Novellus Systems, Inc. Q1 2010 Earnings Call Transcript

Apr.21.10 | About: Novellus Systems, (NVLS-OLD)

Novellus Systems, Inc. (NASDAQ:NVLS-OLD)

Q1 2010 Earnings Call Transcript

April 21, 2010 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

Mahesh Sanganeria – RBC Capital Markets

Krish Sankar – Bank of America/Merrill Lynch

C.J. Muse – Barclays Capital

Stephen O'Rourke – Deutsche Bank

Conor Irvine – Needham & Company

Gary Hsueh – Oppenheimer & Co.

Satya Kumar – Credit Suisse

Stephen Chin – UBS

Ethan Steinberg – Friess Associates

Ben Pang – Caris

Patrick Ho – Stifel Nicolaus

Jagadish Iyer – Arete Research

Timothy Arcuri – Citi

Operator

Welcome to Novellus First Quarter 2010 Earnings Conference Call. As a reminder, this call is being recorded April 21st, 2010.

At this time, I would like to turn the conference over to Ms. Robin Yim of Novellus Systems. Please go ahead, ma’am.

Robin Yim

Thank you, Kelly. Good afternoon, everyone and thank you for joining the Novellus Systems first quarter 2010 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 the first quarter 2010 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 forecasts of key metrics for the second quarter of 2010.

Specific forward-looking statements include, but are not limited to, our expectations regarding forecasted growth in the electronics, semiconductor, and semiconductor capital equipment industries, our expectations that we will continue to maintain our position or grow the market share, the forecasted bookings, shipment volumes, revenue, gross margin, operating expense, tax rate, and earnings per share target for the second quarter of 2010 including our expectation that our fiscal 2010 tax rate will be 15% to 20% and the sufficiency of our tax reserve, 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 2009 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 2010, and then open the call for the question-and-answer session.

I’ll now turn the call over to Jeff.

Jeff Benzing

Thank you, Robin. I'll start by reviewing our first quarter 2010 results, which I'm pleased to say were very strong as we began to realize the earnings potential we have built into our leaned operating model.

Our first quarter 2010 net bookings came in at $321.4 million, up 24.7% sequentially from $257.6 million in the fourth quarter of 2009 and at the midpoint of our revised guidance range of up 20% to 30%. First quarter shipments of $282.8 million were up 15.7% from $244.5 million in the fourth quarter and near the high end of our revised guidance range of $265 million to $285 million.

First quarter revenues were $276.2 million, up 13.1% from $244.2 million in the fourth quarter and $6 million above the high end of our revised guidance range of $255 million to $270 million. By geographic region, first quarter revenues are as follows; United States 26%, Greater China 38%, Korea 26%, Japan 4%, and Europe 6%.

Throughout the rest of my remarks related to the P&L, I will be distinguishing between GAAP results and results that exclude certain other charges. I'd like to preface my remarks with a discussion – a description of these other charges 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 included in today's press release.

Other items totaled $6 million in the first quarter. These other items included $4.4 million of legal expenses related to the Linear Technology Corporation trial, which concluded on February 26, 2010 in favor of Novellus; $900,000 in costs related to the completion of the consolidation of our manufacturing facility in Oregon; and $700,000 in charges for reductions in workforce and restructuring.

Moving on to discuss the results, first quarter GAAP gross margin finished at 48.5%. Excluding other items, gross margin was 48.7%, which was at the high end of guidance range of 47% to 49%. Gross margin in Q1 benefitted from product mix and higher absorption of fixed overhead costs as shipment volumes continued to increase throughout the quarter.

First quarter GAAP operating expenses totaled $84.9 million. Excluding other items, operating expenses were $79.5 million, up only 7.4% sequentially while revenues rose 13.1% quarter-over-quarter. I am pleased to announce that we performed to our model and kept our operating expenses below our target even at these revenue levels with the reinstatement of variable compensation accruals, no shutdowns, and the restoration of executive salaries, all of which totaled an incremental $11.3 million expense versus the fourth quarter of 2009.

Quarter one operating income came in at $49 million, up 28.8% sequentially. Excluding other items, operating income was $55 million, up 30.8% sequentially, resulting in an ongoing operating margin of 19.9%, up from 17.2% in the quarter four of 2009.

