Novellus Q3 2007 Earnings Call Transcript

Novellus Systems, Inc. (NVLS)

Q3 2007 Earnings Call

October 23, 2007 4:30 pm ET

Executives

Robin S. Yim - Investor Relations

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

William H. Kurtz - Chief Financial Officer, Executive Vice President, Principal Accounting Officer

Analysts

Robert Mayer - Robert W. Baird

Satya Kumar - Credit Suisse

CJ Muse – Lehman Brothers

Gary Sims – CIBC World Markets

Jim Covello – Goldman Sachs

Timothy Arcuri - Citi

Harlan Sur – Morgan Stanley

Steve O'Rourke - Deutsche Bank

Stephen Chin – UBS

Brett Hodess – Merrill Lynch

Mark Fitzgerald – Banc of America Securities

Suresh Balaraman – ThinkEquity

Mahesh Sanganeria – RBC Capital Markets

Steven Pelayo - HSBC

Patrick Ho – Stifel Nicolaus

Tim Summers – Stanford Group Company

Elliot Glazier

Presentation

Operator

Welcome to the Novellus’ third quarter 2007 earnings conference call. As a reminder this call is being recorded today, October 23, 2007. I would like now to turn the call over to Ms. Robin Yim of Novellus Investor Relations. Please go ahead ma’am.

Robin S. Yim

Thank you Alan. Good afternoon and thank you for joining the Novellus Systems’ third quarter 2007 earnings conference call. With me today on the call are Rick Hill, Chairman and Chief Executive Officer and Bill Kurtz, Chief Financial Officer. Financial results for our third quarter 2007 were released on PR Newswire shortly after 1 p.m. Pacific Daylight Time. You can obtain a copy of the news release in the Investors section of our website, at www.Novellus.com.

Today the earnings call contains forward looking statements about Novellus’ business outlook, the future performance of Novellus, and our product forecasts for the fourth quarter 2007. Specific forward looking statements include but are not limited to our expectations about semiconductor industry growth and capital equipment spending, the demand for and competitiveness of our product, and our expectations that we will continue to maintain our position or market share. The forecasted bookings and shipment volume, revenue, gross margin, operating expense, tax rate and earnings per share are presented both on a U.S. GAAP and pro forma basis.

We caution you that our forward looking statements are projections and expectations regarding future events. They involve risk and uncertainties that could cause actual results to differ materially from the results contemplated, including an inaccurate basis for our financial forecasts. 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 2006, our form 10-Qs for the first and second quarters of fiscal 2007, and our current reports on form 8-K. Forward looking statements are based on information as of today and we assume no obligation to update any such statements.

Bill Kurtz will begin today’s call with a review of the financial results from the third quarter of 2007. Rick Hill will discuss business climate and outlook for the fourth quarter, then we’ll open up the conference call for the Q&A session. Now I’ll turn the call over to Bill.

William H. Kurtz

Okay thank you Robin, and good afternoon everyone I’m pleased to report that we met or exceeded the guidance on all of our key metrics that we provided on our mid quarter update call on August 30. We’ll begin with bookings. Bookings came in at $305 million which is down 8.1% from the second quarter and it was at the low end of our mid quarter guidance range. Bookings were 85% 300 mm and 15% 200 mm bringing our year to date bookings to 81% for 300 mm and 19% for 200 mm. Third quarter shipments of $388 million were down 11% and we’re actually slightly above our mid quarter guidance range of $370 to 385 million. Third quarter revenues of $393 million was down 5.5% over the second quarter and that was at the high end of our guidance range.

Third quarter revenues by geographic regions came in as follows: United States is 25%, Greater China and Southeast Asia was 32%, Korea 15%, Japan 19% and Europe was 9%. Gross margin for the third quarter was 49.4% and came in right in the middle of our guidance range of 49 to 50%.

The change in gross margin from Q2 was down 6/10 of 1% and it was due mainly to the effects of an approximately $3 million reclassification of operating expense to cost of goods sold in order to conform with our Novellus corporate accounting practices.

