Novellus Systems Inc. Q3 2009 Earnings Call Transcript

Novellus Systems Inc. (NVLS)

Q3 2009 Earnings Call Transcript

October 21, 2009 at 4:30 pm ET

Executives

Richard S. Hill - Chairman of the Board, Chief Executive Officer

Jeffrey C. Benzing - Principal Financial Officer, Executive Vice President, Chief Administrative Officer

Thomas Caulfield - Executive Vice President Sales, Marketing and Customer Service

Timothy M. Archer - Executive Vice President - PECVD Business Unit and Electrofill Business Unit

Fusen Ernie Chen - Executive Vice President, Chief Technology Officer

Analysts

Timothy Arcuri - Citi

Steve O’Rourke - Deutsche Bank

Christopher Muse - Barclays Capital

Gary Hsueh – Oppenheimer Funds

Satya Kumar – Credit Suisse

Steve O’Rourke - Deutsche Bank

Edwin Mok - Needham & Company

Steven Chen – UBS

Ben Pang - Caris & Company

Atif Malik - Morgan Stanley

Mahesh Sanganeria - RBC Capital Markets

Marian Lee - Stifel Nicolaus

Chris Shankar - Merrill Lynch

Unidentified Analyst –Arete Research

Kate Cutler for Jim Covello - Goldman Sachs

Presentation

Operator

Welcome to the Novellus’ third quarter 2009 earnings conference call. As a reminder this conference is being recorded today October 21, 2009. I would now like to turn the conference over to Ms. Robin Yim of Novellus Systems. Please go ahead ma’am.

Robin Yim

Thank you Cynthia, good afternoon and thank you for joining the Novellus Systems third quarter earnings conference call. With me today on the call are Richard Hill, Chairman and Chief Executive Officer and Jeffrey Benzing, Chief Administrative Officer.

Financial results for our third quarter 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 www.novellus.com.

Today’s earnings call contains forward looking statements about Novellus’ business outlook, the future performance of Novellus and our products and forecasts of key metrics for the fourth quarter of 2009. Specific forward-looking statements include but are not limited to our forecasted booking, shipment, volume, revenue, gross margin, operating expense, tax rate, and earnings per share both on a U.S. GAAP and pro-forma.

Our expectations that we will grow and maximize our market position within the semiconductor industry, our efforts to restore the Company and return to profitability, our efforts to get to our targeted financial model and maximize our operational cash flow. Our anticipated cost-completion and annual savings from the consolidation of our manufacturing facilities in Oregon, our efforts to improve inventory control, order management and forecast accuracy, the effect of the current economic climate on our performance over the next several quarters. General economic trends and trends within our industry and market and other anticipated future events.

We caution you that forward-looking statements are projections and expectations regarding future events. They 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 and our filings with the Securities and Exchange Commission, including our Form 10-K for fiscal 2008, our Form 10-Q for the first and second quarters of fiscal 2009 and our current report on Form 8-K.

During our call today, we will make references to Non-GAAP financial measures which excludes certain charges, benefits and other items which are detailed in our earnings release. For a reconciliation of Non-GAAP to GAAP financial measures, please refer to our earnings release and our Form 8-K furnished to the SEC today.

We do not provide a reconciliation of the forward-looking Non-GAAP to GAAP measures because of our inability to forget charges, costs, and expenses.

Forward-looking statements are based on information as of today and we assume no obligation to update any of such statements.

Jeff Benzing will begin today's call with a review of the financial results for the third quarter. Rick Hill will then discuss the state of the business followed by guidance for the fourth quarter of 2009, and then we will open the call for the Q&A session.

Now, I will turn the call over to Jeff.

Jeff Benzing

Thank you, Robin and good afternoon everyone. I am pleased to report that we had increase in the positive results in the third quarter as the semiconductor industry marched forward in its recovery and we continue to show strong customer acceptance of our products and leading edge factories around the world.

Third quarter 2009 bookings came in at $171.5 million, up 54% compared to the second quarter and up 121% off the lows we saw in Q1 of this year. Bookings this quarter were at the top end of our revised guidance range above 40% to 55%. As we discussed in our mid-quarter update, we saw a continued investment from the foundries for leading-edge technology products and approved spending for memory due the favorable price trends in both NAND and DRAM.

