Executives
Robin Yim – VP, Treasurer and IR
Jeff Benzing – EVP, Chief Administrative Officer, and Principal Financial Officer
Rick Hill – Chairman and CEO
John Hertz – VP, Corporate Finance
Analysts
Mahesh Sanganeria – RBC Capital Markets
Chris Shankar – Bank of America
C. J. Muse – Barclays Capital
Satya Kumar – Credit Suisse
Atif Malik – Morgan Stanley
Edwin Mok – Needham & Company
Weston Twigg – Pacific Crest
Steve O’Rourke – Deutsche Bank
Gary Hsueh – Oppenheimer & Company
Timothy Arcuri – Citi
Stephen Chin – UBS
Patrick Ho – Stifel Nicolaus & Company, Inc.
Ben Pang – Caris & Company
Jagadish Iyer – Arete Research
Jim Covello – Goldman Sachs
Novellus Systems, Inc. (NVLS) Q4 2009 Earnings Call Transcript February 3, 2010 4:30 PM ET
Operator
Welcome to the Novellus System’s fourth quarter and year end 2009 financial results conference call. As a reminder, this call is being recorded today February 3, 2010. 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, operator. Good afternoon, and thank you for joining the Novellus Systems’ fourth quarter and fiscal year 2009 earnings conference call. Joining me on the call today are Rick Hill, Chairman and Chief Executive Officer, Jeff Benzing, Chief Administrative Officer and John Hertz, Vice President of Corporate Finance.
Financial results for our fourth quarter and fiscal year 2009 were released by PR Newswire shortly after 1:00 PM, Pacific 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 first quarter of 2010. Specific forward-looking statements include, but are not limited to, our belief that our increased operating leverage will enable the company to drive for greater profitability cycle-to-cycles.
Our belief that the continued momentum behind the recovery in the semiconductor industry is sustainable; our expectations and belief that the various factors that are contributing to and fueling continued growth and increased demand in semi-conductors and capital equipment; our belief that the application of semiconductors will continually drive improvement in the quality of life around the globe, our progress in securing bookings with leading semi-conductor manufacturers, the demand for and competitiveness of our products, our expectations that we will continue to maintain our position or grow market share, the forecasted bookings and shipment volumes, revenue, growth margin, operating expense and earnings per share target for the fourth quarter of 2010 and our tax rate for both the fourth quarter and fiscal year of 2010, and any other unanticipated 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 and our forms 10-Q and 8-K filed during fiscal year 2009. Forward-looking statements are based on information as of today and we assume no obligation to update these statements.
During our call today, we will make reference 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 project certain charges, costs and expenses.
Jeff Benzing will begin today’s call with a review of the financial results for the fourth quarter and fiscal year 2009, Rick Hill will provide an overview of the business environment and guidance for the fourth quarter of 2010, and then we’ll open up the call for our question-and-answer session.
Now I’d like to turn the call over to Jeff.
Jeff Benzing
Thank you, Robin, and good afternoon everyone. As Robin outlined, I’ll begin today’s call with a review of the financial results for both the fourth quarter of 2009 and the 2009 fiscal year.
While year-on-year comparison of our 2009 reflects the weak economic global condition that began in late 2008 and persisted through most of 2009 the quarterly improvements in orders, shipments and earnings which began in the second quarter continued through the fourth quarter. This was driven by a return to a steady and continued investment by our IDM boundary and DRAM customers. Here are the results.
Net bookings for the fourth quarter of 2009 came in at $257.6 million, up 50.2% over quarter three and at the high end of our revised guidance range of above 40% to 55%. Net orders for the fiscal year 2009 were $618.1 million, which was down 24.4% from fiscal year 2008 as a result of the weak macro economic conditions we experienced throughout the year.
Fourth quarter shipments were $244.5 million, up 47.8% from quarter three and also at the high end of our revised guidance range of $225 million to $245 million. Shipments for our fiscal year 2009 were $622 million, a decrease of 35.1% over fiscal year 2008 consistent with the reduction in bookings experienced throughout the year.
Fourth quarter revenues were $244.2 million, up 38.1% from the September quarter and also at the high end of our revised guidance range of $225 million to $245 million. Revenues for fiscal year were $639.2 million, a decrease of 36.8% over fiscal year 2008.
Our fourth quarter revenues by geographic region are as follows
United States 21%, Greater China 48%, Korea 18%, Japan 5% and Europe 8%. Our yearend backlog at the end of the fourth quarter was $184.3 million, modestly lower than the 2008 fiscal year at backlog of $188.3 million. Throughout the rest of my remarks related to the P&L I will be distinguishing between GAAP results and results that excludes certain other charges and benefits. I’d like to preface my remarks with a description of these other charges and benefits, and will refer to them collectively going forward as other items.