Our first quarter GAAP tax expense was $9.3 million and our tax rate for the quarter was 18.4%. During the quarter, we analyzed the impact of a recent U.S. tax court opinion, as well as related comments from IRS appeals official and determined that these developments had favorable impact on our U.S. tax position regarding our international operations.

After a detailed review, we determined that our existing tax reserves related to the issue covered by the tax court opinion are sufficient and no further accruals are required. As a result, we now expect our fiscal 2010 tax rate to be 15% to 20%. Assuming similar geographic revenue mix, profitability levels, and no significant changes in U.S. tax law, we would expect to see an effective tax rate in that range going forward.

As discussed in our EPS pre-announcement press release on April 15th, our first quarter 2010 GAAP net income and fully diluted EPS came in at $41.3 million or $0.43, higher than our revised guidance of $0.32 to $0.39. Excluding other items, net income and fully diluted EPS was $45.5 million or $0.47, higher than our revised guidance of $0.37 to $0.44.

While the outperformance to guidance was largely due to the improvement in tax rate, which contributed $0.03 to $0.04 to our earnings per share, we still had an excellent quarter. The higher revenue levels, improved gross margin, and control over operating expenses, all contributed to producing a net income of 14.9% on a GAAP basis and 16.5% excluding other items.

Now, turning to the balance sheet, we ended the quarter with $751.6 million of short and long-term cash and investments, including $123.6 million of restricted cash. Total cash increased by $38.4 million sequentially, net of $15.2 million of stock repurchases. We generated $62 million in cash flow from operations in the first quarter. Depreciation and amortization and non-cash stock compensation for the quarter were $11 million and $7.7 million, respectively.

In the first quarter, we brought – bought back 709,000 shares of stock for $15.2 million at an all-in cost per share of $21.50. The stock repurchase program remains active and there is approximately $788 million left under the authorization until October 2011.

Despite improving business conditions, we continue to maintain tight control over our working capital. Net accounts receivable at the end of Q1 totaled $154.7 million, up 2.7% from $150.6 million at the end of the fourth quarter despite a 13.1% rise in revenues. In the first quarter, our DSOs dropped to an all-time historic best of 50 days from 56 days at the end of Q4 due to continued focus and effective collection practices. Inventory levels increased by 9.5% or $15.3 million quarter-over-quarter, while supporting a 15.7% increase in shipments.

That concludes my prepared remarks of the financials. I'd like to turn the call over to Rick to provide an update on the state of the business and guidance for the second quarter of 2010.

Rick Hill

Thank you, Jeff. We are very happy we are able to bring these financial results to the table today. And as we reported, GAAP earnings of 14.9% after tax, non-GAAP of 16.9% after tax and when we look back historically prior to stock option expensing, the effective after-tax return would be upwards of 17.2%. So we are very pleased with those results.

In addition, we are also happy to report that through the history of our stock option buyback, we bought back approximately 1.75 million [ph], all in, at an average price of about $25.32 and as of today, we are above water on that investment, which also makes us very, very pleased.

Since we last talked at our mid-quarter update on March 10th, the environment has actually gotten incrementally better. The end markets for electronics remain very strong and has been confirmed by third-party forecasters, it's been driven largely by PC unit growth, which is now topping 20% as the corporate refresh cycle continues to gain momentum.

Now, I'd like to also add that a lot of this PC refresh cycle is really utilizing 64-bit machines, which again builds strongly into the growth potential for our business as we believe DRAM demand will continue to grow. This PC growth is augmented by solid growth in mobile phone market and smartphones in particular, which are forecasted to see a nearly 50% growth year-over-year.

In addition, iPads have had a great start out of the gate and both consumers and industrial electronics are poised for growth as the global economy continues to improve. We also discussed in our mid-quarter update on March 10th the third-party forecasted semiconductor revenues. They have increased to 20% from 13.5% as a result of this robust PC refresh cycle in the industrial sector recovery. Now, we believe there is potential upside to this forecast, driven by strength in all three segments, IDMs, memory, and foundry.

Utilization levels are averaging around 93% in Q1. That's approximately 5 points higher than the normal seasonal levels. We've seen DRAM contract prices up 16% sequentially in Q1 and up another 10% in Q2 so far. On the NAND side of the equation, NAND prices, they are down 6% sequentially, which actually reflects normal seasonality. But they are up 5% so far in the second quarter. So we find that to be very encouraging.