Total operating expenses for third quarter were $129 million and we’re down 6 ½ million from the prior quarter. Now half of that sequential reduction came from the $3 million reclassification adjustment as I noted on my gross margin comment. The other half came from operational savings with a continued focus to control operating expenses until the top line really accelerates. Our effective tax rate in the third quarter was 33% a 1% decrease from the prior quarter and it was also 2% below the prior year. Third quarter net income on a GAAP basis was $49.7 million or $0.41 per diluted share. That was $0.02 higher than our guidance range.

Now turning to the balance sheet, I am pleased to report that we ended the quarter with approximately $1 billion of cash and cash equivalents which is relatively unchanged from the prior quarter. It is also important to note, that during the quarter, we bought back approximately 5% of the company’s outstanding shares or $6.2 million shares at an average price of $27.60 for a total of $170 million in the third quarter. This was offset almost 100% by cash flows from operations of $168 million in the third quarter, which essentially funded the buy-back in third quarter.

On a year to date basis we have now repurchased approximately $9.2 million shares at an average price of $28.32 for a total of $260 million and have generated $236 million of operating cash flow. We have just over $350 million left on our existing authorized buy-back authorization and we expect to fully utilize that over the remaining period between now and September 2009.

Net accounts receivable decreased by $67 million to $355 million in the quarter. This decrease was a result of both lower shipment and a 7 day improvement from 90 days to 83 days at the end of the third quarter. Inventory also went down 5 million sequentially reflecting cautious management of inventory in light of our continued softness in booking. So that is a summary of our Q3 financial results. Now I can turn the call over to Rick who will comment on the state of the business and provide an outlook for the fourth quarter. Rick?

Richard S. Hill

Thank you Bill. Good afternoon ladies and gentleman. As Bill just reported, our EPS hit $0.41 per share thanks to greater expense control and continued improvement in our product performance which is facilitating both acceptances and revenue recognition. To start out with bookings at the low end of the guidance as demand continues to weaken throughout the quarter; delays in foundry and memory were the primary reasons for the short-fall.

The business in general looks like this: our customers’ underlying demand continues to be strong. Macro-economic factors tend to make them cautious. Their demand is largely driven by computer and graphics which is strong and should remain strong; computer demand is coming from both industrial demand and consumer demand. Flash memory demand should remain strong as it proliferates more in the personal PCs as well as numerous other applications including multimedia units, video cameras and game technology. We expect demand and price to grow beginning in Q1 driven by faster take-up of systems by the industrial segment which thus far has really been relatively slow in that uptake.

There are two fundamental factors driving the equipment business today: one is further consolidation of the semi conductor manufacturers coupled with fad-like strategy. Examples are the recent acquisition of Sony’s semiconductor business by Toshiba and of course earlier this year, the announcement by TI not to pursue 45 nanometer development. In addition, another factor is rational deployment of capital being changed to rational time dependent deployment of capital. We see our semi conductor manufacturers adding smaller incremental capacity as close as possible to the forecasted needs. Now the result of these two trends are clear: foundries will become increasingly important as global suppliers of semi conductors and two, the volatility of the ordering periods will be dampened and downturns shortened. In the U.S. demand seems to be strengthening, Asia’s stable and Japan is somewhat weakening.

Let’s turn to operations: bookings as we reported were weaker than expected at the start of the quarter. Revenue and shipments were strong but you can’t ship without bookings. Our industrial group was very strong across the board in quarter three which helped our results. Operating expenses were managed well during the quarter we got back $6.2 million shares in the quarter which was approximately 5% of the outstanding shares of the company and yet our balance sheet is still strong and still has a billion dollars for us to complete that buy-back as we get further opportunities.

The outlook going forward is as follows: for the fourth quarter we expect bookings to be up 5% to 15%. Shipment between $365 million to $390 million. Revenue $355 million to $365 million. Our gross margins are being pegged at 49%. Our earnings per share including stock option expense will be between $0.34 and $0.37 per share without stock option expense we anticipate that to be$ 0.37 to $0.40 per share.

