Caution Plagues Novellus

The chip-equipment maker continues to see the effects of inventory concerns.
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Updated from 8:45 a.m. EDT

Novellus Systems

(NVLS)

swung to a third-quarter profit on slightly stronger-than-expected sales. But the chip-equipment maker noted weaker bookings in September stemming from inventory buildups plaguing the semiconductor industry and said fourth-quarter results would fall significantly short of analyst estimates.

Shares of Novellus were down $1.17, or 4.4%, to $25.71 in early Thursday trading.

"We saw significant weakening in our bookings outlook in the month of September," Novellus CEO Richard S. Hill said in a statement. "We believe this is a direct result of customer cautiousness stemming from the sell-discussed inventory correction that is occurring in the semiconductor industry."

San Jose, Calif.-based Novellus earned $64.7 million, or 45 cents a share, in the three months ended Sept. 25, up from a net loss of $97.6 million, or 64 cents a share, last year.

Excluding one-time benefits as a result of litigation settlements and a pretax charge, Novellus earned $54.7 million, or 38 cents a share, in the third quarter, compared with net income, excluding charges, of $6.1 million, or 4 cents a share, a year earlier. Third-quarter sales were $415.9 million, up 88.1% from last year.

Excluding the benefits and charge, analysts surveyed by Thomson First Call had forecast earnings of 38 cents a share on sales of $411.4 million in the latest quarter.

In August, Novellus noted that customer-order patterns have become more cautious, prompting the company to reduce its third-quarter guidance. At that time, the company said it expected to earn 37 cents a share on $412 million in revenue, vs. a previous range calling for earnings of 37 cents to 39 cents in earnings on $408 million to $418 million in revenue.

For the fourth quarter, Novellus forecast revenue of $300 million to $330 million, with earnings ranging from 19 cents to 26 cents a share. That's significantly lower than the consensus estimate calling for earnings of 37 cents a share on $410.3 million in revenue for the fourth quarter. Novellus expects bookings for the quarter to fall to between $320 million and $330 million, and shipments to range from $315 million to $330 million.

"We've seen a continual deterioration in the market," Hill said in a postclose conference call. "We do see some people holding back on capital expansion."

But "at this juncture it does not look like it's a long-term slowdown, and it doesn't look like it's a vacuum that we're running into," Hill added. "The fundamentals in the market just seem too good to us."

Hill even ventured to give his view of 2005 -- a divisive period during which some analysts project renewed order growth early on and others predict a bottom as late as the third quarter.

"My gut feeling is that 2005 comes in like a lamb and goes out like a lion," Hill said. "We've just had a major upturn that we've seen and we're now in a period of digestion. But I think when I look at the product offerings that are either just entering the market from a consumer standpoint and some of the things I've seen going forward, I think there are strong semiconductor drivers that will ripple down to demand for new capacity, and we'll benefit from that and we'll see a resumption of growth in the equipment business."

But Hill said if oil prices continue to sit at their current record-high levels, inflation surfaces and there is a weakness in flash demand, then he would start believing the trend is longer term and more systemic.

Still, Novellus, which at least one analyst has suggested would lay off employees, is looking at ways to reduce expenses to match the lower third-quarter revenue, Hill said. Whether that includes layoffs, however, is too early to tell, he said.

On a geographic basis, bookings in Korea increased substantially quarter over quarter, while bookings in both China and Japan decreased, Hill said. Europe was up dramatically and U.S. bookings were flat quarter over quarter.

Novellus reported third-quarter shipments of $382.2 million, representing a sequential increase of 4.4%, while deferred revenue dropped 18.6% from the second quarter to $147.4 million. In August, the company had projected that third-quarter shipments would run about $390 million, below previous guidance of $408 million to $418 million, due primarily to Asia-based customers pushing out shipments.

The company's gross margin declined to 48.4% from 50.2% in the second quarter.

Novellus bought back 8.41 million shares during the quarter for $219.2 million.