Foundry revenues were above normal seasonal levels and that's largely due to the strength in communications. For our semiconductor equipment business, we had increased our forecast CapEx for the industry to be in a growth range of 65% to 85% at our mid-quarter update and our confidence level on this revised range continues to increase as we start to see the recovery in the NAND flash materialize.

Now, I'll provide guidance for the second quarter. We expect bookings to be flat to up 15% and that is dependent upon the timing of certain sizeable orders. Second quarter [ph] shipments are forecasted to be up sequentially and range from $300 million to $330 million. And our revenue is forecasted to be up sequentially in the range of $285 million to $315 million. Our gross margins are forecasted to improve in the range of 48% to 50% and the earnings per share is forecasted to be in the range of $0.50 to $0.60.

Now, that concludes my comments and our guidance for the second quarter. Now, I'd like to open it up to any questions you might have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We'll pause for just a moment. We'll go first to Mahesh Sanganeria with RBC Capital Markets.

Mahesh Sanganeria – RBC Capital Markets

Yes, thank you very much. Rick, can you give us some color on your booking in terms of the – for the June quarter bookings? What is changing in terms of segments in foundry, logic, and memory side?

Rick Hill

So from a booking standpoint, we still see strong foundry demand along with strengthening memory demand. But we are seeing a shift from what was largely a technology-driven buy, which I believe the last time we reported was roughly 40% technology, 60% capacity to today; it's 60% capacity and 40% technology. So we have seen it switch.

Mahesh Sanganeria – RBC Capital Markets

Okay. And in terms of – can you give us some update on your market share momentum? Is that on track or anything incremental on that front?

Rick Hill

Well, we believe that our continued improved performance, both on a top line, as well as throughout the P&L is a function of our ability to gain market share and utilize capacity which is allowing us tremendous leverage on the income statement. And we do believe we are gaining market share in multiple segments within the business.

Mahesh Sanganeria – RBC Capital Markets

And one last question for me. I'm not looking for guidance, but if you give – looking at your forecast for the CapEx increase and your strong revenues you have reported in the first half, it would appear – if I took the year-over-year increase, it would appear that we might see some kind of a pause before we see spending come back for next year's CapEx. Do you think that is a reasonable thought process?

Rick Hill

Well, I don't see things weakening at this juncture. Certainly, when you have such strong performance in the first quarter and again strong performance in the second quarter, a lot of times there is a digestion period. But at this particular time, I think the momentum is such that there is a good chance assuming companies can digest the capital that they are buying and installing during the first quarter and second quarter, we will see some – albeit, maybe somewhat moderated, we'll continue to see growth in the second half.

Mahesh Sanganeria – RBC Capital Markets

Okay. Thank you very much.

Rick Hill

All right.

Operator

We'll hear next from Krish Sankar with Bank of America/Merrill Lynch.

Krish Sankar – Bank of America/Merrill Lynch

Yes, hi, thanks for taking my question, Rick. Just to follow up on the previous one, if you think there is going to be a digestion, if there is, do you think that will happen in Q3 or somewhere in the summer time frame?

Rick Hill

Well, historically, Europe always slows down in the summer months, but Europe is not that significant of a factor relative to semiconductor CapEx expenditures. So we don't have that weighting down on us. I think changes quarter-to-quarter are more going to be a function of when the orders fall in the quarter. If the second quarter is exceptionally strong, then I'd expect the third quarter maybe be a little bit weaker, then have the fourth quarter come back up again. If the second quarter doesn't come in as strong, it's more because of a timing of a particular order than it is of a fundamental slowdown in the market.

Krish Sankar – Bank of America/Merrill Lynch

Got it. And a couple of months ago, the general thought process was in 2010 there are no new fabs. Do you actually think there could be any equipment intake in 2010 in a new fab?

Rick Hill

I think there is possibility towards – in the fourth quarter to see equipment going to a new fab. I mean, if you are talking about breaking the ground starting today and going into a new fab, of course, I think that might defy the laws of physics, but from a standpoint of some empty shelves that would then be opened up and begin to be capitalized, the answer to that is I think that very well could happen in the fourth quarter.