Please note that a detailed breakout of these items by type and geography is in today's press release. Other items totaled 3.5 million for the fourth quarter and 42.9 million for the 2009 fiscal year. Other items for the year included severance charges related to reductions in force, restructuring and other charges, consolidation of our manufacturing operation in Oregon, impairment of inventory and evaluation systems, write-down of certain R&D assets and various tax related items.
Fourth quarter GAAP gross margin was 46.5%, which includes 1.9 million of other items. Excluding these other items, quarter four gross margin was 47.3%, which exceeded the high end of our guidance range of 45% to 47%, and up from 40.6% in the third quarter. The increase in Q4’s gross margin was due primarily to improved absorption of fixed cost and shipment volumes increase and change in mix.
For fiscal year 2009 GAAP gross margin was 37.7% compared to 43.1% in 2008. Excluding other items fiscal year 2009 non-GAAP gross margin was 39.4% compared to 44.2% in 2008 primarily due to lower shipment volumes compared to the previous year.
Total GAAP operating expense for the quarter was $75.6 million. Excluding other items, ongoing operating expense was $74.0 million, up slightly from $72.2 million in the September quarter which included a non-recurring bad debt recovery. Over the last year, we’ve re-aligned our ongoing cost structure and reduced our operating expenses to $303 million, a decrease of 29.3% compared to 2008. As we stated before, improving business trends forecast in 2010 or return the company to a more normal operating model, and we will see certain increases in OpEx as we eliminate incremental factory shutdowns and reinstate salaries, merit increases and variable compensation.
Fourth quarter GAAP operating income was $38.1 million. Excluding other items, operating income was $41.6 million. Our GAAP operating loss for the fiscal year 2009 was $76 million, and excluding other items we incurred an operating loss of $51.5 million. Our fourth quarter effective tax rate was 13.3% versus an effective negative rate in the third quarter. The tax rate differed between the two quarters because we generated income in non-US jurisdiction in the fourth quarter versus generating losses in those jurisdictions in third quarter.
For the year end December 31, 2009 our effective tax rate was negative 22.9%, due again primarily to the fact that we generated losses in non-US jurisdiction. As projected business levels have improved, we expect that our tax rate will return to more normalized levels in 2010. We are currently expecting a tax rate in the range of 25% to 30% for fiscal year 2010.
Fourth quarter GAAP net income was 35.2 million or $0.36 per share on a fully diluted basis. Fourth quarter net income excluding other items was 38.2 million or $0.39 per fully diluted share, which was on the high-end of our revised guidance range of $0.25 to $0.40 per share.
For the full year 2009, GAAP net loss was 85.2 million or a $0.88 loss per fully diluted share compared to the 2008 net loss of 115.7 million or $1.18 loss per fully diluted share. Excluding other items fiscal 2009 net loss was $49.1 million or $0.51 loss per fully diluted share compared to fiscal 2008 net income of $7.1 million or $0.07 per fully diluted share.
Looking at the balance sheet, we ended the year with 713.2 million of short and long-term cash and investments, including $133.1 million of restricted cash. Total cash increased by 31 million for the year, net of 23 million used in the repurchase of our stock. We generated 38.3 million in cash flow from operations in the fourth quarter and 63.3 million for fiscal year 2009 despite a very difficult business environment.
In the fourth quarter we bought back 631,000 shares of our stock for 13.1 million at an all-in cost per share of $20.76. For the year we purchased 1.1 million shares for 23.1 million at an all-in cost of $20.79. The stock repurchased program remains active and there is approximately 804 million left under the authorization until October 2011.
Net accounts receivable at the end of Q4 totaled $150.6 million, up 39.3 million from 111.3 million at the end of the third quarter. In the fourth quarter our DSOs declined to 56 days from 57 days at the end of Q3, and from 69 days at the end of 2008 due to our continued focus on cash and our effective collection practices.
Quarter end inventories increased by 12.3 million or 8.2% over quarter three, while supporting a 47.8% increase in shipments. We expect to continue to tightly manage our operational inventory as we head into a rising shipment environment in 2010.
Now, I would like to turn the call over to Rick to provide an update on the state of our business, and to provide guidance for the first quarter of 2010.
Rick Hill
Thank you, Jeff, and good afternoon, ladies and gentlemen. Thank you for joining our 2009 fourth quarter and our year end conference call. Needless to say, 2009 was a year of extremes, extreme depression and January of 2009 followed by what I'll call opulent optimism today in 2010. Now, while 2009 was a terrible year by any standard, Novellus maintained its tradition of positive cash flow generating 63 million in operations for the year.