As a result of this increased business level third quarter shipments were $165.4 million, up 38% from the second quarter and up 80% off the low in Q1. Shipments this quarter were also at the high-end of our revised guidance range of $150 million to $170 million. Third quarter revenues finished at $176.9 million, which was up 48.4% over the second quarter and up 79% from Q1. Revenues also came in at the higher-end of our revised guidance range from $160 million to $180 million.

Our third quarter revenues by geographic region are as follows. United States were 30%, Greater China 36%, Korea 20%, Japan 6%, and Europe 8%.

Moving to a discussion of the income statement throughout the rest of my remarks, I will be distinguishing between GAAP results and those results that excludes certain, other charges. I would like to begin with the description of those charges and we will refer to them collectively going-forward as other items. A detailed breakdown of these items by type is included in today’s press release.

Other items totaling $1.5 million net for the third quarter, include $2.5 million in additional charges, primarily related to reductions in force and the consolidation of our manufacturing facilities within our Oregon campus, including $400,000 in related tax benefits and a net $1 million of discrete tax benefits we realized in the quarter.

Third quarter gross margin on a GAAP basis was 40.0%, excluding $1.2 million and other items, non-GAAP gross margin came in at 40.6%, up 8.2% points over the second quarter, this was on the high side of our guidance range at 40% plus or minus 2%. This significant improvement in gross margin was a result of improved absorption and leveraged on our fixed overhead cost as shipment volumes increase 30% compared to quarter two, combined with the many operational cost reduction initiatives that we have started throughout the year.

Third quarter operating expenses totaled $74 million on a GAAP basis on a non-GAAP basis, operating expenses were $72.2 million for the quarter, excluding $1.8 million in other items. Please note that in the third quarter, operating expenses also benefitted from a $1.4 million recovery of a previously written off receivable.

I am pleased to report that we exceeded our OPEX guidance and closed the third quarter with operating expenses below the $75 million level on both the GAAP and Non-GAAP basis. Other income in the third quarter was a negative $100,000. We had approximately $2.4 million in net interest and other income which was offset by $2.5 million in unrealized losses related to foreign exchange currency fluctuations.

The third quarter tax provision on a GAAP basis was $625,000 resulting in a negative effective tax rate of 18%. Without other items, our third quarter tax provision was $2.1 million, $1.5 million larger than on a GAAP basis primarily due to the previously mentioned $ 1 million discrete tax benefit.

The $1 million discrete tax benefit is comprised of a $20.7 million benefit associated with a favorable change and estimated utilization of net operating loss carry forwards arising from previous acquisition. Offset by an increase in tax reserves primarily related to the modification of intercompany terms governing international legal entity structure.

Looking forward to the next quarter, our tax rate for the fourth quarter on a Non-GAAP basis excluding any discrete items is expected to be approximately 15%. As we stated earlier in the year, at this pre-taxed levels small changes in the geographic mix of income and or loss, can cause unusual volatility in our tax rate.

Net loss for the third quarter on a GAAP basis was $4 million, or net loss of $0.04 per share. Excluding the $1.5 million in charges previously discussed, net loss on a Non-GAAP basis was $2.5 million or a net loss of $0.03 per share which was at the high-end of the revised guidance range of a loss of $0.09 per share to breakeven.

Moving to the balance sheet, we ended the quarter with $704 million in cash, short-term investments, restricted cash and long-term investments, which is up $4 million from the $700 million ending balance in the prior quarter and up from the $683 million in which we began the year.

Cash flow from operations in the second quarter was $6.7 million, cash flow for fiscal year 2009, year-to-date is $25 million. In the quarter, we purchased approximately480,000 shares of stock for $10 million, under our authorized stock repurchase program and still have $817 million left under the current authorization.

Accounts receivable in the third quarter increased by 16% to $111 million despite a 38% increase in shipment levels quarter-over-quarter. Additionally, DSOs decreased to 57 days, from 73 days at the end of the second quarter. This is a historical one for the Company and is due to proactive collection efforts and timely customer payments. Inventory decreased by approximately $14 million on a sequential basis as a result of improving inventory controls, order management and forecast accuracy.

