Varian Semiconductor's CEO Discusses F2Q 2011 Results - Earnings Call Transcript

Varian Semiconductor Equipment Associates, Inc. ( VSEA)

F2Q 2011 Earnings Conference Call

April 28, 2011 5:30 PM ET

Executives

Robert Halliday – EVP and CFO

Gary Dickerson – CEO

Analysts

Chris Blansett – JPMorgan

Krish Sankar – Banc of America Securities-Merrill Lynch

Jim Covello – Goldman Sachs

Edwin Mok – Needham

Stephen Chin – UBS

Satya Kumar – Credit Suisse

C.J. Muse – Barclays Capital

Patrick Ho – Stifel Nicolaus

Weston Twigg – Pacific Crest Securities

Ben Pang – Caris & Company

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2011 Varian Semiconductor Equipment Associates Inc. earnings conference call.

My name is Lacy and I’ll be your coordinator for today.

At this time, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the presentation over to your host for today’s call, Mr. Robert Halliday, Executive Vice President and Chief Financial Officer. Please proceed, sir.

Robert Halliday

Good afternoon. I’m Bob Halliday, Varian Semiconductor’s Chief Financial Officer. I want to thank you for joining us for our fiscal 2011 second quarter conference call and webcast.

With me on the call this afternoon is Gary Dickerson, our Chief Executive Officer.

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 guidance for the third quarter and the positive outlook for Varian in its core and growth markets, both in fiscal 2011 and beyond.

Now I will review second quarter results. In the second quarter of fiscal year 2011, we reported record quarterly revenues, operating margins, net income, and earnings per share. Second quarter 2011 revenue was $330 million. Second quarter revenue increased from the first quarter by $47.4 million, due to increased tool sales to foundry and logic customers. In the second quarter of fiscal 2011 unit shipments were approximately 52% foundry, 46% logic and 22% memory.

Second quarter 2011 earnings per share of $1.07 were at the higher end of our guidance of $1.02 to $1.07 cents per share. This is our highest ever quarterly earnings per share.

The geographic breakdown of our revenue this past quarter based on fab location was Asia, 68%; North America, 23%; and Europe, 9%.

Second quarter 2011 gross margins were 49%, in line with our guidance, despite an increased mix of system revenues relative to non-system.

R&D expenses of $29.8 million were higher than our guidance as we increased our development of products for new markets.

Marketing, general and administrative expenses were $36.8 million. Second quarter MG&A expenses increased from the first quarter due to calendar year focal reviews, other variable compensation increases, annual corporate governance expenses, and cost relating to upgrading our IT infrastructure.

In the second fiscal quarter, we had operating margins of 28.9%, which represents the highest achieved in the history of the company. Our effective tax rate was approximately 13.9% in the second quarter of 2011, resulting in income tax expense of $13.3 million.

At the end of the second quarter, our full-time equivalent headcount was 1,924, up from 1,795 at the end of the first fiscal quarter of 2011. 125 of the addition out of total increase of 129 were in operations and R&D.

Our cash and investment balance increased to approximately $104 million in the second quarter to $554 million. In the second quarter, we repurchased approximately 543,000 shares of our own stock for approximately $20 million.

Second quarter capital spending was $5.7 million, primarily for IT, R&D equipment and facility equipments. Depreciation expense for the quarter was $3.9 million.

Now, I will turn to our third quarter guidance. In the third quarter of fiscal year 2011, we anticipate revenues of between $323 million and $333 million. We anticipate the gross margins in the third quarter will be 0.5% lower than the second quarter.

In the third quarter, we expect R&D expenses will be up approximately $1.6 million, mainly due to the accelerated investment in two next-generation tools for our core and adjacent markets.

Marketing, general, and administrative expenses should be up $600,000 in the third quarter. This increase is related to additional demo tools for our Solion and Trident products.

Our operating margins in the third quarter of 2011 will be between 27% and 28%. We expect our tax rate for the third quarter to increase to between 16% and 17% as the mix of our business shifts towards the US. As a result, in the third quarter of fiscal year 2011, we expect to earn approximately $0.97 to $1.02 per share.

We expect capital expenditures in the third quarter to be approximately $6.5 million.

I get a lot of questions about gross margins. I thought I might give a little more insight into the various moving pieces. Over the past five quarters, we have achieved gross margins of approximately 49%. That is about 2 percentage points higher than our prior cyclical peak.

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