Novellus Systems, Inc. Q1 2009 Earnings Call Transcript

Novellus Systems, Inc. (NVLS)

Q1 2009 Earnings Call Transcript

April 22, 2009 4:30 pm ET

Executives

Robin Yim – VP, Treasurer and IR

Jeff Benzing – EVP, Chief Administrative Officer and Principal Financial Officer

Rick Hill – Chairman and CEO

Analysts

Brett Hodess – Bank of America

Satya Kumar – Credit Suisse

Timothy Arcuri – Citi

Ben Pang – Caris & Company

Mahesh Sanganeria – RBC Capital Markets

Atif Malik – Morgan Stanley

Patrick Ho – Stifel Nicolaus

Steven Pelayo – HSBC

Stephen Chin – UBS

CJ Muse – Barclays

Kate Kotlarsky – Goldman Sachs

Matt Petkun – D.A. Davidson & Co.

Presentation

Operator

Thanks very much for holding everyone. Welcome to the Novellus 2009 First Quarter Earnings Conference Call. Just a quick reminder, today’s call is being recorded. And now at this time, I’ll turn things over to Miss. Robin Yim of Novellus Systems. Robin, please go ahead.

Robin Yim

Thank you, Bow. Good afternoon everyone, and thank you for joining the Novellus Systems first quarter 2009 earnings conference call. Joining me on the call today are Rick Hill, Chairman and Chief Executive Officer; and Jeff Benzing, Chief Administrative Officer.

Financial results for the first quarter 2009 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 forecast of key metrics for the second quarter of 2009.

Specific forward-looking statements include but are not limited to our expectations regarding semiconductor industry growth and capital equipment spending; our expectations that we will continue to maintain our position or grow market share; our continued efforts and expected progress related to our restructuring plans and cost reduction across several areas; our ability to manage the company with the already ample and readily available cash and liquidity resources at our disposal and our confidence in completing the renewal of the Euro revolver in the second quarter of 2009; the forecasted bookings, shipment volumes, revenue, gross margin, operating expense, tax rate, and loss per share target for the second quarter of 2009; the effect of the current economic climate on our performance over the next several quarters; 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, our filings with the Securities and Exchange Commission, including our Form 10-K for fiscal 2008 and our most recent Form 8-K. Forward-looking statements are based on information as of today and we assume no obligation to update any of these statements.

Jeff Benzing will begin today's call with a review of the financial results for the first quarter. Then, Rick Hill will discuss the state of the business and our industry outlook followed by guidance for the second quarter of 2009, and then open the call for the question-and-answer session.

I will now turn the call over to Jeff.

Jeff Benzing

Thank you, Robin. I’ll start by reviewing the first quarter 2009 results. As forecasted, results for the first quarter were impacted by weak economic conditions in which we saw our customers continue to hold off on capital investment. As a result, first quarter 2009 bookings finished at $78 million, down $4.9 million or 5.9% sequentially from $83 million in the fourth quarter of 2008 and within the guidance range of $76 million to $85 million. Bookings were net of $10.6 million and $44.9 million of backlog adjustment in Q1 and Q4 ’08 respectively.

First quarter shipments of $92 million were down $83.5 million or 47.6% from $176 million in the fourth quarter and near the low end of our guidance range of $90 million to $100 million. First quarter revenues were $99 million, down $89.5 million or 48% from the $189 million in the fourth quarter and within our guidance range of $95 million to $110 million.

By geographic region, first quarter revenues are as follows. United States were 47%, Greater China 15%, Korea 5%, Japan 11%, and Europe 22%. First quarter gross margin finished at 26%, which was on the higher side of guidance of 25% plus or minus 2%.

Gross margin in quarter one was impacted by lower absorption of fixed overhead costs from reduced shipment volumes in the quarter and higher inventory write-down as a percentage of revenue. First quarter ongoing operating expenses totaled $77 million, down $18 million from the $95 million in ongoing operating expenses recorded in the fourth quarter of 2008.

Ongoing operating expenses exclude certain other charges and benefits, which totaled $2 million in the first quarter of 2009 and $108 million in the fourth quarter of 2008, both of which are detailed in today’s press release. As discussed last month in our mid-quarter update conference call, we have a stated target of lowering ongoing operating expenses to below $80 million.