Now with that I’d like to open it up to any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Robert Mayer with Robert W. Baird.

Robert Mayer - Robert W. Baird

On orders, are we supposed to read into this that this is sort of the bottom of the cycle or work orders from the quarter pushed into December quarter or maybe if you could give more detail on that?

Richard S. Hill

Well I think that this quarter tended to be worse than we expected at the beginning of the quarter I do think there is some shift from the third quarter into the fourth quarter but I do see that we are beginning to really fully utilize a lot of the capacity that’s out there which I think is going to augment the growth in orders.

Robert Mayer - Robert W. Baird

Okay so that kind of fits the definition of being at the bottom quarter right there.

Richard S. Hill

I always like to hope so; hope springs eternal Robert.

Robert Mayer - Robert W. Baird

Okay, very good thanks and congratulations.

Operator

And we’ll go next to Satya Kumar of Credit Suisse.

Satya Kumar - Credit Suisse

I just want to get a sense of what you’re seeing n terms of demand from your current customers. Are you waiting to see that situation over the next few weeks?

Richard S. Hill

If I remember the mid-quarter call correctly, I mentioned the fact that I would be visiting with my customers shortly after the call itself. And I’ve done that and they are relatively optimistic at the opportunities for memory going forward.

Satya Kumar - Credit Suisse

So does that mean that your outlook was more positive when you came back?

Richard S. Hill

Well I’d like to comment on what I commented on earlier that by looking at the underlying demand for memory, both flash and D-RAM and I looked beyond my customers to their customers, I think strong computer demand which we continue to see come out of the marketplace, which I don’t think comes out clearly enough, is both consumer driven and industrial driven - bodes well. And in addition to that, I think there is an increasing use of flash and different applications that I highlighted that will show particular strength during the holiday season and I expect that to continue. And so based on all the data I see short of the collapse in the financial market, things look to be pretty solid.

Satya Kumar - Credit Suisse

Excellent.

Operator

And we’ll go now to CJ Muse of Lehman Brothers.

CJ Muse – Lehman Brothers

Good afternoon, thanks for taking my question. Rick you can offer your thoughts on two fronts. First your outlook for 2008 given you’ll be taking some share in ECD as well as your positive outlook on the Vector PECVD tool.

Richard S. Hill

Well I only comment when I talk about the fourth quarter, so relative to the industry I think we’ve forecasted 2008 flat up 5%, in the past as an industry. I think that what you will see is much more time based deployment of capital mainly our customers are adding smaller and smaller capacity increments as they try to run more closely to full capacity and so as a result I don’t expect a downturn to be as long nor the big upswings that we’ve seen in the past in bookings. I could be wrong but that is the way it’s trending to. And we expect next year to be as an industry 5% as I said before.

CJ Muse – Lehman Brothers

If I could just follow up with that idea. You talk about decreasing visibility given the slower capacity or more timely but also when you factor in the budgets that we’re hearing from, you know all over the map whether it’s logic or memory, I guess I’m trying to understand how you see a flat-out type environment.

Richard S. Hill

I think I see it based on you know all of these will be dependent – and again that’s why I say it’s time dependent – upon how operable these businesses are. I think that they will get the confidence that the business is sustainable, that it’s not going away, then you’ll see them release spendings and then put upward pressure on their expenditures rather than downward pressure. But you always have to be looking ahead of their demand. I think what they’re doing right now is trying to bring their utilization of capacity up to higher levels than ever before and that requires them to wait longer to put equipment on. But I think when you look at the fundamental underlying demand in the industry, the need for productivity in the industry, those are all strong drivers for semiconductors.

CJ Muse – Lehman Brothers

Appreciate it, thank you.

Operator

And we’ll go now to Gary Sims - CIBC World Markets.

Gary Sims – CIBC World Markets

Thanks for taking my question. Rick as I understand your comments, basically Korea and the U.S. are driving this 15% order guidance in Q4? Is that right?

