Novellus Systems’ (NVLS) third quarter earnings beat the Zacks Consensus Estimate by $0.06. Revenue beat by 3.0%.
Revenue
Revenue of $244.2 million was up 38.1% sequentially, 29.6% year over year and within the guided range. This reflects continued demand from foundries and increased expenditure on the memory side, driven by strengthening prices for NAND and DRAM.
Revenue by Geography
Asia was the largest contributor, generating 71% of total revenue. This was a sequential increase of 58.1% and year-over-year increase of 124.4%.
The greater China region accounted for the largest chunk, generating 48% of total revenue. This was followed by Korea at 18% and Japan at 5%. Approximately 21% of revenue came from the U.S., down 3.4% sequentially and 36.7% year over year. Europe contributed the remaining 8%, increasing 38.1% sequentially and declining 35.2% year over year.
Management stated that Taiwan looked strong at present and Korea was strengthening rapidly (partly driven by market share gains), while other regions continued to look weak. However, the situation is expected to improve as the year unfolds.
Orders
Orders continued to grow exponentially, posting a 50.2% sequential increase in the last quarter. The Dec quarter was the first since the recession started that orders also grew from the year-ago period. The year-over-year growth of 102.0% points to the strength the company is seeing in its served markets.
We estimate that backlog increased by over 7%, much better than in the Sep 2009 quarter. Management stated that lead times had started to stretch out a bit, although the company had been successful at managing customer accounts. Consequently, there was no revenue loss.
The pro forma gross margin for the quarter was 47.3%, up 666 basis points (bps) from the previous quarter’s 40.7%. The improvement in gross margin was on account of higher volumes, which helped fixed cost absorption as well as a more positive mix of business.
Operating expenses of $74.0 million were up slightly on a sequential basis. The operating margin was 17.0%, up 1,716 bps from -0.1% recorded in the previous quarter. All the three components of cost — COGS, R&D and SG&A — decreased as a percentage of sales, although lower COGS was the largest contributor to the better margin, followed by lower R&D and then SG&A.
Net Income
Excluding the impact of restructuring charges on a tax-adjusted basis, the pro forma net income was $38.2 million or 15.7% net income margin, compared to a net loss of $2.5 million or -1.4% in the previous quarter and net loss of $12.3 million or -6.5% in the year-ago quarter.
Including these charges, the GAAP income was $35.2 million ($0.36 per share) compared to loss of $4.0 million (-$0.04 per share) in the Sep 2009 quarter and loss of $130.3 million (-$1.36 per share) in the Dec quarter of last year.
Balance Sheet
Inventories were down 8.2%, with inventory turns improving from 2.8X to 3.2X. Days sales outstanding (DSOs) went down slightly from 57 to around 56. The company ended with cash of $501.4 million, up $17.8 million during the quarter.
In the last quarter, the company generated $38.3 million in cash from operations and spent $23 million on share repurchases. Novellus still has $804 million left under the current authorization to expire in October 2011.
Guidance
The fourth quarter guidance is for bookings increase of 10-25%, shipments in the $255-285 million range, revenues in the 245-270 million range, gross margin of 47-49% and earnings of $0.35-$0.42 a share.
Estimate Revisions
Estimates for the Mar 2010 quarter have been inching up over the last three months, with the current Zacks Consensus Estimate of $0.34 up significantly from the -$0.47 reported in the year-ago quarter. Considering the fact that the current estimate is below the guided range, we believe further upward revisions are likely.
We currently have a Zacks Rank of #2 (Buy) allotted to the shares, and further revisions could only move the rank higher towards our long-term Outperform recommendation on the shares.
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