operating expenses of $96.5 million were up 8.1% sequentially and 1.5% year over year. The operating margin was 17.8%, up 255 bps from 15.2% recorded in the previous quarter and down 964 bps from 27.4% reported in the year-ago quarter. As a percentage of sales, all expenses declined sequentially, with SG&A declining the most. All expenses increased on a year-over-year basis, but R&D increased the most.

Net Income

Novellus reported pro forma net income of $46.0 million or a 14.1% net income margin, compared to $30.8 million or 10.9% in the previous quarter and $97.5 million or 23.6% in the year-ago quarter.

Including restructuring charges and merger-related costs on a tax-adjusted basis, the GAAP net income was $44.4 million or 59 cents a share compared to $38.5 million or 56 cents in the December 2011 quarter and $96.4 million or $1.04 a share in the March quarter of 2011.

Balance Sheet

Inventories were up 5.6%, with inventory turns going from 2.8X to 3.1X. Days sales outstanding (DSOs) went from 61 to 63. Novellus ended with cash and short term investments of $1.01 billion ($14.35 per share), up $95.2 million during the quarter. In the last quarter, Novellus generated $32.8 million in cash from operations, spending $5.2 million on capex and $1.4 million on share repurchases.

Our Recommendation

Novellus shares currently carry a Zacks Rank of #3, implying a Hold recommendation in the short term. We are also Neutral on a long-term basis.