Krish Sankar – Bank of America/Merrill Lynch

And my final question is, do you actually still see any component shortages in your supply chain that is hindering shipments?

Rick Hill

We continue to really work the supply chain and it's strained, but it is responding and we are able to make deliveries at this juncture.

Krish Sankar – Bank of America/Merrill Lynch

Thank you.

Operator

We'll hear next from C.J. Muse with Barclays Capital.

C.J. Muse – Barclays Capital

Yes, good afternoon. Thank you for taking my question. I'm following the same train of thought, Rick. Do you still think it's reasonable to expect first half, second half comparing pretty equally in step with what you said on your mid-quarter call?

Rick Hill

I haven't seen anything yet that has caused me to think otherwise, but predicting the future is always the toughest part of the job.

C.J. Muse – Barclays Capital

Okay. I guess maybe a question that makes it a little tougher. Assuming we do see sustainable trends, do you anticipate a mix shift when you look at what would allow that sustainability, I guess, thinking about Tier 1 versus Tier 2 customers, greater breadth in one particular sub-segment versus another? Any thought there would be very well appreciated.

Rick Hill

Okay. I think that largely the companies that are being very, very successful, I think are going to accelerate their capacity, because there is the clear opportunity to gain market share through capacity in this upturn and what I would see is somewhat of a technology acceleration up to the wall and so it isn’t going to require that other players step in, but rather the existing players, I think, are going to modify their CapEx plan to take advantage of a unique situation in the semiconductor industry, which is extremely robust demand and a shortage of capital with – for some and excess capital in the hands of others.

C.J. Muse – Barclays Capital

Very helpful. So can I ask one last question? Regarding Peter Wolters, I know you continue to lose money there, at least on operating profit basis through December, I guess. When do you expect to turn that into a profit and I guess, how should we think about that impacting your target business model in the quarters ahead?

Rick Hill

I think that from the third quarter on it should have a positive impact on our financial model.

C.J. Muse – Barclays Capital

Great. Thank you.

Operator

Moving on to Stephen O'Rourke with Deutsche Bank.

Stephen O'Rourke – Deutsche Bank

Thank you. Good afternoon. Rick, at the very end of your prepared remarks, I think you made a comment that you are seeing recovery with NAND. I don't know if that related to the pricing that you commented on. But if you could just elaborate on that and also give us an indication of how you are seeing NAND spending on full – through the year, Q2, Q3, Q4 just sort of generally? And then second question, the shift from 60% technology, 40% capacity to the other way around, is that for DRAM foundry or overall?

Rick Hill

In general, I would say it's overall spending as we begin – there continues to be a shortage of components in the supply chain for our customers' customers. And so capacity ramp has become a major focus of our customers. And relative to NAND unfolding, I think that the introduction of smartphones along with things like the iPad are greatly increasing the demand for NAND flash. And as a result, you will see that unfold a little bit in the second quarter, stronger in the third, and extremely strong in the fourth quarter.

Stephen O'Rourke – Deutsche Bank

And if I could ask one follow-up, what percentage of orders are you seeing that are for delivery beyond six months?

Rick Hill

Oh God, why don't you give me a couple?

Stephen O'Rourke – Deutsche Bank

Thought I'd ask.

Rick Hill

Oh my God, six months? I'd love that, okay.

Stephen O'Rourke – Deutsche Bank

The visibility really hasn't improved much.

Rick Hill

Well – I mean, if we weren’t looking ahead of our customer, we would be in trouble.

Stephen O'Rourke – Deutsche Bank

Fair enough. Thank you.

Operator

We'll hear now from Edwin Mok with Needham & Company.

Conor Irvine – Needham & Company

Hi, this is Conor Irvine calling in for Edwin Mok. How are you?

Rick Hill

Good. Hey, Edwin.

Conor Irvine – Needham & Company

Hey. First question is based on some – based on recently published market share data –

Rick Hill

Conor, sorry.

Conor Irvine – Needham & Company

Yes, you guys gained some share in 2009 in traditional areas such as strip and tungsten and not new areas such as PVD. Can you give us an update as to the progress in PVD and your – expectations you might have for the year?