In summary, we continue to make progress in our efforts to optimize the structure of the Company and restore profitability at lower revenue levels. We are keenly focused on returning to our targeted financial model and maximizing our operational cash flow and continue to improve our performance in future quarters as we look forward to increasing levels of business and the result in working capital that will be required.

That concludes my prepared remarks for the opening results of the third quarter 2009 and I will turn it back over to Ric, who will comment on the state of the business and give our guidance for Q4.

Rick Hill

Thank you, Jeff. I will now provide you with our view of the current business conditions followed by guidance for the fourth quarter. Now since our mid-quarter update, the overall electronics industry outlook remains relatively unchanged, based on current industry reports the outlook for PCs has improved once again to down 1% year-over-year compared to down to 2% we thought at our mid quarter update and down 6% of what we thought at the beginning of the year.

Intel is slightly more bullish, recently stating they expect CC units to be flat to up in 2009 and up 10% in 2010. If Intel’s forecast materializes, as I have mentioned previously, double digit PC unit growth is nothing but good for the equipment business. The semiconductor market continues to strengthen on the heels of improved industry forecast for PC sales and demands for Smartphones and we expect quarter four will also be better than seasonal for the following reasons.

Utilization levels are expected to get back to normal seasonal patterns but again lower levels than the fiscal year 2007 peak levels. Published DRAM prices are up 130% year-to-date on average, driven by continued DDR-3 demand and a shortage of DDR-2 supply. Publish NAND prices are up 115% year-to-date on average driven by the enterprise server cache memory applications in–addition to Smartphone demand and the supply shift to 32 gigabit memory and finally foundry utilization levels and revenues continued to increase quarter-over-quarter.

We continue to see improving conditions into the fourth quarter for our semiconductor business. Through the first half of the year, customers were focused on technology transitions and are now converting to capacity additions as demand in the end-markets materialize. As you know, we announced the consolidation of our manufacturing operations in Oregon in our second quarter earnings call. The estimates of time and cost to complete this undertaking remained in-line with our earlier announcements.

The consolidation should be completed by the end of the first quarter of 2010 at a cost of between $6 million to 10 million, leading to an annual savings of approximately $5 million to $6 million starting in the second quarter of 2010. In this fourth quarter, we expect to ship over 90% of our production, out of the Oregon facility.

Now, I would like to highlight a key achievement of the Company over the last year and that is our asset management. Cash flow, we have been cash flow positive and will be cash flow positive for the year, by roughly $30 million to $40 million versus the new clear winner scenario we were talking about at the end of the fourth quarter last year in the January conference call, of a maximum spend of $20 million a quarter.

It makes me very proud of the entire Novellus team to report those type of results to you. With that, here is our revised guidance for the fourth quarter. The expected range for booking is up 25% to 50%. Shipments are expected to range from $215 million to $245 million. Revenues are also expected to range from $215 million to $245 million. Gross margins will continue to improve on a Non-GAAP basis, it is expected to range from 44% to 47% and our earnings per share on a Non-GAAP basis is expected to be in the range of $0.20 to $0.40 per share.

Now that concludes my comments and our guidance for the fourth quarter. Now I would like to open up the call for questions and answers. Operator?

Question-and-Answer Session

Operator

Thank you (Operator Instructions). Your first question comes from Timothy Arcuri with Citi first.

Timothy Arcuri - Citi

Hi Rick, a couple of things, there seems to be some view out there from some folks that your exposure to NAND is less than some of your peers? So I am wondering if maybe you can start to give us some flavor of sort of what your exposure is to these different segments of the market foundry DRAM, NAND, even if you do not give us exact numbers, can you give us some sort of sense?

Rick Hill

Well I think our exposure to NAND is no different than any of our competitor’s exposure to NAND in particular and I think we have been around a long time we are in every semiconductor company in the world when you look at our product portfolio, given its level of performance and quality, I think that we should be for those that are financially driven companies, the product of choice in most thin film applications. That is my view.

Timothy Arcuri - Citi

Okay, and this is just a quick follow-up for me Rick, obviously the earnings guidance is just great and I am just looking beyond that and I am wondering whether some expenses will start to come back as you move into the first half of 2010 and maybe if you can extend the model and maybe pick a couple of revenue levels and say, “maybe $400 million what the general PNL might look like?

