Novellus Systems (NVLS)

Q1 2011 Earnings Call

April 27, 2011 4:30 pm ET

Executives

Robin Yim -

John Hertz - Chief Financial Officer, Principal Accounting Officer, Vice President and Corporate Controller

Richard Hill - Chairman and Chief Executive Officer

Timothy Archer - Chief Operating Officer

Analysts

Atif Malik - Morgan Stanley

James Covello - Goldman Sachs Group Inc.

Weston Twigg - Pacific Crest Securities, Inc.

Mehdi Hosseini - Susquehanna Financial Group, LLLP

Stephen Chin - UBS Investment Bank

Thomas Diffely - D.A. Davidson & Co.

Christopher Muse - Barclays Capital

Patrick Ho - Stifel, Nicolaus & Co., Inc.

Krish Sankar - BofA Merrill Lynch

Edwin Mok - Needham & Company, LLC

Timothy Arcuri - Citigroup Inc

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Benedict Pang - Caris & Company

Satya Kumar - Crédit Suisse AG

Mahesh Sanganeria - RBC Capital Markets, LLC

Presentation

Operator

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Welcome to the Novellus First Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, April 27, 2011. I would now like to turn the conference over to Ms. Robin Yim of Novellus Systems. Please go ahead, ma'am.

Robin Yim

Thank you, Carla. Good afternoon, everyone, and thank you for joining the Novellus Systems first quarter 2011 earnings conference call. Rick Hill, Chairman and Chief Executive Officer, is traveling and joining the call remotely. And with me here in San Jose are Tim Archer, Chief Operating Officer; and John Hertz, Chief Financial Officer. Financial results for our first quarter 2011 were released on PR Newswire shortly after 1 p.m. Pacific Daylight Time. You can obtain a copy of the news release in the Investor Relations section of our website at novellus.com.

Today’s earnings call contains forward-looking statements about Novellus’ business outlook, the future performance of Novellus, our products and forecast of key metrics for the second quarter of 2011. Specific forward-looking statements include, but are not limited to, the impact of inflation in the events in Japan on our business, our belief that the long-term drivers for this semiconductor equipment business remain on track, estimates and projections for growth in our industry, PC unit and semiconductor growth, tablet and smartphone market, capital expenditures and wafer fab equipment demand. The forecasted bookings, shipment volumes, revenue growth margin, earnings per share target and tax rate for the second quarter of 2011 and other unanticipated future events.

We caution you that forward-looking statements are projections and expectations regarding future events, which may involve risks and uncertainties that could cause actual results to differ materially from the results contemplated, including an inaccurate basis for our financial forecast. Information concerning risks that could actual results to differ materially is contained in today's press release, our filings with the Securities and Exchange Commission, including our Form 10-K for fiscal 2010 and our most recent Form 8-K.

Forward-looking statements are based on information as of today, and we assume no obligation to update any of these statements. During our call today, we will make references to non-GAAP financial measures, which exclude certain charges, benefits and other items which are detailed in our earnings release. For a reconciliation of non-GAAP to GAAP financial measures, please refer to our earnings release and our Form-8K furnished to the SEC today.

John Hertz will begin today's call with a review of the financial results for the first quarter. Then, Rick Hill will discuss the state of the business and our industry outlook, followed by a guidance for the second quarter of 2011 and then open the call for the question-and-answer session. Now I'll turn the call over to John.

John Hertz

Thank you, Robin. I'm pleased to report a solid first quarter 2011 in which results were within guidance, and we delivered another record quarter in terms of net income and earnings per share.

Starting with bookings, first quarter net bookings came in at $415 million, up at 1% sequentially and at the low end of our guidance range of flat to up 10%. First quarter shipments of $377 million were down 10% and in the lower end of our guidance range of $370 million to $400 million. First quarter revenues were $413 million, up 7.5% and slightly above the midpoint of our guidance range of $395 million to $425 million.

First quarter revenues by geographic region were as follows: United States, 34%; Greater China, 40%; Korea, 9%; Japan, 8%; Europe, 9%. Now turning to gross margin. First quarter gross margin was 50.4%, which came in at the midpoint of the guidance range of 49.5% to 51.5%.

First quarter operating expenses totaled $96 million, which include the $1 million donation in relief aid for the Japan earthquake and tsunami victims and their families. Q1 operating expenses as a percentage of revenues were a record low 23% and well within our target business model at these revenue levels. So I'm very pleased with the continued companywide commitment to discipline and control in operating expenses.

First quarter operating income was $112 million on both a GAAP and non-GAAP basis, up 27% versus Q4 on a GAAP basis, and up 11% on a non-GAAP basis. Q4 non-GAAP operating income excludes certain charges that are detailed in today's press release. The result in Q1 operating margin of 27% is the best operating margin the company has achieved in the last decade.

Our first quarter tax rate was within guidance at 14.5%. Going forward, our projected tax rate for 2011 remains unchanged at 15% plus or minus 2 points. That guidance assumes a similar geographic revenue mix, profitability levels and no significant change in U.S. tax law. Our record first quarter net income and fully diluted EPS came in at $96 million and $1.04 per share, respectively, which was just above the midpoint of our guidance of $0.95 to $1.10.

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