Rick Hill

Well, I think our progress in PVD is extremely good. It's particularly strong in advanced technology areas. We think it's actually an enabling technology at 32 and beyond for simplified metal structure. And we believe that with the capability that we've put into the system today, there are some opportunities for customer – innovative customers to increase the performance of their interconnect beyond what they had conceived of prior to this point based on the capability of our system to be able to provide defect-free metallization in a copper domain without putting a lot of alloys and doping into the copper too, which would increase the R and the RC equation.

Conor Irvine – Needham & Company

Okay, great. Thank you. And next question is how the industrial application business performed in the first quarter?

Rick Hill

In the first quarter, they were a drag on our earnings.

Conor Irvine – Needham & Company

Yes.

Rick Hill

We anticipate them to be neutral to our earnings pretty much in the second quarter and they will be positive relative to earnings in the third and fourth quarter of this year.

Conor Irvine – Needham & Company

Great. And my last question is last year at SEMICON, you guys laid out a target of $1.2 billion in revenue and $2 a share in earnings by 2011 and it appears business is tracking better. I'm wondering if you guys can maybe give us an update with your long-term targets.

Rick Hill

We normally only give the next quarter and I have been leaking in giving little hints about the future, but I'm not – I can't project long-term targets beyond this quarter.

Conor Irvine – Needham & Company

Fair enough. Thanks so much.

Rick Hill

Thanks.

Operator

And Gary Hsueh with Oppenheimer & Co. has our next question.

Gary Hsueh – Oppenheimer & Co.

Hey, Rick. Thanks for taking my question. I think we've got a pretty good look at what your view is of the second half. I just want to kind of take a look at your bookings guidance, flat to up 15%. You guided basically Q1 at the beginning of 10% to 20%, eventually 25% to 30%. But it looks like Q2, in terms of the guidance, is starting out a little bit more flat-footed. Is there anything I can read into that or is this somehow more conservatism that you are building into your bookings in light of that sizeable order that you guys talked about? And for bookings to grow kind of materially further from here, do you think we need to start to see CapEx revisions to the upside?

Rick Hill

I think the thing you can read into there is right now we are shipping and as someone else commented do you have any orders for outside of six months and I said, please give me one, we are not bending over backwards to bring in orders at this juncture. We are trying to look and see where they might fall within the quarter because from a standpoint of liking to see the lead times go out a little bit, we wouldn't mind doing that.

So from our perspective, we quote things based on you get an order and there is a certain lead time associated with it. And so there are a couple of large orders that have an impact toward the end of the second quarter and we are trying to give you a range that builds those into our projection, and that's all we can – if it doesn't show up in this quarter, it will show up beginning of the next quarter.

Gary Hsueh – Oppenheimer & Co.

Okay, Rick. So what you are saying is basically the magnitude of your order increase is beginning to slow somewhat because of your capacity constraints, not because of any fundamentals downstream –

Rick Hill

No, I don't think so. It's not slowing because of capacity constraints. We not – might not be in as a hurry to book that order as we might have been in the past. I think order demand, because it went up so quickly, isn't is – is obviously isn’t as strong going into the second quarter as it was going into the first quarter, but it's a function of timing, when you are anticipating the orders are actually going to fall.

Gary Hsueh – Oppenheimer & Co.

Okay. And last question here. The timing of the sizeable orders, are these sizeable orders tied to NAND flash and potentially to new fabs? Is that exactly what you are talking about here?

Rick Hill

Some are tied to NAND flash and some are tied to some foundry activity.

Gary Hsueh – Oppenheimer & Co.

Okay. Thank you, Rick.

Rick Hill

Thanks.

Operator

We'll hear next from Satya Kumar with Credit Suisse.

Satya Kumar – Credit Suisse

Yes. Hi, can you hear me?

Jeff Benzing

Yes.

Rick Hill

Yes.

Satya Kumar – Credit Suisse

Thanks for taking my question. I just wanted to get your views on any new market opportunities that you might be seeing let's say, is packaging or I know you are not particularly fond of solar, but is there anything else out there that you think you can leverage your technologies into, like LEDs?

Rick Hill

I don't want to get burned by the sun. But from a packaging standpoint, I believe the world is going vertical. There is no question in my mind. And both from a packaging standpoint, but also cell structures and NAND flash are going to be changing and I think there are unique opportunities within film deposition in these particular areas.