I’d like to review some of the things that both the good news and bad news for 2009. On the bad side of the ledger, of course, is the fact that bookings declined from 817 million in 2008 to 618 million in 2009, down 24.4%. Our shipments tracked that going from 958 to 959 million in 2008, down to 622, down 35%. Revenues likewise track down 37% from 1.11 billion, down to 639 million. On a positive note, we made tremendous progress in our operating expenses seeing them go from 429 million in 2008 down to 303 million in 2009. Unfortunately we ended up with a loss but however we did have positive cash flows.
At Novellus, we are cautiously optimistic about the future. For the first time since the late 90’s, I see fundamental worldwide demand generating the needs for semiconductors once again at an unprecedented rate. Before I get into that detail of those drivers let me focus on quarter four a little. In quarter four, we had net sales of 244 million, that was up 148% over the low of 98 million in quarter one of 2009. Now while that's a terrific rebound. Let me point out that this revenue level is only 54% of our previous quarterly peak revenues in Q3 of 2006. This is a very important fact when judging the sustainability of this current upcycle, which I do believe to be sustainable.
On the bright side for Novellus, in the third quarter of 2006, our profit after tax was 15.8% on 444 million. On the 244 million in quarter four of 2009, our profit after tax was 14.4%, indicating tremendous expense control plus strong operating leverage going forward.
Now while $244 million is 54% of peak that business is coming from only a handful of customers. Let me characterize demand as Japan is very, very weak; Europe is very, very weak; the US is weak; Korea is strengthening very quickly, Taiwan is strong and the rest of Asia frankly is somewhat weak. So, what will sustain the business cycle? So let me give you a perspective having live through the 90s, 2000 through 2007 and the bust we saw last year.
If I look at those periods, the 1995, 1993 to 2000 period was driven by robust demand for semiconductor growth that was driven by building infrastructure, mainly the Internet network. It was driven by a demand for semiconductors due to fear of uncertainty and doubt that fear of uncertainty and doubt was Y2K, that fear of planes falling out of the sky and cars stopping on the streets at the end of the year, and finally by the consumerization of the personal computer.
We saw a big bust in 2001 followed by robust demand for semiconductor equipment that was driven for an entirely different reason. It was a supply-side driven growth in capital equipment and in the supply side of memory, which drove down prices and ultimately became robust at the end of 2008 and through 2009. So what’s different today? I think what we are seeing is, number one, there's been a tremendous restructuring worldwide of corporations to become more efficient. Now in order to become more efficient we have to have increased focus on productivity and information technology. And today with Microsoft’s successful introduction of Window 7, the first real product introduction from Microsoft since the late 90s, we see IT departments including our own coming with very credible proposals for investment in IT technology to improve overall corporate productivity. And we like many of our counterparts throughout the world are beginning to invest again more heavily into IT.
In addition, the move from wired to wireless is also increasing demands on infrastructure bills, not only in the United States today but throughout the world. So, that first leg of the triangle is very similar to the mid-90s. Now the question is one leg of the triangle doesn’t make a great market but it makes a reasonable market. So, what's the fear of uncertainty and doubt in the 2010 to 2015?
Again, the fear of uncertainty and doubt is planes falling out of the sky. The fear of terrorism, the fear of security throughout the world is driving an unprecedented government investment in cyber technology, which includes interconnected networks; it includes advance storage systems in order to interconnect worldwide. Now this is a trend that just happened on Christmas day with the advent of the Fruda Kaboom [ph] underwear. This is a trend that’s been going on over the last couple of – probably six to eight quarters and we have seen it in the performance of some of the biggest corporations in the United States that is IBM, at HP, and at Intel, what was the fundamental driver?
So this fear of uncertainty in doubt is going to accelerate investment by governments throughout the world and provide a second leg of the triangle. Now the question is, what fixes up the consumerization of the personal computer. Most recently. we did a study looking at overall consumer demand., and one of the things that was most illuminating to us is the fact that if you are look at the percentage of disposable income that is used to buy electronic equipment by emerging economies versus developed economies, you find that they purchase about twice as much as for our percentage point of their disposable income.
At the same time, the population of those peoples are three times as much, and of the result we see that there is over six times the demand in the developing world for electronic product today than they are in the developed world. And I offered to you today that China is no longer an emerging economy but in fact has emerged. Now I know there is some fear and speculation on China’s recent raising of interest rates but I would contend to you that that’s a prudent move by the Chinese Government to stay off of real estate but something that we obviously have, at least halfway lived through over the last year. And so I believe the third leg of that triangle going forward is in fact the consumerization of China. And I believe that more and more consumer spending within China and India will continue to sustain the economic growth and the use of semiconductors throughout the world over the next five years as a minimum.