In the first quarter of 2009, we achieved this goal by continuing to execute on the actions we introduced over a year ago, continued headcount reductions including an additional 5% in the first quarter of 2009, executive pay cuts, plant shutdowns, and conservative management of overall operating expenses.

Even with these efforts, the deterioration in business conditions experienced in the first quarter resulted in an operating loss of $51 million excluding certain charges. Our first quarter tax expense of $14.3 million included a $19.4 million discreet tax charge as the result of a recent change in the revenue of apportionment provision of the California State Tax Code that will significantly reduce our tax payments to the State of California, once the provision goes into effect in 2011.

As a result, we’re now forecasting a de minimus amount of California tax in those future periods do not expect to recover the $19.4 million in California deferred taxed assets on our balance sheet. Without the discrete charge, our Q1 tax rate was 10%. We expect this tax rate to continue into the second quarter.

Our GAAP loss per share for the first quarter 2009 was $0.69, a higher loss than the guidance range of $0.45 to $0.60 loss per share. However, excluding certain charges as described in today’s press release and the impact from the change in California Tax Code, the effective loss per share was $0.47 and within the guidance range.

Looking at the balance sheet, we ended the first quarter with just over $702 million in cash, short-term investments, restricted cash and long-term investments, which is up $20 million from the $682 million in the prior quarter. Despite the challenges in the quarter, we generated approximately $23 million in cash flow from operation. This was achieved primarily through disciplined working capital asset management.

Net accounts receivable declined by $72 million or 50% sequentially quarter-to-quarter and DSOs decreased further to 66 days, down from 69 days at the end of December. In addition, inventory declined by $20 million or 9% on a sequential basis.

Today, we filed an 8-K with the SEC regarding the cancellation of our $150 million revolver. We are confident in our ability to manage the company without this revolver, because we have more than apple and readily available cash and liquidity resources. Additionally, our EUR79.5 million revolver used to acquire Peter Walters is up for renewal in the second quarter and we are in the final process of completing the refinancing.

That concludes my remarks on the first quarter. Now, I’ll turn the call over to Rick, who will comment on the state of our business, followed by the guidance of our key metrics for the second quarter.

Rick Hill

Thank you, Jeff. Today marks Novellus’ 25^th Anniversary as a company. The business environment, as well all know, is not that strong. Particularly, the electronics and semiconductor markets have been weak in the past quarter-and-a-half to two quarters.

Today we see the electronics and semiconductor markets have stabilized in the last six weeks. We are seeing initial signs that semiconductor companies are more seriously looking at spending CapEx dollars, although all spending is at a greatly reduced level. We either have seen or expect to see some increased investment activity in Europe, the U.S., and Asia. Japan continues to remain dormant, China is weak, but we expect to see a rebound in Q3 and Q4 within China.

While we may have reached a bottom and the current bookings forecast will be up significantly on a percentage basis, we are still operating at anemic levels. Therefore, during the second quarter, we are completing a further restructuring of the company to reduce field service and operations headcount and other corporate actions to restore profitability in the near term and improve it over the longer term.

In addition, we have completed our CMP system development and have demonstrated world class results both technologically and economically. But due to the present marketing conditions, we are scaling back the CMP business operations to only focus on our internal needs.

As a result of the above actions I just articulated, we will incur $12 million to $16 million in charges related to all of these actions and expect to see an additional $5 million reduction in our quarterly OpEx run rate, starting in the third quarter.

Now, I’ll provide guidance for the second quarter, which excludes that $12 million to $16 million in one-time charges and despite one week less of planned shutdowns in Q2, we’ll have OpEx below $80 million. With that said, we expect bookings to be up 20% to 50% in quarter two. Shipments are forecasted to be up sequentially and range from $110 million to $125 million. Revenue is also forecasted to be up sequentially in the range of $110 million to $125 million. Gross margins are forecasted at 31% plus or minus 2% and the net loss per share is forecasted to be in the range of $0.35 to $0.45.

That concludes my comments and our guidance for the second quarter. Now I’d like to open up the call for questions and I’ll try to provide any answers that I can during this period of time. Thank you.

Question-and-Answer Session

Operator

Thank you very much. (Operator instructions) And we will pause for just a moment. We’ll go first this afternoon to Brett Hodess of Bank of America.