You may have seen some of our announcements vis-à-vis some breakthroughs and TSV technology in the copper fill domain in particular. I think you can expect to continue to see that and we've had substantial number of wins technology wise in this TSV area. And we think that will continue to be strong. At this juncture though, it is – they are technology wins and the ability to see these things go into mass production is still a ways out.

Satya Kumar – Credit Suisse

Okay. A question on the OpEx. I think you mentioned that you've reinstituted full working days and some merit increases and executive pay. How should we think about OpEx trending from Q1 levels as we go into the rest of the year?

Rick Hill

The same way we have told you to view them and that is $0.07 on the dollar above $250 million.

Satya Kumar – Credit Suisse

All right. Thanks.

Operator

Next, we'll go to Stephen Chin with UBS.

Stephen Chin – UBS

Great, thanks. Hey, Rick. And just a follow-up question, Rick, on that wildcard order in the June quarter, this NAND flash or foundry order. Is that capacity, is that – is that kind – is that a capacity expansion order, would you say or?

Rick Hill

Capacity.

Stephen Chin – UBS

Okay, thanks. And then in terms of Japan, the last time we asked you, you were still pretty pessimistic about Japan, but I think since then Rick, we've seen Toshiba give their update on Fab 5 and Elpida raise their CapEx. So could Japan be a wildcard upside for Novellus to help orders in the second half of the year?

Rick Hill

Well, when you talk about Wi-Fi, that's going to be tough since it's just still dirt. And so until you got walls up around that place, that's going to be hard. But I think there are – is some limited potential expansion between now and the end of the year, but it's not a major factor.

Stephen Chin – UBS

Okay. And one last question. In the past up-cycles, I think you've talked about Novellus having perhaps lower sales exposure to some of the smaller Taiwanese DRAM companies. Can you share any updates on how Novellus may have improved their position with the Taiwanese DRAM companies so maybe Novellus can benefit from this customer type?

Rick Hill

Well, we sell to everyone and if anything we have is you've obviously done research and know that we've improved our position, largely because of the value equation that we offer our customers. I think to be competitive in the industry, you have to have the most productive equipment and the best technology and I think it's becoming clear that we do provide that and we see a lot more people who have had difficulties and struggled competitively seeking us out to try to understand how they can take advantage of some of our key strengths.

And so we believe that if they are able to get funding, it will bode well for us in the future. But the key will be the ability to get funding. I think funding is still difficult for some and I'm not sure everybody wants to go to the market and just float converts. And if they do, then there will be more money available and maybe this thing even gets much larger and much faster, but we are not planning that into the equation.

Stephen Chin – UBS

Thanks, Rick.

Operator

Moving on to Ethan Steinberg with Friess Associates.

Ethan Steinberg – Friess Associates

Thanks. I think my questions have been answered, but I just want to make sure so you said anything, any OpEx increase after $250 million will just be $0.07 increase in OpEx?

Rick Hill

$0.07 on the dollar, yes. Not $0.07 for total. I mean, we don't – $0.07 on every dollar.

Ethan Steinberg – Friess Associates

Right. I got it. Okay, thanks.

Rick Hill

We do refine us to that level, but for you guys, we sort of round.

Ethan Steinberg – Friess Associates

Yes, okay. Thanks.

Rick Hill

All right.

Operator

And now, we'll go to Ben Pang with Caris.

Ben Pang – Caris

Thanks for my taking my question. First, on your comments regarding the capital spending for the whole year. You commented that you are more positive about the 55% to 85% growth. Is that based on what you are seeing with your customers or have they given you some revised forecast already?

Rick Hill

It's based on projections we have for people, their needs, yes.

Ben Pang – Caris

When would you expect that – are your clients coming in, your customers coming in more proactively these days to revise those numbers?

Rick Hill

Some are, some aren’t.

Ben Pang – Caris

Okay. And finally, one clarification on the orders. The plus 15% depends on both foundry, as well as NAND?

Rick Hill

Well, one or the other at a given time, yes. It could be more, they were both.

Ben Pang – Caris

Okay, perfect. Thank you very much.

Operator

Moving on to Patrick Ho with Stifel Nicolaus. Patrick, your line is open if you still have a question.