So that is why I am optimistic. Now, what could happen to derail this fundamental demand? Well, another credit crisis is certainly a possibility. And as we all know, there is a significant lump going through the bower Boa Constrictor of loan defaults that peak in June of ’11. The next thing that could derail it, of course, is protectionism on the part of the United States, something we have to avoid with a passion, and finally, massive government spending on social programs rather than economic stimulus for the private sector. I believe China is very knowledgeable of this as they shed their philosophy of an iron rice bowl for all of their citizens and move more and more to a truly capitalistic environment. We sure hope the US will not try to move in the opposite direction.
So, to reiterate we think there is still strong growth in this business throughout the year. We, in fact, believe that CapEx will be up between 60% and 75% over 2009 in the semiconductor capital equipment area.
So, with that, I would like to give you what our outlook is for quarter one. We believe we’ll see bookings up from 10% to 25% in the first quarter. Our shipments will be between 255 million to 285 million, and revenues will track to between 245 million to 270 million. We’ll see our gross margins between 47% to 49% and we are expecting our earnings per share to be between $0.35 and $0.42 as we absorb the additional cost of bonuses and profit share that come to path as the quarters become more profitable.
So with that, I would like to open it up for any questions you might have.
Question-and-Answer Session
Operator
(Operator Instructions) We will go first to Mahesh Sanganeria with RBC Capital Markets. Please go ahead.
Mahesh Sanganeria – RBC Capital Markets
Thank you for the question. Hi Rick, thank you for the commentary on the drivers for the semi and semi-cap industry. Focusing little bit more on Novellus, you have been talking about memory transitioning to copper and market share gain with that, and particularly I think the products which can have a big impact as PECVD and DVD. Can you tell us a little bit about how the progress has been particularly on PVD? Have you made an inflection where you can be – you consider you are reasonably competitive on the PVD?
Rick Hill
Thank you, Mahesh. We believe that the transition to copper is in full swing now and that in the future all devices will be made with copper. And as you point out, we are extremely competitive in the area of PECVD, Electrofill and PVD particularly in the memory arena. In fact we think that we have technology differentiators that allow us to more rapidly accelerate that the no transition from memory manufactures due to some unique capability with our PVD technology. We in fact believe that is the only PVD technology that will allow us to continue to use PVD technology down at the 22 nanometer node.
Mahesh Sanganeria – RBC Capital Markets
On the technology, I recall that you talked about some details of that technology during the SEMICON, is that what you are referring to in terms of your technology edge?
Rick Hill
That is correct.
Mahesh Sanganeria – RBC Capital Markets
Okay. All right. Thank you. That’s all I have.
Operator
We’ll take our next question from Chris Shankar with Bank of America. Please go ahead.
Chris Shankar – Bank of America
Yes, thanks for taking the question. I had two questions, Rick. Number one, in terms of Q1 and absolutes through the year, how do you think who are the end drivers from foundry, memory or logic, in Q1? How do you see that progressing through the year into the back half? And I have a follow-up.
Rick Hill
I think you will see foundry continuing to grow while we had one major foundry the driver in the previous – towards the end of 2009. I think you will see additional foundries making substantial investments going throughout the year with a tending to accelerate into the fourth quarter.
Chris Shankar – Bank of America
Okay. And another question I had was, given your largest competitor’s issues in Korea recently, do you actually that could potentially catalyze some market share gain in your direction because of these issues?
Rick Hill
Well I think we will get market share gain regardless of what our competitor does, but because of the way we do business both from a standpoint of development of our technology, and basically our business practices. So, we are going to gain market share in Korea regardless of what our competitor does.
Chris Shankar – Bank of America
All right. Thank you.
Operator
We will take our next question from C. J. Muse with Barclays Capital. Please go ahead.
C. J. Muse – Barclays Capital
Yes, good afternoon. Thank you for taking my question. I guess, first question, can you comment on what you are seeing on the NAND side today and how do you see that progressing throughout the year?
Rick Hill
I think we have not begun to see significant expansion of the NAND capacity yet, but I expect to see significant expansion in NAND capacity throughout the year beginning in the second quarter with some expansion in the first quarter.
C. J. Muse – Barclays Capital
Okay, helpful. And then on the OpEx side, you've done a great job there, and clearly with the pickup in shipments it makes sense, that’s grown higher. I guess, could you share what your OpEx target is for Q1? And then how you see that progressing through the year, and I guess what the target model looks like, one quarter, two quarter out? And I guess within – the context to that question is, is whether or not you are cutting more cost?
John Hertz
So, we have said that our target is 80 million at the 250 level with no more than 7% growth in OpEx above the 250 million in the quarter.
C. J. Muse – Barclays Capital
Okay. And so that’s a target model, what should we see in Q1 implied in the guide?
John Hertz
Well we gave our guidance for, I guess EPS and taxes and also with, so I prefer now to just call out the number.