Rick Hill

What we have said in the past is that we are going to hold our expenses flat at roughly up through $250 million per quarter and roughly $80 million per quarter maximum and our target operating model, where operating expenses are 28%.

Operator

Your next question comes from Steve O’Rourke with Deutsche Bank.

Steve O’Rourke - Deutsche Bank

Rick, can you please tell in kind of where you are seeing the orders from in Q4 to sort of like segment some pretty strong guidance going forward and just trying to get a better idea where it is all coming from?

Rick Hill

I think demand will come largely from three sources, Taiwan, Korea and the United States.

Steve O’Rourke - Deutsche Bank

One follow up, when you think about NAND Flash and the demand for equipment for NAND Flash coming out to 2010, Sandisk recently commented that they have not made commitments for new capacity next year, it does not mean they will not, but it seems a lot of companies are thinking that way to try and keep things strong. How are you looking at NAND Flash spending based upon how you are looking at the industry going out for 2010?

Rick Hill

I think that we are underestimating what the demand for NAND Flash will be and I believe going out through 2010, we should see a rebound in investment in NAND Flash.

Operator

Your next question comes from Christopher Muse with Barclays Capital.

Christopher Muse - Barclays Capital

I was hoping you could expand your original comments on starting to see capacity additions, is that strictly in the foundry space, were you starting to see incremental capacity but it is coming out of the memory space as well.

Rick Hill

Also in the memory space as well.

Christopher Muse - Barclays Capital

Can you expand on that a bit?

Rick Hill

No that is as far as I would go.

Christopher Muse - Barclays Capital

Alright and one quick follow up question if I may, on the OPEX trying to take the midpoint of your guidance, it looks like you are talking about $72 million in OPEX, is that the right way to think about it and then I guess beyond that looking into March, June, considering some of the things you are doing up in Oregon. What does the trajectory look like there?

Rick Hill

As we said before, in my previous comments, we expect to be done with the consolidation at the end of the first quarter in Oregon, that will affect our overall manufacturing cost and begin to help us improve margins to the tune of the $5 million to $6 million in operating expenses from a manufacturing perspective per year and from a standpoint of our operating expenses below the line, we have targeted that we have given the increase in profitability, we have some bonuses that will come back as well as profit sharing that will come back and we will manage that to $80 million max through $250 million a quarter and then our model is going to try to be the whole 28% overall operating expenses.

Christopher Muse - Barclays Capital

So I guess if we are at the run rate, if in the high end of your revenue you got $245 million, we are almost there at $250 million, do we see that $80 million comeback immediately in one quarter-to-quarter?

Rick Hill

I doubt it.

Operator

Your next question comes from Gary Hsueh with Oppenheimer Funds.

Gary Hsueh – Oppenheimer Funds

I have a question here, it is just about revenue recognition shipments and bookings. When I look a real long time ago and granted that it is real long time ago, at a $200 million run rate, backlog is a little bit more elevated I would say, closer to the 200 or 300 range, then what I think is implied in guidance which I calculate the backlogs, is still in the high 100 range, is there anything different in the business and surely there are a lot of things that are different, but is there anything different in the way you recognize revenue and the way you shift today then maybe three or five years ago?

And is that a shift in your part or is that a shift in the behavior of your customer?

Jeffrey C. Benzing

No, this is Jeff. No, I do not think that there is a change in our revenue. It is not going to change in our revenue recognition policy. I think what you are seeing, is you are seeing the fact that the order patterns we are getting from our customers tend to be aligned with many initiatives that we have taken in our manufacturing space for shorter cycle times and as in that result, we are carrying on the order one quarter’s backlog as opposed to in prior periods perhaps, we carried up to quarter and half.

Gary Hsueh – Oppenheimer Funds

Okay and just to give me a little bit more comfort about sustainability of this elevated run rate in terms of revenues, given the fact you have a lot lean or backlog compared to the historical periods in time. I mean, what sort of drivers do you see in terms of Q1, order intake and in-demand for Semi-Cap Equipment. Do you see more of this acceleration in terms of the capacity add on the memory side or is there more of a movement to a broader base, sort of recovery coming from the IDMs because right now it looks pretty narrow in terms of the customer base and giving the lean backlog just would like a little bit more comfort on this narrowness broadening out to a bigger customer base in Q1 and Q2 next year.