Brett Hodess – Bank of America

Good afternoon, Rick. I guess really two questions. First, when you were commenting on the stability in the marketplace in the sometimes of a pickup, can you break that down in terms of what type of customers, memory versus foundry, IDM? Can you give us a little color on that side of it?

Rick Hill

Okay. And the next question?

Brett Hodess – Bank of America

And the second question was when you look at the cost restructuring here, can you give us the break-even points that you expect once you are done with this in the third quarter?

Rick Hill

Yes. Okay, first of all, let’s talk about stability in the marketplace. From the stability in a marketplace what I mean is it’s not heading downward any longer, we see a rise in average selling price of memories, we see more conversations with our customers about planned expansions and technology moves. And so, just overall in the memory, the IDM, and the foundry business, we see a stabilization.

As I said, we are starting to see an uptick in some areas and we anticipate an uptick continuing in other areas and I articulated that in my comments. The only place that right now we still see somewhat uncertainty is it remains in the Japanese market. On the cost restructuring, this will lower our break-even to about $160 million cash from a standpoint of cash break-even to a $160 million. Okay?

Brett Hodess – Bank of America

Very good, thanks.

Operator

And we’ll take our next question now from Satya Kumar of Credit Suisse.

Satya Kumar – Credit Suisse

Yes, hi. Thanks, Rick. In terms of your bookings outlook into June, could you provide any commentary on whether there is any large pull-ins of orders happening from large Taiwanese foundries whether these order levels are sustainable and how you think about that in the back half of the year?

Rick Hill

I wouldn’t articulate any large pull-ins. I think there are normal levels of business and that – I think that if their business rebounds, it will be very sustainable, but what is dependant upon of course is the overall economy in general and depending upon what happens there from day-to-day, it could change, but right now, there seems to be somewhat of an optimism. Now, some of this could be refilling channels that were being drained, but I think underlying demand is also stabilizing.

Satya Kumar – Credit Suisse

Okay. And in terms of memory in the second half outlook, what exactly are you seeing from some of the Korean memory producers? Are these companies back of the table placing orders? At this point, looking at the order funnel that you have, do you have a view on what the second half orders would look like relative to your levels in the first half?

Rick Hill

Well, we don’t comment other than on the second quarter what I gave you from a formal standpoint, but in general from an industry standpoint, I would tend to think that the second half will be up over the first half if things continue.

Satya Kumar – Credit Suisse

Right. And the Korean memory outlook?

Rick Hill

I think from a standpoint of the Korean memory outlook, I would expect that to begin to improve, but again, it isn’t going to be improvements where it’s going to snap back to the levels it was at in 2007, but I definitely see it trend in the positive direction.

Satya Kumar – Credit Suisse

Got it, thanks a lot.

Operator

And we’ll go next now to Timothy Arcuri with Citi.

Timothy Arcuri – Citi

Hi, Rick. Two things, can you somehow quantify how far some of the necessary shrink activities going on in the memory world, especially in DRAM? How far can that take you? Certainly there is lots of stuff going on there, but I’m wondering where does that kind of tap out relative to your business volumes?

Rick Hill

I’m not quite sure I understand the question. How do the – can you reword it?

Timothy Arcuri – Citi

Yes. Basically, how far – the whole memory industry is kind of getting back on the shrink, kind of a more regular shrink cycle than now and I’m wondering how far that can take you. So, I’m wondering if you exclude any spending from the foundries, if you exclude any spending from the processor companies and just focus on what you know will be done from a shrink perspective at the memory companies, what sort of incremental opportunity there is just from that?

Rick Hill

I don’t have it broken out that way, Tim. I’ll tell you what, I’ll go back and take an action item to have the marketing people look at it, but I don’t have it quantified that way. Certainly what shrinks do for us is give us the opportunity to provide better quality films, they obviously tend to be thinner films and that’s where we tend to shine with these thinner films. And so, from that standpoint, I think shrinks are good.

From the standpoint of memory however, as you shrink if you are not getting big growth that’s over a 100%, you are basically increasing over-capacity. So, that’s sort of a negative on that side, but I don’t have it quantified. Those are just our general competing forces with the movement of shrinks.

I think shrinks to a large extent help the strong lower their overall cost and get back to profitability, which then allows the strongest memory manufacturers to be more cost competitive, take more market share from those that can’t follow. That’s the only dynamic that we quantify. And so, we see continuing growth in market share by the stronger Korean manufacturers.