C. J. Muse – Barclays Capital
Okay. Can you help me there, what other income are you including in that guide?
John Hertz
Not far off of what you see this quarter.
C. J. Muse – Barclays Capital
Okay, great. Thank you very much.
Operator
We'll take our next question from Satya Kumar with Credit Suisse. Please go ahead.
Satya Kumar – Credit Suisse
Hi, thanks for taking my question. In Q1 your midpoint of bookings guidance is about $300 million and your shipments are a bit below that, whereas in the last couple of quarters you've been booking as much as you’ve been shipping. Are lead times starting to stretch out for you guys, and how are they holding up?
John Hertz
Well, I think lead times have moved out a little bit but not significantly, and we try to ship at the customers’ request, but we also try to manage the customer to understand that recent down cycle virtually brought the food chain to its knees in order to just bringing it back up.
Satya Kumar – Credit Suisse
What's your maximum shipment capacity, and given that you're building backlog in Q1, any comment to that you see business continuing to improve through the year. What type of shipment, any idea, are you looking at as we move into Q2 and the rest of the year?
Rick Hill
Well, our maximum shipping capacity is probably north of $2 billion a year, but so, we are nowhere near. And as I pointed out, we are only at 54% of our previous peak. So between here and $444 million in revenue, we shouldn’t have any problem, whatsoever.
Satya Kumar – Credit Suisse
In terms of shipment any idea in the rest of the year?
Rick Hill
It's customization.
Jeff Benzing
Relative to linearity in the quarter?
Satya Kumar – Credit Suisse
No. You are going to be building backlog in Q1, and you are fairly optimistic that business will continue to improve through the year. I was wondering if you are able to offer more color on your shipments.
Jeff Benzing
No. We only highlight the next quarter.
Satya Kumar – Credit Suisse
Sorry. And last quick question, what was depreciation in Q4?
Jeff Benzing
Depreciation and amortization was 11.5 million.
Satya Kumar – Credit Suisse
All right. Thank you.
Operator
Our next question comes from Atif Malik with Morgan Stanley. Please go head.
Atif Malik – Morgan Stanley
Hi, thanks for taking my questions. Rick, I am just reconcile your statement cautiously, optimistic and sustainable, what is making you take cautiously part of the cautiously optimistic statement, is it the macro or is it something that?
Rick Hill
The macro makes me cautious, I mean, everyday you go home and you hear your response to news relative to our government spending and that keeps me cautious.
Atif Malik – Morgan Stanley
Okay. And then on the market share commentary, I know there is ebb and flow in the PVD and then in other segments there could be ebb and flow in market share. For this year expectation and for last year, I mean, what are your goals when the Gartner data comes out in April, so how much market share gains should we expect from the data for last year and what should we expect for this year?
Rick Hill
Well, I think you would see market share growth in every products segment but one, I would not expect you to see market share growth within HDP but all the other products I expect you to see market share growth, and within HDP it would be flat.
Atif Malik – Morgan Stanley
Okay, and on that topic, can you update us what are you planning to do with your HDP roadmap, have you found a new technology to extend it or what's going on?
Rick Hill
No inventions yet.
Atif Malik – Morgan Stanley
Okay, thanks.
Operator
We’ll take our next question from Edwin Mok with Needham & Company. Please go ahead.
Edwin Mok – Needham & Company
Great, thanks for taking my question. Rick, just curious on your guidance, it's seems to imply that your OpEx will be flattish on the fourth quarter based on your guidance, and in commentary you mentioned that your OpEx will go up, maybe you just help us out in terms of how do you see operating expense run rate for the full year over the coming year?
Rick Hill
I told you what their model was relative to our OpEx. And so to the extent that we raise revenue over the 250 mark, you could see as much as $0.07 on a dollar increase but we certainly are going to try to continue to make operating expense efficiencies to the best of our ability and maintain a prudent budget in order to keep operating expenses under control.
Edwin Mok – Needham & Company
Great, that was helpful. And then on the – how what you’ve ordered or how your order is at least so far, do you see that in the near-term, you are more weighted towards memory spending or how do you look at that versus foundry or logic?
Jeff Benzing
I don’t think that are weighted anyway toward one or the other. I think we are well positioned in both, and it’s a function of when each company determines when they want to spend the money. And I think we are well positioned in everyone that’s likely to be a buyer through 2010.
Edwin Mok – Needham & Company
Great and last question just on cash. Look like cash is growing and assuming, based on your guidance and things, it looks like your cash will continue to grow, any thoughts to be more aggressive in the buyback or any other potential use of cash?