Rick Hill

Well I think that, the reality is, at this juncture, it has been a relatively narrow rebound, but we are seeing others begin to follow when we expected to broaden somewhat, again limited by the concept of rational deployment of capital. We do not see people being able to secure money at zero cost and therefore, there is a limit, both a risk limit and cost limit for our customers to secure capital.

So it is not going to expand unabated into the first quarter and the second quarter but we still see that there are legs in this upturn as we had a downturn that has been unprecedented and we are having technology shifts that are obsolescing some of that capacity.

Operator

Your next question comes from Satya Kumar with Credit Suisse.

Satya Kumar – Credit Suisse

I just wanted to reconcile something, last week [Inaudible] reported and they sounded somewhat cautious on NAND Flash and I think in the past you have been a little bit more optimistic on the same capacity coming for NAND Flash sooner. Is there a disconnect or so, between what you might be saying and versus what the [Inaudible] might be saying?

Rick Hill

Well, I do not think again, as I try to articulate. I am not just responding to--when I give you information, I am trying to give to the market the same information I am using to judge what we are doing internally. When I look beyond our customers and I have some visibility into products that are coming out or at least on the drawing board, vis-à-vis that have demand on, will provide demand for NAND Flash, I tend to think, there are some real opportunities for corporations to take advantage of new enterprise systems.

Because of all their cutbacks on people, their attempts to cut cost, to cut power consumption, everything else, I think these products are going to have traction, and therefore, I think we are not fully recognizing what that end-demand is going to be. Now, is that an absolute? Of course not, I am just trying to share with you what I think will be the next leg of the upturn and I think it will be a resumption of NAND Flash demand. I could be wrong, but I have given you the best I have.

Satya Kumar – Credit Suisse

No, that is not a problem. In terms of your move to Oregon, you mentioned that 90% of the shipments are coming from Oregon, would you clarify if that is for Q3 or Q4 and how is that move going? Is there any possibility? Can you add more color to that? Would you leave any shipments on the table because of any potential delays or things like that? In terms of the move to the Oregon site?

Rick Hill

I will let Jeff handle that question.

Jeffrey C. Benzing

We began this activity early on in the third quarter after planning it in the second, what you have to realize is we run our virtual factory now for quite some time where we had routinely built systems in both facilities and what you are seeing now is a rationalization of moving some tooling sets as well as moving the complete production of the different product lines to [all of them].

We expect that in Q4, over 90% of our shipment volume will be coming out of our Tualatin facility, and as a matter of fact, we have--the majority of our products are already production qualified and shipping from that facility as of this call.

Steve O’Rourke - Deutsche Bank

It sounds like it is going pretty smooth.

Jeffery C. Benzing

Yes.

Steve O’Rourke - Deutsche Bank

Lastly Jeff, what are you assuming in terms of interest level coming in Q4 and is there going to be an unusual Forex gain or loss in Q--like in--?

Jeffrey C. Benzing

I think you will see it returning to more normal levels without the currency issue we saw in Q3.

Operator

Your next question comes from Edwin Mok with Needham & Company.

Edwin Mok - Needham & Company

The first question regarding your gross margin guidance, it is very strong there and if I look back historically, you guys do not have any gross margin at 50% or above until like $400 something million, do you kind of look forward and look at your business growing?

What kind of revenue level do you see you need to get to that 50% or above considering gross margin?

Rick Hill

We have commented that we would be to our targeted gross margin of say 52% when we hit a billion dollar annual run rate. We are slightly, 50% I guess, we are slightly below that trap, due largely to mix but I think depending upon the mix in the given quarter, we should be able to hit that 50% gross margin and go beyond that greater than 250.

Edwin Mok - Needham & Company

Great, thanks for verifying that and then the second question regarding in the industrial group, I am just wondering how it tracked in the third quarter--.

Rick Hill

The industrial group has basically been a detractor to the financials in the third quarter and we will continue to wait on the financial result in the fourth quarter. So you can deduce by that, the semiconductor results are actually stronger. As you know, Europe is still somewhat on a downward trend or at least it has flattened out, but we have not seen it start to trend upward yet.