Timothy Arcuri – Citi

I guess Rick, what I’m – where I’m trying to go with that is where does the business kind of top out before you have to start to see capacity buys. So, i.e., can you do $250 million per quarter just on the back of the – the whole industry kind of getting back on a regular shrinking?

Rick Hill

I don’t think you can do that without having some capacity expansion.

Timothy Arcuri – Citi

Okay. Thanks, Rick.

Operator

We’ll go next now to Ben Pang with Caris & Company.

Ben Pang – Caris & Company

Thanks for taking my question. Just a follow-up on the previous question. Are you characterizing that the orders that you expect to receive in 2Q are more weighted towards capacity expansion? And the follow-up is concerning Japan. Japan seems to be slower, is it because the fabs are under – there is more under-utilization at Japan? I’ll take my answers offline, thank you.

Rick Hill

Okay, I get it. First of all, the Q2, what we are seeing in orders is some capacity expansion for a 65-nanometer fab capacity expansion. And the second part of the question was – and in the case of the Japan, I think that right now what we are seeing in Japan is largely a memory-centric area and I think there is a little bit more capacity offline that still has to come online before we see expansion.

Ben Pang – Caris & Company

Thank you very much.

Operator

And we’ll go next now to Mahesh Sanganeria with RBC Capital Markets.

Mahesh Sanganeria – RBC Capital Markets

Thank you. I apologize, I was out for a little while, I might have missed this thing. But I just quickly saw your AR went down 50% from $144 million to $72 million. Did you write down any receivables this quarter?

Jeff Benzing

I’m sorry, Mahesh. Could you repeat the question? We didn’t quite get that.

Mahesh Sanganeria – RBC Capital Markets

The question I have is that your accounts receivable went down pretty significantly this quarter.

Rick Hill

No, we didn’t write anything off.

Mahesh Sanganeria – RBC Capital Markets

So, this all came from –

Jeff Benzing

We just had a – combined with lower shipments in the first quarter and a good strong push from our accounts receivable team to go get collection.

Mahesh Sanganeria – RBC Capital Markets

So, you were not having any issues with collection like some other companies have reported?

Rick Hill

We did in Q1, but not – in Q4, but not in Q1.

Mahesh Sanganeria – RBC Capital Markets

Second question, the commentary we are hearing from most of the semi companies is they are being very conservative in guidance and you are guiding for a pretty good sequential growth in order. Have you built enough conservatism considering the environment is still a little bit unstable?

Rick Hill

I built – we built in as we always do the best available data we have at the time of this call.

Mahesh Sanganeria – RBC Capital Markets

Okay.

Rick Hill

We don’t try to shade it, we don’t try to put spin on it, we just try to give you the data we are using to make our decisions.

Mahesh Sanganeria – RBC Capital Markets

Okay. Then, one last question. If you can give some more color on CMP? You said you are using it for internal purpose. Is there any cost associated with that operation, is there a significant cost associated with that operation or pretty much –?

Rick Hill

There is some ongoing cost associated with CMP, but we reduced our overall operating expenses or expect to reduce our overall operating expenses by a total of $5 million per quarter. That includes some reduction in our expenditures on CMP, as well as field service reduction, overall corporate reductions from the standpoint of finance, HR, and other administrative areas.

Mahesh Sanganeria – RBC Capital Markets

So, we would be looking at OpEx in 3Q in $70 million to $75 million range?

Rick Hill

Well, $70 million – yes, approximately the $75 million dollar range, correct.

Mahesh Sanganeria – RBC Capital Markets

Okay. Thank you very much.

Operator

And we’ll go next now to Atif Malik with Morgan Stanley.

Atif Malik – Morgan Stanley

Hi, thanks for taking my question. Is it possible for you guys to give some kind of qualitative comments on the bookings growth? How much of it is getting contributed from services and also, from Peter Walters businesses? Is that fair to assume that that business is not the reason the bookings are inflicting in Q2?

Rick Hill

Well, they’d be up more if – in this particular case, our industrial business happens to be a drag on the uptick in bookings.

Atif Malik – Morgan Stanley

Got it. And a question on your market share. The most recent Gartner data indicates that your market share actually stabilized in last year and then – and last year, the mix was more unfavorable for you guys because of Taiwan DRAM. So, as we start to see memory technology or shrink new buyers come back, how do you guys look at your market share momentum or opportunity in the second half of ’09, especially in memory?