Patrick Ho – Stifel Nicolaus

Sorry about that. Rick, can you comment in terms of the June quarter booking, whether you are continuing to see a broadening of the customer base or is it still concentrated with the same customers?

Rick Hill

On a relative basis, that's still concentrated, although there is somewhat of a broadening we are seeing, more onesy, twosy type of business from smaller people filling out capacity. That is also part of the growth.

Patrick Ho – Stifel Nicolaus

Okay, great. And in terms of the market share, you've talked about some of the other areas like strip, PVD. Can you just comment on the core CVD business and in what type of applications, as well as what type of customers you are seeing, I guess progress on the CVD front?

Rick Hill

Well, I think in PECVD area, we are seeing quite a bit of uplift in our VECTOR product line from the standpoint of some new technological innovations that we've come up with are relative to ashable hard mask films and several other very device-specific films that offer unique performance advantages and extendibility down at 32 nanometers and below and that's getting a lot of traction.

Also, our conformal films with our ability to put them down at a very, very cost-effective way is also being very, very well received. We talked already about PVD. We talked as well about tungsten where we've had tremendous success in enabling tungsten in new applications, again performance-driven at 45 nanometers and beyond with low-resistivity tungsten and the ability to fill extremely aggressive aspect ratio features.

And so overall, I believe, today, all of our products not only offer a cost advantage, but a technological advantage. And I can take strip as an example. We believe given its capabilities to remove photoresist, it's an essential element for anyone doing any type of logic whatsoever because of its extremely effective capability of removing photoresist at the transistor level without silicon loss.

And we think that's a strategic advantage that is difficult, if not impossible with existing architectures to do and do it in a cost-effective way so you can still get the kind of technical performance and also get the throughput so you don't drive the cost of that particular step-up and there is a lot of those steps in the process.

So I think both our technology roadmaps and our productivity roadmaps have come together in a way that we are better able to provide the customer with value than ever before in the history of the company. And I couple that with the market opportunity that I've communicated to the industry now here for the last several months that we are seeing a similar confluence of demand that we haven't seen since the mid-90s.

And with the rebuilding of the infrastructure, with the necessity for governments to rebuild their infrastructure in the IT arena both from a standpoint of cyber security and citizen security from a travel standpoint, we are going to see tremendous continued demand for computing capability, as well as mass storage, which is going to continue to drive DRAM, NAND flash, microprocessor technology to solve these problems and we are well positioned to help our customers meet the demands their customers are putting on them in a cost-effective way. And I'd tell you, it's a good industry again. I've been encouraging kids to get into it in college at this juncture.

Patrick Ho – Stifel Nicolaus

Thanks a lot, Rick.

Rick Hill

You're welcome.

Operator

We'll hear now from Jagadish Iyer with Arete Research.

Jagadish Iyer – Arete Research

Hi, Rick. Thanks for taking my question. Two questions, Rick. First is, how do you see the DRAM spending between the first half, as well as the second half in terms of both technology, as well as capacity buying, please?

Rick Hill

Well, I – in general, I see more of a move to capacity expenditures than technology buys, although there is some technology buys, particularly in the NAND flash area that are going on.

Jagadish Iyer – Arete Research

Okay. So – I mean, ASML mentioned that basically the Tier 1 DRAM guys are doing technology shrinks right now and they expect capacity buys to happen sometime in the second half or first half of '11. Do you share that view that the Tier 1 DRAM companies are going to come back for some massive capacity buying either in the second half or in the first half of '11, please?

Rick Hill

I think I'll come back with rational capacity buy. I think there is – they have such strong technological leads that you'll begin to see them be able to control the capacity expansion and hopefully, control a little bit of their own destiny relative to pricing on DRAM as well, which would bode well for the entire industry.

Jagadish Iyer – Arete Research

Okay. One last question, Rick. There have been a couple of fabs in China still waiting in the wings. What is the conviction level that it will happen in 2010?

Rick Hill

Well, I think it's a certainty.

Jagadish Iyer – Arete Research

Okay. That's great. Thanks so much.

Operator

(Operator Instructions) We'll go next to Timothy Arcuri with Citi.