Yes, they are much more influenced by raw wafer capacity expansion , although we expect to see that coming beginning of next year, from an industrial standpoint, the automotive industry is still down, there are still some questions marks that will now resume..

Edwin Mok - Needham & Company

Great, can I make just one follow up question, in terms of the Silicon deal market how do you look at that breakdown in 2010? Do you expect that to start ramping in 2010 or is it more on the 2011 timeframe?

Rick Hill

Well I think TSV market is an interesting market that technologically has the opportunity to increase packaging density. We feel, we have a strong position technologically in TSVs in solving some of the technological problems. They are not all sold yet by people, but I definitely see it as a growth opportunity that pulls directly on Novellus’ skills and strength and I think it is an opportunity where we can, in a very, very short period of time take a pretty commanding market share leadership position.

Operator

Your next question comes from Steven Chen with UBS.

Steven Chen - UBS

Great, thanks, hi Rick, hi Jeff, Rick, I was wondering if you could share with us your current thinking for 2010 semiconductor industry, capital spending trend and how you see the linearity of 2010 capital spending perhaps playing itself out?

Rick Hill

Well obviously with a strong Q3 and Q4 from a booking standpoint, a lot of those shipments occur in Q1 which tend to be the CapEx expenditure rate of our customers in 2010 and right now it looks like that the CapEx expenditure will be up north to 30% in 2010 for the industry.

Steven Chen - UBS

As you look into that percent at 2010 Rick, do you think there will be a material falling of these strong orders and shipping in close rate or do you think the new customer demand on NAND Flash can offset that in the first half of 2010?

Rick Hill

Well, I think given how low the depths of this recession has taken us, there are a lot of room to go upward and grow, but it is all depending upon macroeconomic effects. Certainly, from a standpoint of U.S. corporations with the devaluation of the dollar, as bad as that has been, our equipment is much more competitive in Asian markets, so that is a plus side.

On a downside, it makes good obviously, that confirmation more expensive for U.S. consumers which is sort of an offsetting balancing act, but I think in general, the stimulus that is going on by governments throughout the world is creating a positive effect on the overall economy. The question is whether that will continue throughout 2010. My sense is it is effective and we will see continued expansion through 2010.

Now, will we see expansion without inflation? Probably not. So that will put another factor we will have to manage going forward, but overall, I think for demand, I think industrial or corporate spending has to go up to try to improve productivity given as many people that have been laid off.

I think that overall demand in the market is being stimulated by government spending and so in general, when I weigh all those factors, again I am giving you the same factors that we look at. We tend to think that 2010 will be a fairly good year.

Operator

Your next question comes from Ben Pang with Caris & Company

Ben Pang - Caris & Company

Thanks for taking my question, first of all, are you starting to see some capacity addition to DDR-2?

Rick Hill

I am not going to go down to that level because it starts to identify customer. CapEx plans but I would say that clearly, with the price rise, one could anticipate that you will see some expansion in capacity.

Ben Pang - Caris & Company

The second question is, on your 30% capital funding growth for 2010, what type of estimates do you have baked in for NAND Flash capacity expansion?

Rick Hill

From a standpoint, NAND Flash capacity expansions, we would not see it go back to the historical levels, but we would see it become probably a 20% to 30% part of the overall CapEx expenditure.

Ben Pang - Caris & Company

In 2010?

Rick Hill

In 2010.

Operator

Your next question comes from to Atif Malik with Morgan Stanley.

Atif Malik - Morgan Stanley

I have a question on your HDP market back in your Analyst Day Semicon, you guys talked about exploring maybe the different technology beyond 45 nanometer for HDP and if I look at the greater market share, you guys have been steadily losing market share since a peak in 2003. Just an update on the new product launch on HDP and what are the expectations again for next year?

Rick Hill

Well I have nothing new to offer on the HDP market, obviously as we pushed out into 32 nanometer and 22 nanometers HDP markets, HDP for applications in STI and also PMD layers are not satisfied by that technology and while we work on other technologies, there is really no good solution. It is one of the biggest challenges for our customers, the quality of that film and the manufacturability of that film, but I, unfortunately cannot tell you we have the solution.

Atif Malik - Morgan Stanley

Got it, and just a quick clarification, is it fair to assume that a NAND orders in your client for Q4 are pretty low levels still?