Rick Hill

I think we would tend to see our market shares increase.

Atif Malik – Morgan Stanley

Thank you.

Operator

And next with Stifel Nicolaus, we’ll hear from Patrick Ho.

Patrick Ho – Stifel Nicolaus

Thanks a lot. Can I just first get a housekeeping question? What was the stock options expensing during the quarter?

Rick Hill

One minute.

Patrick Ho – Stifel Nicolaus

I guess –?

Rick Hill

I want to say it’s $7.8 million, but that just is from reference. I’ll have it somebody look it up.

Jeff Benzing

We’ll look it up. What’s your next question?

Patrick Ho – Stifel Nicolaus

Okay. In terms of the used equipment market that’s probably growing right now especially with a lot of the 200 millimeter lines coming offline, first, how do you guys view that versus I guess your own new tools business and how do you counter I guess the growth of that marketplace as you go forward?

Rick Hill

Well, we have a refurbished business. So, we recognize the fact that there are customers who want to use used equipment and we have an opportunity in the after-market associated with that. I was wrong on the stock option expenses. It was $7.6 million, not $7.8 million. So, my memory is getting bad as I’m getting old. And so, getting back to the used equipment, the – we participate profitably in that with upgrades, relocation of the equipment, software licensing of that equipment if it’s moved to other vendors.

Now, in some cases, it’s taking 200 millimeter equipment offline, which is reducing overall capacity in a market that’s had excess capacity and by doing that what we are doing is creating demand for 300 millimeter, which is positive for us. So, it’s from a standpoint of the memory manufacturers as an example, 300 millimeter offers a more competitive solution for them for capacity expansions.

So, we anticipate the 200 millimeter coming offline will ultimately bring in additional 300 millimeter capacity. But it’s a fact of life, we’ve dealt with it before, we are dealing with it now, it’s a little bit more difficult now because we are in a situation where the end demand is going down, so there is a lot of excess equipment. But you have to remember, a lot of this old equipment that’s coming offline is quite obsolete and it requires some extensive upgrades in order to make it viable.

Patrick Ho – Stifel Nicolaus

Okay, that’s great, that’s very helpful. Final question for me on – in terms of the CMP, would it be fair to characterize what’s going on there as you’re shutting it down, but not completely shutting it down?

Rick Hill

Well, not exactly. I wouldn’t think that would be a good characterization, because while we are pairing it back pretty dramatically, we are still working with several customers on a basis of developing things jointly as opposed to out marketing and selling. You might know that in a traditional introduction of a product, we might decide to put three or four systems out in the field at a cost to the company, which is substantial. Given this market environment, we’ve determined we cannot afford to do that and so, we won’t do that. We will work with customers who are willing to work with us and then guarantee us a certain portion of that business if they want to use our equipment, provided we meet certain performance specification, but we won’t be putting evals and expanding our infrastructure to support the introduction of a new product on a global basis.

Patrick Ho – Stifel Nicolaus

Great. Thanks a lot.

Operator

And we’ll go next now to Steven Pelayo with HSBC.

Steven Pelayo – HSBC

Yes, Rick. Just first of all, a quick one here, your bookings guidance, is that’s on a based on the net $78 million that you just did it or on a gross number?

Jeff Benzing

Net-net.

Steven Pelayo – HSBC

Net-net? Always on a net. And then just a bigger picture question. On industry consolidation out there – and I guess I’m just trying to think about long-term sizing of this market, we are seeing a lot of questions obviously about memory consolidation, but even on the microprocessor side as we are seeing shifts to net books, there is a lot of questions about dye sizes, average dye sizes shrinking quite a bit and just not as much that [ph] capacity going to be needed. So, how are you thinking about the kind of capital spending pie a couple of years out from now relative to what we just saw in kind of 2007, 2008?

Rick Hill

Well we’ve – we articulated in the last conference call, the end of the fourth quarter. What we saw was a nuclear winner and that had a dramatic reduction in the overall CapEx spending within the industry. From our standpoint, obviously the semiconductor industry is forecasted to go down close to 20% in 2009 that will ripple on through to the equipment business, which is not only is going down at 20%, but also has the added problem of less capital intensity from an investment level instead of being 22% to 25% it’s going to be down in the probably 12% to 16% of cap of revenue of the semiconductor industry revenue, which puts more downward pressure on the equipment business.