Timothy Arcuri – Citi

Hi, Rick. I wanted to ask you about something that is company-specific. If I sort of look at your guidance and I compare it relative to the financial performance of the company and product cycles sort of at similar revenue levels, the primary difference really is on R&D. The gross margin is about the same, SG&A is a little bit better, but the primary difference really is on R&D. You are spending $20 million to $25 million less per quarter at similar revenue levels than you have last cycle. That's like $80 million to $100 million a year. That's a significant number.

So I'm wondering was the company – and I think I might have asked this last call too, but was the company that inefficient before or are there products and sort of initiatives that you've scrapped and you are focused on particular verticals of say, PECVD or HVP and you were more broadly playing in those markets before, because it's just such a significant number that I'm wondering where that change is coming from.

Rick Hill

Well, I think I explained it at least several times that back in 2003, 2004 time period, we went away from our typical model for development into a model where we put a lot more evals out into the field relatively broadly without really discriminating both the technological opportunity, as well as the business opportunity from each individual customer, which I guess you might say grows inefficiency into the system from a standpoint of use of capital.

Now, about two years ago now, maybe it's three, I lose track of time, it seems to go faster as I get older, we came to you and had announced that we had a plan to bring down our operating expenses and I think you may have been one of the people that says there was no way you could bring them down unless we close businesses. And in fact, we didn’t and we didn’t close businesses nor have we needed to close businesses. We needed to refocus our efforts and make sure we were making the right choices, not buying things in anticipation of demand and not embarking on programs we didn’t think were successful.

And I think we very, very successfully refocused our R&D methodology back to where it was and that's enabled us – so if you go back and you look at the 90s, you'll see that our R&D levels back at these kinds of levels were at this type of investment level. And we think we can churn out new products very, very effectively and if you read the press, you'll see that we continue to churn out technology and I think you will see something in the next six to eight weeks that will also surprise you.

And it is because we are very, very focused and we are very, very determined to be as efficient as possible with R&D and only focus on the things we believe will be successful. And it's that simple, it isn’t cutting businesses, not abandoning product lines, but it’s making sure that we get a return on technology and use the best and brightest minds we have in the company to determine which technologies are unlikely to be successful and not be working on those.

And we have made a lot of those determinations and you know something? In 95% of the cases, we've been absolutely right. I mean, one of the things that people were pouring a lot of money into were cobalt lining layers, okay? We made sure we are not pouring any money into that because we knew it really was not a technology that made any sense. And as a result, we haven't wasted a lot of money on it.

And so we feel very, very good about our technical prowess in the company and our ability to make choices technologically and I think that's what enables us to operate at these levels and we will continue to do that without any loss of new products coming out the door.

Timothy Arcuri – Citi

Okay. I guess, Rick, maybe let me ask you this way then. So can you give us some idea – gross margin is sort of gross margin and that's not much of a mystery. But as the revenue scales up to say $400 million, how should we think about OpEx scaling? Is it – I mean, is there any sort of inflection point in OpEx or is it going to scale pretty much like it has in the past even as you get to these higher revenue levels?

Rick Hill

Well, I think ultimately when you get to the higher revenue levels; OpEx will level out at a percentage. Is it 25%, 22%, 23%? I don't know what the number is exactly. There may be periods of time when we see tremendous opportunity for new products because we have some vision that we might spend 16% on R&D. There might be sometimes we might only spend 12% on R&D, in which case operating expenses would be lower.

So I think it all depends upon the situation and the opportunities that are in front of us. But obviously when we get up there around $400 million, $450 million and if we were to stay on that 7% track, you can easily see us getting down to total OpEx in the range of 23% to 25%. But at that juncture in time, we will be looking at other opportunities, is there something else we could do, and if we have an innovative idea, we won't hesitate to spend the money.

Timothy Arcuri – Citi

Okay, Rick. Thanks.

Operator

And at this time, I'd like to turn things back to Richard Hill for closing remarks.

Rick Hill

I would like to thank all of you for joining us for the first quarter conference call. We look forward to talking to you at the mid-quarter update and then seeing you at SEMICON for the second quarter results, which as we always do, we'll announce during the SEMICON period.

So thank you again and good luck to all of you on all of your business endeavors. Thank you.

Operator

That concludes today's conference. Thank you all for your participation.

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