Rick Hill

I think that is pretty safe.

Operator

Your next question comes from Mahesh Sanganeria with RBC Capital Markets.

Mahesh Sanganeria - RBC Capital Markets

Thanks, congratulations on the great EPS guidance. I just want to make sure that I am not getting the numbers wrong. So last, on the mid quarter update, your guided revenue EPS, high end was $2.30 and $0.20 and now at $2.30 you are guiding $0.30 which is 50% higher, did I get that correct? What is driving that surprise in a period of less than a couple of months?

Rick Hill

Well you are correct in your analysis and I think what you are seeing is just a rationalization of the flow-through of the improvements that we have made on our own overall operating model.

Mahesh Sanganeria - RBC Capital Markets

Okay, moving on to a different question--.

Rick Hill

Margin kicked up higher than perhaps we saw back early in the third quarter also.

Mahesh Sanganeria - RBC Capital Markets

The second question, there is a lot talk about the lead times and capacity constraint as well as to supply chain in the semiconductor market. From your perspective, are you able to ship everything you are getting request for, or are your customers metering the shipments from you depending on what they can get from the lithography side, any color on that will be helpful.

Rick Hill

Well I think clearly in this environment, the customer wants to let the order go as laid in the order cycle as possible in order to maximize their exposure. I think we benefit from the standpoint of having very good relationships with the customers that are doing the bulk buying and the buying and are able to work with them on forecasting that demand and getting them in.

That does not mean we can meet every absolute request but we certainly work together to meet a workable solution and so far, we have been able to drive a compromise between the two of us and satisfy the customer’s need.

Mahesh Sanganeria - RBC Capital Markets

Is it safe to say that you could have shipped more if you had no constraint?

Rick Hill

Well I think clearly, if I could ship everything I would rather be overbooked on any given day, so that you could put--theoretically see something falling one quarter versus another but I do not think that is the general rule.

Operator

Your next question comes from Marian Lee with Stifel Nicolaus.

Marian Lee - Stifel Nicolaus

Hi this is Marian for Patrick Ho, do you have that stock option fund stock-options fund for this quarter?

Rick Hill

It is $7 million.

Marian Lee - Stifel Nicolaus

What do you expect the 2010 tax rate to be?

Rick Hill

Two-thousand and ten?

Marian Lee - Stifel Nicolaus

Yes.

Rick Hill

We are not in the position of forecasting 2010 at this time. I think if you, think about us getting back to normal profit levels, that you should think about at 20% to 25% effective tax rate.

Marian Lee - Stifel Nicolaus

Okay, great and my last question, so as memory adopts copper, can you talk a little bit about the potential dollar opportunities for the electroplating business over the next several years?

Rick Hill

We do not disclose individual business opportunities.

Operator

Your next question comes from Chris Shankar with Bank of America, Merrill Lynch.

Chris Shankar - Merrill Lynch

When you give the guidance during the mid quarter update now and its last one month, which segment deal with the upside? Was it purely foundry? Was it incremental memory? Can you give some color on that?

Rick Hill

I think largely, it has been driven by foundries with some incremental memories spend.

Chris Shankar - Merrill Lynch

Got it and in terms of project momentum, when do you think we can actually start seeing the impact of any potential market share gains? Either it is memory adoption of copper or in the computer environment, do you think that would relate to pure capacity spend in the environment or you think we are starting to see evidence of that in Q4.

Rick Hill

Right, I think you are starting to see evidence in Q3 and you will a further evidence in Q4.

Chris Shankar - Merrill Lynch

My last question is how much is the share buyback?

Rick Hill

Eight-hundred and seventeen million.

Chris Shankar - Merrill Lynch

Eight-hundred and seventeen million, thank you very much.

Operator

Your next question comes from [Unidentified Analyst] with Arete Research

Unidentified Analyst –Arete Research

Two questions, one is that as you look at 2010, how do you see the foundries spend shaping up, do you see some structural shifts in the spending pattern going forward? The second question is, do you see any manufacturing efficiency gains as you move to your Oregon facility compared to your San Jose facility?