Richard S. Hill

They in and of themselves are not driving it, obviously if everybody else was zero we wouldn’t achieve that. But from the standpoint of the trend of where bookings might be coming from that’s an indication.

Gary Sims – CIBC World Markets

Okay, my follow-up question to that is just how do we get comfortable that it’s really not a typical first half loaded spending pattern in Korea that this order uptake in December’s really supporting. How do we get comfortable with the fact that maybe this is a little more sustainable and long-lived?

Richard S. Hill

I think the only way to get comfortable with that is to get comfortable that you believe that current computer sales is sustainable, if you can’t get comfortable with that, obviously you can’t get comfortable that this growth is sustainable. When I look at what’s being added to products, for profitability you know; for example, flash in laptop computers - I think a lot of these features are enough to drive both industrial and consumer demand to continue to buy. Given that you see double digit PC growth I think it’s sustainable.

Gary Sims – CIBC World Markets

Thanks for your thoughts.

Operator

And we’ll go now to Jim Covello with Goldman Sachs.

Jim Covello – Goldman Sachs

Good afternoon and thanks so much for taking my questions. Can you talk about the delta between the bookings and the shipments and where you’re booking and where you’re shipping and how you think that will play out over the next couple of quarters.

William H. Kurtz

Sure, Jim this is Bill. As we’ve experienced lower bookings in Q3, obviously influencing our revenue and shipments outlook for Q4 and so we would expect now as we start to see bookings improve that’s an indicator of what future revenues and shipments are going to be like in 2008 for the first quarter. It’s not as precise as taking the estimates and moving one quarter over, as you know, there are timing differences: some of the bookings are clearly within the quarter but the majority of them are one quarter out in terms of delivery. So I think you can draw from the trend data that as the bookings are now improving slightly we would expect after Q4 as long as that trend continues to see our top lines grow again. We would expect as we’re forecasting the decline that we’re seeing in Q4 reflect the drop in bookings that we experienced in Q3.

Jim Covello – Goldman Sachs

Okay as a follow-up I understand Rick, what you’re saying about demand being very robust, but this has arguably been the best quarter for PC demand in the last decade and DRAM prices saw an extremely precipitous drop much more than anybody expected; so I understand the comment about looking at demand but I don’t think it’s realistic to think that demand gets any better than the best in the decade and yet we still had tremendous declines in prices and then you said you kind of have to look at the profitability which obviously for the majority of customers is really declining pretty significantly over the last quarter or two. So can you help me reconcile all of that?

Richard S. Hill

It’s difficult Jim, I tried to present the data and everybody can interpret the data a different way. I tend to think that people don’t save their way to prosperity; the reality is there are issues with productivity of U.S. Corporations. I think that stimulating end-demand, particularly in information technology, we’ve been spending well below the curve in that area. The U.S. has to get more competitive; the dollar can’t continue to fall, although it’s great for our shipping for awhile, ultimately it means nobody wants the dollar. Other nations are going to try to remain competitive, but I think worldwide demand for computer technology is going to continue to grow and I think we still lead at that; that’s going to drive semiconductors.

I think relative to costs, believe me, our customers, the memory manufacturers, they’re not sitting on their hands not trying to drive productivity into their staff, that’s one of the reasons I feel good about the opportunity Novellus has to serve those customers, because we can bring product that brings productivity, lower their costs down, despite the fact that there are price decreases. So we feel pretty confident about our ability to impact their bottom line by bringing productivity to them. I just can’t be negative about the semi conductor industry and I try to present the things I know, the things I’m looking at; I know you see it through a different set of eye glasses and I think that, you know, that’s another viewpoint, but I’m just trying to share with you the way I see it.

Jim Covello – Goldman Sachs

I appreciate that Rick, thanks very much.

Operator

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

Timothy Arcuri - Citi

Hello Rick, couple things. It looks like if I add up the last three quarters, the last nine months it looks like you shipped about $240 million more in total than you booked and your backlog is down to about 3 months and it looks like it’s going to go sub-three months in December, so judging from what Bill was saying that shipments sounds like are going to slacken up in March; I don’t see how that’s possible given how much more than you shipped than you booked unless bookings are not big in March, is that the right way to think about it?