So the key to success is A, having tools of value to increase their productivity, because that’s what our customers are driving for. B, be focused on the right customers, because when you sell it, you want to be able to get paid for it and you would like to make sure that the company is at your width, you’re building a long-term relationship and they’re going to be successful. We hope all our customers are, but understanding which ones are most likely to be is very, very important.

From a pie standpoint, we think it’s an opportunity for us to gain more and more market share. And we think that the nature of our products are geared for the market demands that our customers have. But from a standpoint of is this market going to be three times the size it was in 2007, not in the near term.

Steven Pelayo – HSBC

Yes I guess we are just trying to figure out that. We know it’s bad right now. We’re down whatever 30%, 40% in ’08, ’09 for capital spending.

Rick Hill

Right.

Steven Pelayo – HSBC

What’s your trajectory look like as we think about 2010, 2011? What do you think we can get back to in terms of the total pie? Are we just trying to align ourselves with customers that are likely spending as the pie likely shrinking or do you think that pie actually has a chance of getting back to the total?

Rick Hill

Our projections don’t show it getting back to 2007 levels. 2008 levels, we see coming back in the 2011 to 2012 time period. We don’t see the 2007 period coming back till probably 2013 or 2014.

Steven Pelayo – HSBC

All right. That gives me something to think about.

Jeff Benzing

I mean, it’s Jeff, these are all – I mean it’s very subjective as you well know. You have as good a handle on that as we do, but that’s our best guess.

Steven Pelayo – HSBC

Thanks, Rick.

Operator

We’ll go next now to Stephen Chin of UBS.

Stephen Chin – UBS

Great, thanks. Hi Rick, hi Jeff. Nice progress on the gross margin guidance here for June. Do you feel comfortable Rick that these gross margin improvements can continue through the year, especially do you think second half looks better or are there any concerns that you have?

Rick Hill

They will absolutely continue with every dollar that goes up on the revenue line.

Stephen Chin – UBS

Okay, thanks for that. And my second question is, are you seeing a continued strong rebound in spares [ph], the services as you look into the second half? Is that – is that what is also giving you confidence to the second half?

Rick Hill

I characterize it as a healthy rebound, okay? But it’s still not up at the levels where we would have a confidence level that utilization rates are north of 80%, 85%. It has to go up a ways before I get that confident.

Stephen Chin – UBS

Okay, thanks. That was helpful, Rick.

Operator

And we will take our next question now from CJ Muse with Barclays.

CJ Muse – Barclays

Yes good afternoon. Thank you for taking my question. Rick in the past, you’ve talked about a recovery in the second half of ’09 in the $600 million to $800 million revenue run rate. Now that you’ve got the 1Q behind you and guidance out there for 2Q, what are your thoughts on that range today?

Rick Hill

Those are big numbers for Q3 and Q4, if I do the math right. It’s hard for me to project. You never know with this industry. I think it is clearly dependent upon the overall macroeconomics. If this thing takes a turn for the worst – if we all follow Spain, would never happen in a million years, but if we all start buying flat panel televisions like Germany is buying solar, we’re off to the races.

CJ Muse – Barclays

All right. In terms of the backlog adjustments you made over the last two quarters and it looks like I think you talked about $5 million in adjustments in the first six weeks to eight weeks on the quarter and another $5 plus million in the last six weeks. I guess do you think you are done there, you think the backlog is clean and we’re on, we’re in upward from here?

Jeff Benzing

Yes the predominant adjustments we had in the backlog were service related through either changing in service contracts, similar things like that. There was very little system influence.

CJ Muse – Barclays

All right. And then last question here. In terms of deferred revenues and correct me if I am wrong here. It looks like the deferred profit on that is – is it about 28%, so I guess first off, is that correct? And secondly, does that negatively impact gross margins in the next couple of quarters?

Jeff Benzing

No, has – it really has no impact on gross margin.

CJ Muse – Barclays

All right, thank you.

Operator

And we will next go to Jim Covello with Goldman Sachs.