Richard S. Hill

First, on the foundry, I think the foundry model is a great model as CapEx becomes tighter more and more people are going to foundry rather than have their own expansion of their capacity so I think the foundry model is a good one. I expect to see all the foundries do quite well. I expect also to see expansion of foundry activity within China which I think should be in that positive for the overall equipment industry going in 2010 relative to the impact on our cost with our consolidation of manufacturing facility. I will let Jeff handle that but I believe he already talked about the numbers.

Jeffrey C. Benzing

Yes, we have forecast you guys that you should expect to see on an annual basis between $5 million and $6 million of a run rate savings in our period cost line. Now, clearly getting into less facility, we will drive our fixed over head cost down and having one location will eliminate the redundancies in management, etc. that will allow us to operate more efficiently.

Unidentified Analyst –Arete Research

Just one quick thing to follow-up, Do you think 2010 foundry spending is going to be up on a year–to-year basis compared to 2009?

Richard S. Hill

I intend to think that it will be from flat to up but it would not be down.

Operator

Your next question comes from the line of Jim Covello of Goldman Sachs.

Kate Cutler for Jim Covello for Goldman Sachs

Hi, this Kate Cutler for Jim Covello. I have a couple of questions and my first question is when you guys think about the technology, traditions that some of your customers particularly on the memory side are going through, clearly those have been driving a lot of the orders sort of to date. How far do you think we are along those customers ordering for those technology transitions. So in other words how long do you thing those technology transitions can support the order inflow and when do you think we need to start seeing significant capacity additions to continue on the upward trajectory?

Richard S. Hill

I think the memory market has entered a period of rational capital deployment and rather than doing the big bang theory with capacity expansion, our clearly metering out capacity expansions with factories into multiple phases which I think is a very, very good thing but I think relative to transition to copper, transition and technology nodes we are in the first inning.

Kate Cutler for Jim Covello for Goldman Sachs

That is really helpful and maybe just another question on the foundry side. Obviously we are going to have a pretty big new player in the foundry space entering the market in the next couple of years. Just curious to get your thoughts as to when you think we might start seeing more significant orders from that new player and what are your engagements for them have been like today?

Richard S. Hill

Well, I think 2010 is a year that we are optimistic, can be positive for the equipment business driven by fundamental and demand and since the economy keeps up I expect to see all the usual suspects spending in 2010 and I am optimistic to that but given the economic uncertainty we face it is difficult to forecast the future but I am positive.

Operator

(Operator instructions). Your next follow up comes from Timothy Arcuri

Unidentified Analyst for Timothy Arcuri

Hi, this is Peter [Inaudible] for Tim. Rick, if we were to just annualize Q bookings it implies that 2010 CapEx number of $40 billion plus, it is a pretty rich CapEx number really what I want to get down to, is two potential scenarios around that. One is just lithography bookings are ahead of themselves and could have some potential to roll over and really the other is that you can see some this CapEx spend to spread out to the other equipment which I think we are starting to see but I really want to get your thoughts on which is the more likely scenario of things rolling over and CapEx really coming in below that $40 billion or if you think it is more likely that it just starts spreading and we have just starting to see the tip of that?

Richard S. Hill

Well, Peter you answered the question and clearly lithography leads the train, we buy in bulk or in slugs and lithography is the key enabler for the technology transition to smaller nodes not necessarily they are not key to the technology transitions to copper and DRAM as an example but clearly going down to 22 nanometers and beyond, they are. As everybody fight to do that you are going to see an early uptick of CapEx that goes into lithography by a broad number of customers and then that is followed by capacity expansions and other key technologies such as ads which is a key technology and also copper interconnect which is key technology clearly going forward and so I think there will be somewhat time-phased, you know $40 billion is a pretty robust number I could only hope springs eternal. We definitely be willing to take that orders if they are coming as long as I get the shipment and get paid for.

Operator

And now if there no further questions in the queue, I would like to turn the conference back to Mr. Hill for closing remarks.

Richard S. Hill

Thank you very much for joining us on this third quarter conference call. I know at the end of November we will have mid-quarter update and we will give you that latest information we have at that particular time. We are looking for a good finish to 2009 which did not start out that good and we are very, very hopeful that we can have a positive 2010 and I hope it is positive for all of you guys as well. Thank you very much for your attention to Novellus and your continued support of the Company, we do appreciate it. Thanks very much.

Operator

That concludes our conference call today. We would like to thank you for participation.

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