Rick Hill
We have close to $800 million still left within our buyback. We didn’t buy very much back in 2008 and hindsight being 2020, I wish I had bought it all back in 2008, but – or 2009 rather. However, given what the potential disaster scenario was at the beginning of 2009, we had to protect the downside scenario. So we didn’t buy as much back as we felt we wanted to, but we have a very significant buyback left to go and we’ll continue to pursue it.
Edwin Mok – Needham & Company
Great. Thanks. That’s all I have. Thank you.
Operator
We’ll take our next question from Weston Twigg with Pacific Crest. Please go ahead.
Weston Twigg – Pacific Crest
Hi, couple of questions. The first one, just wondering you commented on foundry demands for the rest of the year, and I am wondering if you could you give us some more color on memory and DRAM in particular, and how you thing that looks through the rest of the year?
Rick Hill
Yes, right now, I think most of the industry forecasters, prognosticators tend to see memory prices coming down, NAND prices coming down. I tend to think they will continue to move in an upward direction as fundamental demand for these devices continues to grow as we see a build-out of infrastructure continue at a very, very rapid rate. And I think that you are going to see the major players continue to spend to expand capacity, which will enable them to both gain market share, and in addition to that transition from node to node more quickly than their competitors.
You will then also see, I believe, some of the small memory players step up in order to create niche businesses in the memory market. And you will see a greater number of companies within the field investing this year as I had highlighted at the mid-quarter update, I felt that there would be upward pressure on the CapEx expenditures. Many of the key players, and I think we’ve already begun to see some of those announcements come out. I tend to think we will see more of those announcements come out as we move forward.
Weston Twigg – Pacific Crest
Okay. Do you expect DRAM CapEx to trend up through the year?
Rick Hill
Yes, I do.
Weston Twigg – Pacific Crest
Okay. And my next question is, what is your Spaper [ph] acquisition this year, should we or could we expect anything over the next four quarters or so?
Rick Hill
Well, we could expect something, the opportunity is right and it's the best thing for the shareholders, and we most certainly are continuing to look at those opportunities as they come forward.
Weston Twigg – Pacific Crest
Okay. Thanks.
Operator
We will go next to Steve O’Rourke with Deutsche Bank. Please go ahead.
Steve O’Rourke – Deutsche Bank
Thank you. Rick, your comments on CapEx growth this year of 60% to 75% year-over-year, how do you see that progressing for the year, that is, do we see a sequential increase, and could you see the first half loaded?
Jeff Benzing
Wise, I think you see a healthy increase during the first half. Always, you get a little bit of a reset in the third quarter followed by strong growth in the fourth quarter, that’s more of a traditional model.
Steve O’Rourke – Deutsche Bank
And how much of a contribution to that growth do you think could come from the smaller memory manufacturers?
Jeff Benzing
I think it will be less this time around and the last time around. I think you will see more capacity – significantly more capacity being put on by the primary players. And the secondary players will probably only put on a half to a third of what they did the previous time.
Steve O’Rourke – Deutsche Bank
Fair enough. Thank you.
Operator
We’ll go next to Gary Hsueh with Oppenheimer & Company. Please go ahead.
Gary Hsueh – Oppenheimer & Company
Thanks for taking my question. Rick, you have been pretty open about helping us about what this in the past, but could you help me understand the discrepancy in terms of your guidance was for Q1 in terms of revenue and shipments seems pretty modest or meted compared to lab researches, and given you are both in front end processing equipment and given the fact that you actually have a little bit better exposure at Intel, I am a little bit surprised that your guidance is a little bit much lighter than RAM [ph]?
Rick Hill
I am also not forecasting the business to be front half loaded.
Gary Hsueh – Oppenheimer & Company
Okay. I guess if you could help me understand what’s the delta has between maybe why RAM is seeing such a front half loaded pattern this year, and maybe you guys are seeing a much more kind of meted sort of this year?
Rick Hill
I haven’t got a clue.
Gary Hsueh – Oppenheimer & Company
Okay. That’s it from me. Thank you.
Operator
And we’ll take our next question from Timothy Arcuri with Citi. Please go ahead.
Timothy Arcuri – Citi
Hi, Rick. Two questions. First of all, would there be any meaningful cancellations in the quarter?
Rick Hill
None.
Timothy Arcuri – Citi
Okay and second of all, actually, sorry, three questions, second of all, if I sort of look back to 2006, 2007 and then I even look back to before you bought Peter Wolters, there has been a – kind of the biggest change in the model is that you’ve cut R&D by a significant amount, it’s between $15 million to $25 million a quarter or lower than what it was, that kind of comparable revenue levels back then. So, you're talking about $60 million, $70 million, $80 million a year. So that’s a big chunk to be taking out of R&D, and you’ve really only gotten rid of CMP. So, I'm sort of wondering, can you give us some metric or some sort to hang our hat on the fact that, you can get that much more efficient, were you indeed just that inefficient before or are there other products that you are thinking about getting rid of that just aren’t announced yet?