Kate Kotlarsky – Goldman Sachs

Hi. This is Kate Kotlarsky for Jim Covello. I have a more of a big picture question on consolidation. Someone had asked you earlier about what you thought of the consolidation of your customer base. I was curious what your thoughts are on the semi-equipment industry and consolidation there, whether you think it should happen, it will happen, and what your willingness is to participate in that? Thank you.

Rick Hill

Yes. I think you’ve begun to see the fallout of companies within the semiconductor CapEx space. I think it was the (inaudible) to file for bankruptcy yesterday or the day before yesterday. I expect there are a few more that will file for bankruptcy. The situation in this industry is a little bit different than it is in the semiconductor industry from the standpoint of there are competitive companies. For example, we compete with Applied Materials on an array of products, but not their entire product portfolio.

We don’t compete with companies like Lam or KLA or Varian or Tokyo Electron to speak of. Lam competes with Applied and Tokyo Electron. So, the whole nature of the business is very, very much I think different than the semiconductor industry. And the question becomes of what value is there in combining with entities that maybe too weak to survive, that’s a question mark. We are always open to it, but I wouldn’t say we are going to rush out and there is anybody that we feel a necessity to buy or to combine with. But are we open to it? We are always open to ideas. There isn’t an idea that we don’t look at every day of the week.

Kate Kotlarsky – Goldman Sachs

Is there maybe an area that’s not a drug business herein now, but another business that might make sense and it’s complementary to what you do today?

Rick Hill

And we’re always looking for those opportunities, yes.

Kate Kotlarsky – Goldman Sachs

Okay. And then just another question on the CMP business, if we think about what the benefit is to from scaling that business back, is there a number from for whether it’s margin or operating expenses that we could think of coming down a little bit as result if you scaling that back?

Rick Hill

Well we already commented that they’re coming down. They’re part of that OpEx $5 million that came down. It’s also avoidance of increased expenses from the standpoint of marketing process support by not going out with a broad distribution of this product to a large range of customers.

Kate Kotlarsky – Goldman Sachs

Okay. So, the $5 million in corporate sort of all of the savings so to speak from scaling the business back, we shouldn’t expect incremental savings just sort of OpEx avoidance?

Rick Hill

What, no, OpEx is coming down. There are definite reductions in OpEx, I articulated that. We – from a revenue standpoint, the revenue on that product is zero anyway. So it’s not going to hurt or help gross margin one way or the other.

Kate Kotlarsky – Goldman Sachs

Okay, thank you.

Operator

We’ll hear now from Gary Hsueh of Oppenheimer. Gary, your line is open, you maybe on mute. Hearing no response. (Operator instructions) We’ll go next now to Matt Petkun of D.A. Davidson & Co.

Matt Petkun – D.A. Davidson & Co.

All right, thanks for taking my question, Rick. Just a little bit I was trying to read the tee leaves here and you’ve already addressed this to a certain extent. But in the press release, you comment that while orders have stabilized, they’re still at relatively low levels compared to your expectations. I’m wondering which expectations in particular you’re referring to, the expectations for your full year maybe as of the most recent call or expectations from a year ago?

Rick Hill

My expectations from I would say a year go. I would not anticipate the semiconductor industry nor the CapEx equipment industry to be at this particular level.

Matt Petkun – D.A. Davidson & Co.

Okay that’s fair. Just wanted to maybe get more qualitative sense in the back half. And then this is my final question, what do you see out there in terms of opportunities in the advanced packaging market and how maybe is Novellus trying to position itself for opportunities not just in pre-silicon vias, but in stack packaging and maybe getting more of your ECD business to capture some of that marketplace?

Rick Hill

Yes, I think clearly we have the technology and the capability to solve the technological challenges that exist. In that particular business segment, we also have the ability to put out a product that can be cost effective for the customer base and to the extent that that market were to materialize, we believe we could capture a very, very large share of that market. But it’s still a speculative market segment.

Matt Petkun – D.A. Davidson & Co.

Okay. Thank you so much.

Operator

(Operator instructions) Gentlemen, it appears we have no further questions. Rick, I will turn the conference back to you for any closing comments.

Rick Hill

Okay. Thank you very much for joining us for the first quarter conference call. We look forward to you at the mid-quarter update. Thanks very much and hopefully you have promising investments in this next quarter.

Operator

And again, that will conclude our conference. Thank you all for joining us and have a great afternoon. Good-bye.

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