Richard S. Hill

Well we don’t comment on the first quarter, okay, on either shipments nor on bookings. We did comment that the bookings are going to be up in the fourth quarter and that shipments will tend to follow those bookings and I think that’s as good as we can describe it.

Timothy Arcuri - Citi

Okay, Bill I guess if I look at the guidance, it looks like maybe you’re implying that OpEx is down at about $4 to 5 million sequentially in December?

William H. Kurtz

We would expect OpEx to go down again a couple of million as we continue to have our cost control in effect for the remainder of the year.

Timothy Arcuri - Citi

How much of that is sustainable because I know that you have some shut downs going on in December, how much of that is sustainable heading into next year?

Richard S. Hill

You know, our current run rate for Q3 is probably the best indication of what our run rate would be without the additional shut downs in Q4.

Timothy Arcuri - Citi

Okay great. Thanks Rick.

Operator

We’ll now go to Harlan Sur with Morgan Stanley.

Harlan Sur – Morgan Stanley

Hi, thank you, good afternoon. Nice job on the margins and the expense controls. Rick, as you relate to your foundry customers, do you see foundry utilization continuing to rise; did they rise in Q3; are they set to rise in Q4 and based on that would you expect foundry to be placing orders to the capital equipment industry in the first half of ’08?

Richard S. Hill

My expectation is that foundries will continue to grow and I highlighted that I see foundries as nothing but a good story. And yes, they are trying to operate at higher utilization rates than historical, obviously to improve their bottom line. But I do anticipate that they will continue to grow and they will continue to grow bringing smaller increments at a time. So that’s what I anticipate for the foundry system.

Harlan Sur – Morgan Stanley

Okay great. Then one follow-up question for you Bill.

Given the healthy cash on your balance sheet, can we expect that you will continue to be as aggressive in using the majority of your operating cash flow to buy back stock here, going forward?

William H. Kurtz

As we said on the last call, we remain committed to utilizing the existing buyback authorization between now and the day of expiry, and I think what you have seen in the last quarter, we have that stance. We do not project the future purchases, as a matter of policy.

Operator

Your next question comes from Steve O'Rourke - Deutsche Bank.

Steve O'Rourke - Deutsche Bank

Thank you. Rick, what segment is driving the bookings uptick in 4Q? Are you more confident in industry fundamentals looking into the first half of ’08 than you were, maybe a month or two ago?

Richard S. Hill

I have never been not confident in industry fundamentals; I have been dismayed that the bookings have not rebounded somewhat more strongly. I think I understand a little bit better that strategy, of which I have articulated to you. I am bullish for the semiconductor industry, and I have said that the difficulties in the semiconductor industry is clearly the fact that we have got to continually improve productivity in order to be able to sustain the level of growth and the type of growth that we have historically seen, and that becomes more and more difficult as you lose the shrink knob, as we approach the physical limit.

We believe Novellus is well-placed because it puts more and more emphasis on productivity; but other than that, I can’t think where I wouldn’t be bullish on the fundamentals for semiconductors. Is there some other underlying question I am missing here?

Steve O'Rourke - Deutsche Bank

No, I am just curious if your sentiment has changed based upon all of your inputs when you start to look out into early 2008?

Richard S. Hill

I think when I look into 2008, certainly sell-through at Christmas is going to be a factor, but I am not as concerned about it today as I was six months ago, because I see demand from both the industrial segment and the consumer segment driving demand today, particularly in the computer business, and so I think that is a real positive sign. That is probably the biggest change for me.

Steve O'Rourke - Deutsche Bank

One other question. Can you say what is driving the strength in your industrial business? What is the outlook into Q4 for the industrial business?

