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Call End:

Varian Semiconductor (VSEA)

Q3 2010 Earnings Call

July 29, 2010


Robert Halliday – EVP & CFO

Gary Dickerson - CEO


Kate Kotlarsky - Goldman Sachs

Paul Thomas - Banc of America Merrill Lynch

C J Muse - Barclays Capital

Harry Chondra - Deutsche Bank

Edwin Mok - Needham & Co.

Maja Veering - UBS

Patrick Ho - Stifel Nicolaus

Anupam Ghose - Credit Suisse

Patrick Ho - Stifel Nicolaus

Andrew Galagan - Times Square Capital Management

David Wu - GC Research



Good day, ladies and gentlemen, and welcome to the third quarter 2010 Varian Semiconductor Equipment Associates, Inc. earnings conference call. My name is Salie and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will be conduct a question-and-answer session. (Operator instructions) I would now like to turn the conference over to your host for today, Robert Halliday, Executive Vice President and CFO. Please proceed, sir.

Robert Halliday

Thank you. Good afternoon. I’m Bob Halliday, Varian Semiconductor's CFO. I want to thank you for joining us for our fiscal 2010 third quarter conference call and webcast. With me on the call this afternoon is Gary Dickerson, our CEO.

Before getting into our financial results, we want to remind you that during the course of this call, we may make various comments about the company's future expectations, plans, and prospects. These forward-looking statements are subject to various risks, including those detailed in the company's public filings, including our most recent 10-K filing. The company cannot guarantee that these forward-looking statements will actually occur, and we assume no obligation to update these forward-looking statements.

Today, we will discuss our current financial results and our overall market outlook and an update some of our growth opportunities including recent developments in the solar market. Now I'll review the third quarter results.

Third quarter 2010 revenue was $227.7 million. Third quarter revenue increased from the second quarter by $23.7 million, almost completely due to increased tool sales. This increase was driven by revenues from logic, foundry and memory customers. In the third quarter of 2010, unit shipments were approximately 47% from 38% memory and 15% logic.

Third quarter 2010 earnings per share of $0.60 was at the high end of our guidance of $0.55 to $0.60 per share this is our second highest ever quarterly earnings per share. The geographic breakdown of our revenue this past quarter based on fab location was Asia 80%, North America 14% and Europe 6%.

Third quarter 2010 gross margin were 49%, higher than our guidance and equal to second quarter gross margins. Gross margins of 49% for our total systems and non-systems business, representing record for Varian. These margins were achieved even with an increased mix of systems revenues relative to non-systems.

R&D expenses of $ 25.8 million were slightly above our guidance and approximately up $1.5 million from Q2 as we ramped spending in anticipation of product introductions in our core and new markets.

Marketing, general and administrative expenses decreased to $31.6 million in the third quarter. These expenses decreased slightly compared to the second quarter. We also had a restructuring expense of $400,000 in the third quarter. Income tax expense for the quarter was $10 million, resulting in effective tax rate of approximately 18%.

At the end of the third quarter our full time equivalent headcount was 1,627, up from 1,556 at the end of the second quarter fiscal 2010. 58 of the additions, out of the total increase of 71 were in operations and R&D. We had 254 contract employees in our total headcount of 1,627.

Our cash and investment balance decreased approximately $11 million in the third quarter to $389 million, primarily to support a higher level of working capital. Third quarter capital spending was $3.3 million, primarily for facility and IT improvement. Depreciation expense for the quarter was $4 million.

Now I will turn to our fourth quarter guidance. In the fourth quarter of fiscal year 2010 we anticipate revenues between $250 million and $260 million. We anticipate that gross margins will be approximately equal to our record 49% gross margins achieved in the third quarter of 2010.

In fourth quarter we expect R&D expense will be up $800,000 as we continue to develop products that will expand the adjustable markets for our technology. Marketing, general and administrative expenses will be up $1.1 million in the fourth quarter. Of the increase of $1.1 million, $850,000 will be for evaluation tools. This is in addition to the $600,000 increase in evaluation tools expense in the third quarter.

All these evaluations are for new applications development, new product introduction or share gain opportunities at semiconductor customers. It is also worth noting that our non-revenue evaluation shipments are concentrated at the largest customers with the largest CapEx budgets. Our operating margins should be up more than 2% in Q4 2010 from Q3 2010.

We expect our tax rate to approximate 17% in both the fourth quarter and fiscal year 2010. As a result in the fourth quarter of fiscal year 2010 we expect approximately $0.70 to $0.75 per share. We expect capital expenditures in the fourth quarter to be approximately $4 million.

Now I will turn call over to Gary for his comments.

Gary Dickerson

Thanks Bob. Today I will given an update on progress on our semiconductor implant business and I will discuss some very positive recent developments in solar, including the launch of Solion, our solar ion implant product.

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