Rick Hill
Well, you probably won't like this answer, but you can take it for what it's worth. Number one, I have explained it multiple times that the strategy we were using to penetrate customers drove up that expense to a level that we didn’t think we really needed to do, so we adjusted that. And I explained that quarter after quarter on how we are making those cuts.
Secondly, I like to think of it as, we invested consistently even during the downturns to bring products to market and complete the products. The development of CMP is completed, okay, and as a result we have reduced the heads on it, but we still have the technology and everything is bundled up, and in fact we still use the technology. But obviously we don’t need a full development team for it. We’ve moved them and reallocated them onto other programs. We have continue to pair the organization to make sure we have the strongest people possible, and we think we are investing at the appropriate level for the level of growth, keep in mind we are still – everybody still at 50%, 60% of peak type revenues. You can't just keep spending R&D, you have to cut it. And if there is opportunities that present themselves we will add it at the appropriate time.
Timothy Arcuri – Citi
All right, Rick, just last thing for me, just on NAND, you kind of talked about that, I think, rightfully so about being a big driver of the next cycle, so what do you see out there in terms of NAND, what are the – what’s the code activity, do you think that there will be any new fabs built this year and sort of what’s your outlook there?
Rick Hill
I think you will see the fill-out of some shells that have already been put in place this year. I think that you will see continued growth, and forecasting the future is auspicious as best [ph]. But if I were going to a watch company, I would be watching IBM, I would be watching HP, I would be watching NetApps, I would be watching AMC. With the advent of NAND flash and cash, you can watch Apple, if you like as well, but I just think that as I have said over and over again NAND Flash is in CDS [ph] and it just continues to grow and will continue to grow. And I think it has got unending applications, so.
Timothy Arcuri – Citi
Thanks, Rick.
Operator
We will go next to Stephen Chin with UBS. Please go ahead.
Stephen Chin – UBS
Thank you. Hi, Rick and Jeff. Just a follow-up question, Rick on the March booking guidance what percentage of these bookings do you think are for technology upgrade for your customers versus capacity expansion, and you think these customers waiting for promotion will potentially try at working higher for the industry in the back half of the year.
Rick Hill
Well I think that through quarter one, we will probably still see 60:40 with the bias to technology transition, and then we will see that roll over the other way through Q2 to Q4.
Stephen Chin – UBS
Okay. The second question I had is, I think you called out that Japan still remains relatively weak. What's your view on when Japan returns to ordering equipment in a more meaningful quantity?
Rick Hill
I think I said it was very, very weak. That was two verys. Steve, that’s a good, good question. There is just some fundamental issues in Japan. It surprises me that we don’t see an uptick in the spending within Japan in the first quarter, and I think if we don’t see it in the second quarter, Japan is falling way off of the technology curve, and it doesn’t bode well there.
Stephen Chin – UBS
Okay. Thanks Rick.
Rick Hill
Welcome.
Operator
We’ll go next to Patrick Ho with Stifel Nicolaus. Please go ahead.
Patrick Ho – Stifel Nicolaus & Company, Inc.
Thanks a lot. Two questions
First, in terms of the market share outside of memory, you mentioned that it's been driven by the transition to copper, in terms of non memory customers like the foundries and logic, what's the profit technology change, what do you see as the driver for market share gains in those customers?
Rick Hill
I think that the ability to continue to be able to push the technology knows with PVD is a key driver in the foundry area. Any transition of materials is a fundamental risk to the logic manufacturers, and we believe what our technologies, the combination of our technologies, we have demonstrated the ability to shelve [ph] these down at the – in fact 18 nanometer node. We have the ability to improve VELS [ph]. We have greatly increased our understanding of killer defects in the area of copper interconnects, and we have solved that with key new films that we supply to the customer base. I think all of those things layer into cause us to be the preferred supplier with the copper interconnect in the logic market going forward.
Patrick Ho – Stifel Nicolaus & Company, Inc.
Great, that’s helpful. And in terms of some of the supply constraints that you are seeing right now with the rapid rush of shipments coming on board, when do you see some of these supply constraints abating? Is this another quarter or two before you kind of get back into a normalized building environment?
Rick Hill
Well, hopefully it will be towards the end of this quarter that we’ll be able to beef up our suppliers again and they were pretty close to, they were on life support systems there. In fact, we had to help several of them, but we see them coming out of that and nice levels of business and profitability are returning to them as well.
Patrick Ho – Stifel Nicolaus & Company, Inc.
Okay, great. Thank you.
Operator
We’ll take our next question from Ben Pang with Caris & Company. Please go ahead.
