Novellus Systems, Inc. (NVLS)

Q2 2010 Earnings Call Transcript

July 12, 2010 4:30 pm ET

Executives

Robin Yim – VP, Treasurer and IR

John Hertz – VP and CFO

Rick Hill – Chairman and CEO

Analysts

Gary Hsueh – Oppenheimer & Company

Krish Sankar – Banc of America

Mahesh Sanganeria – RBC Capital Markets

Atif Malik – Morgan Stanley

Edwin Mok – Needham & Company

Satya Kumar – Credit Suisse

Ben Pang – Caris & Company

Timothy Arcuri – Citi

Stephen Chin – UBS

Peter Kim – Deutsche Bank

Jim Covello – Goldman Sachs

Patrick Ho – Stifel Nicolaus

Jagadish Iyer – Arete Research

CJ Muse – Barclays Capital

Presentation

Operator

Good day, everyone, and welcome to Novellus’ second quarter 2010 earnings conference call. Just as a reminder, this call is being recorded today, July 12, 2010. I would now like to turn the conference over to Ms. Robin Yim of Novellus Systems. Please go ahead.

Robin Yim

Thank you, operator. Good afternoon, everyone, and thank you for joining the Novellus Systems second quarter 2010 earnings conference call. Joining me on the call today are Rick Hill, Chairman and Chief Executive Officer, and John Hertz, Vice President and Chief Financial Officer.

Financial results for the second quarter 2010 were released on PR Newswire shortly after 1:00 PM 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, and our products and forecasts of key metrics for the third quarter of 2010.

Specific forward-looking statements include, but are not limited to, our expectations regarding the continued improvement of the economy and the markets in which we operate, including our customers’ CapEx spending; our expectations for improvement in operating efficiency, leverage and cash flow in the third quarter of 2010; and our intention to continue to improve on these areas. Our expected effective tax rate for fiscal 2010; our financial model, including expectations with respect to operating expenses, the forecasted bookings, shipment volume, revenue, gross margin, operating expense, and earnings per share target for the third quarter of 2010; 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 cause actual results to differ materially is contained in today’s press release and our filings with the Securities and Exchange Commission, including our Form 10-K for fiscal 2009, our most recent Form 10-Q and our Form 8-K. Forward-looking statements are based on information as of today and we assume no obligation to update any of these statements.

John Hertz will begin today’s call with a review of the financial results for the second quarter. Then Rick Hill will discuss the state of the business and our industry outlook, followed by guidance for the third quarter of 2010, 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. Good afternoon, everyone, and thank you for joining us for our second quarter 2010 earnings conference call. I’m pleased to announce another outstanding quarter where we met or exceeded our guidance and continue to improve on all key financial metrics such as operating leverage, profitability and cash flow from operations. Before I get into the specifics, I’d like to preface my comments by stating that our Q2 actual and Q1 comparative results will be discussed on a GAAP basis.

So with that, second quarter 2010 bookings were $385 million, up 20%, which was at the midpoint of our mid-quarter update guidance range of up 15% to 25%. The quarter-over-quarter increase on orders was driven primarily by foundry, and we saw continued strength in memory and a broadening of the overall customer base.

Q2 shipments were $332 million, up 17% sequentially, and ended on the higher end of our mid-quarter update guidance range of $315 million to $335 million. Second quarter revenues were $321 million, which was up 16% sequentially, and came in just above the high end of our mid-quarter update guidance range of $300 million to $320 million.

Our second quarter revenues by geographic region are as follows. The United States, 24%; Greater China, 44%; Korea, 21%; Japan, 3%; Europe, 8%. Second quarter gross margin was 48.8%, up from 48.5% in Q1 2010 and at the midpoint of our guidance range of 48% to 50%. Operating expenses in the second quarter totaled $84 million, which was in line with our model, where we expect to apply 7% of every incremental shipment dollar to operating expenses.

Our Q2 effective tax rate was 15.7%, which is on the low end of our guidance of 15% to 20%. We currently expect our effective tax rate for the year to come in at the lower end of that range. Second quarter net income was $63 million or net margin of 19.7%, which resulted in fully diluted earnings per share of $0.66, which exceeded the mid-quarter update guidance range of $0.55 to $0.62. We exceeded guidance due to higher revenue, operating expense control, improved tax rate, and share repurchases.

Moving now to the balance sheet, we ended the quarter with $743 million in cash, short-term investments, and long-term investments, which included $114 million in restricted cash. That total was down $9 million from $752 million in the prior quarter. We generated $104 million in cash flow from operations in the first quarter, which was 32% of revenue. Net income included non-cash charges for depreciation and amortization of $10 million and stock compensation of $9 million.

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