Ben Pang – Caris & Company
Thank you for taking my question. First on, in terms of the capital spending growth 60% to 75%, do you expect your PVD and CBD markets combine to grow at that rate?
Rick Hill
I should hope so.
Ben Pang – Caris & Company
Because lot of your competitors are in different segments, like Litho are saying, they are expecting 100% growth. So, can you help in terms of which areas, do you think, have slower growth?
Rick Hill
Well Litho, thank god is not my competitor but, it is always the one area where there seems to be no competition or minimal competition, and they have one sort of conditions, I think in our field 60% to 75% growth would be pretty healthy.
Ben Pang – Caris & Company
Okay and one follow-up, your comments on the memory pricing, you mentioned that you are going against some of the other forecasters. What type of bit growth estimates are you looking at for DRAM and NAND for 2010? Thank you.
Rick Hill
My estimate is that, for the first time, we might see that we haven’t seen in a long time, it might go over triple digits.
Ben Pang – Caris & Company
That's for NAND.
Rick Hill
That's for 100%. Yes.
Ben Pang – Caris & Company
Thank you.
Operator
We will go next to Jagadish Iyer with Arete Research. Please go ahead.
Jagadish Iyer – Arete Research
Hi, Rick; hi, Jeff. Thanks for taking my question. Two questions, first, on the big picture question, I wanted to find out, can Novellus outgrow the WFE spend this year because of all the tailwinds you have in this upcycle?
Rick Hill
I guess, I didn’t quite get the question again, say it again, Jagadish.
Jagadish Iyer – Arete Research
Yes, my question to you is that, can Novellus outgrowth the WFE spend this year because we have a lot of tailwinds on your side in this particular upcycle?
Rick Hill
Can I outgrow the WFE rate? Our plan is to outgrow that rate.
Jagadish Iyer – Arete Research
Okay. And the second question is on Peter Wolters, is there a number that you could probably provide or though out in terms of how much of an impact it will have on your margins for ‘010 please?
John Hertz
It's probably 200 basis points on the negative side, the headwind. Peter Wolters we’re just starting to begin to see a little bit of a resurgence in the Peter Wolters business. So as the year progresses, we expect that their margins will come back to more normalized levels. Right now they are now at an abysmal level. But we have seen signs – early signs of recovery in that particular area, but they are probably a headwind that’s a couple of percentage points on their gross margin line right now.
Jagadish Iyer – Arete Research
Okay, and last question, Rick is that you had alluded to some Taiwanese DRAM makers in your prior calls. I was just wondering how was the technology shift impacting your share gains at the Taiwanese memory makers as they move from tranche to smart memory.
Rick Hill
I think that we participate equally, okay. We have solutions for both types of cell structures. And so, on an average our position is better as we know relative to the Korean manufactures, but there is some improvement in the Taiwan area as well. I would say substantial improvement with recent developments.
Jagadish Iyer – Arete Research
Thanks so much, Rick. Thanks, Jeff.
Operator
And we will take our last question from Jim Covello with Goldman Sachs. Please go ahead.
Jim Covello – Goldman Sachs
Great. Thanks so much, good afternoon. I actually wanted to continue on that theme and the theme that’s been asked in a couple of different ways, which is the difference at your outlook and not just lambs [ph] but a couple of the company. Is it just possible that some of the technology transitions particularly that’s back to trench, or trench to start transition it's just driving slightly different order patterns for different companies based on kind of timing or a technology exposure, and from a more broader cyclical perspective, everybody kind of seeing the same thing?
Rick Hill
I think that there are some elements of that cell structure that are driving EDGE particularly higher early on that are occurring in some of the other areas, but I don’t think that’s a major difference.
Jim Covello – Goldman Sachs
And so, you think it’s just more differentiating in terms of the outlook or customer exposure would have you that’s driving more of the difference than if you had to make a guess, I know it’s hard?
Rick Hill
It's hard, I'd have to make a – I’d just be guessing. We try to report what we see for the quarter and give it to you and what we see for the year and how we are thinking about it. But our position and the customers that are really strong has actually improved year on year. And as a consequence we're planning for a good year in 2010, and we don’t see it being down in the second half. And so, that’s just our view right now, it’s subject to change. They might be right and, then maybe we're up more than we think, we're going to up in the first quarter, but we try to tell you the way we see it.
Jim Covello – Goldman Sachs
I appreciate that. Thank you.
Operator
Now, I am turning the call back over to Mr. Hill for any closing remarks.
Rick Hill
Thank you very much for joining us at the yearend conference call. We look forward to a good 2010 and let’s hope all our businesses get back on track. Thank you very much. Talk to you in another – at the mid-quarter.
Operator
That does conclude today's teleconference. You may disconnect your line. Thank you and have a great evening.
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