William H. Kurtz

The industrial applications group, we have commented in some of the prior calls, is benefiting from a big increase in their wafer polishing equipment, which is tied to the electronics industry, as well as a general improvement in their industrial tools. So overall, they are having a pretty strong year. Whether it continues beyond that is something that is just like the semiconductor business, we can’t forecast the long-term trends, but what we can say is so far we have been really pleased with the growth in that business since it was acquired.

When we acquired it in 2004, it was sub-100 million, and now it is on a run rate approaching $160 million, $170 million a year.

Operator

Your next question comes from Stephen Chin – UBS.

Stephen Chin – UBS

Rick, on the fourth quarter order guidance, can you just try to share some more color on which type of customer is tracking up there 15%? Is it foundry memory, logic or are all of those customers tracking up sequentially about the same amount? Is there one segment stronger than the other? Any added color there would be great.

Richard S. Hill

I think it is a combination of those three trending up. My expectation is that memory spending will be a little stronger.

Stephen Chin – UBS

Can you share any color as to whether you think the strength in this fourth quarter was mostly for technology buys or capacity buys? What is your take on the spending trend there?

Richard S. Hill

In this quarter?

Stephen Chin – UBS

The Q4 quarter.

Richard S. Hill

During Q4? I think during Q4 it is capacity expansion.

Operator

Your next question comes from Brett Hodess – Merrill Lynch.

Brett Hodess – Merrill Lynch

I have two more company-specific questions. First, I am wondering if you can give us an update on what you think the timeline for memory adoption of copper, when you might see that be a major driver for your ECD and copper TVD related products? Could that be something that gives you a better outlook for Novellus specifically in ’08?

Secondly, I am wondering if you can comment on the consolidation you talked about amongst your customer base, and the shorter lead time, smaller increment of capacity adds? If that is going to require you and some of the other equipment companies to perhaps change your business model a little bit to respond to those fewer customers with short lead times?

Richard S. Hill

Two good questions, Brett. First of all, relative to the adoption of copper, I think the adoption of copper within memory is accelerating, both from a technological standpoint, a technological need and a cost need. Towards the second half of 2008, I think you will see an acceleration even faster of that particular trend.

Relative to the consolidation of our customer base and the purchase of smaller increments, it clearly puts an onus of cycle time on us, and an ability to be able to respond faster to our customers. Fortunately, we are not the long pole in the barn here, and so we get plenty of notice from our companies on their needs for capacity expansion, given their lead times. But there is always pressure to wait until the last moment to order deposition equipment, CMP equipment, strip equipment, et cetera, and ECD equipment.

Operator

Your next question comes from CJ Muse – Lehman Brothers.

CJ Muse – Lehman Brothers

I am struggling here to get to the EPS guidance, so I was wondering if you could help us out with the tax rate, as well as better granularity on what you think the OpEx could climb to look like?

William H. Kurtz

Well, we gave you the top line, we gave you the gross margin of 49%. I commented when Tim asked me a question that we would expect OpEx to be down a couple more million as we put some additional cost controls. The fourth quarter tax rate shouldn’t change that much, it should be between 33% and 34%; say 33.5% just to take the midpoint.

CJ Muse – Lehman Brothers

On OpEx, you are saying $2 million more in savings?

William H. Kurtz

It could be $2 million or $4 million, depending on the range of variable expenses for the fourth quarter.

Operator

Your next question comes from Mark Fitzgerald – Banc of America Securities.

Mark Fitzgerald – Banc of America Securities

If you look at your post-2000 performance, you have been stuck in this $1.4 billion to $1.6 billion range a year. I am curious if you see anything to break you out of that? Is that reflective of the growth rate of the industry at this point?

William H. Kurtz

I think we have been stuck in about the $1.4 billion to $1.8 billion, don’t make me feel any worse than I really already feel. We have had a hard look at it, and when we look at how much productivity we have brought to the semiconductor industry, I think the better we do often the more difficult it is to climb that mountain.

Clearly, we are focused on two things. One is growing market share. We think the introduction of the new product that we’ve made over the last six to nine months have positioned us well in our core market to continue to grow, and we have several new products that are just being adopted that also ought to promote growth for us, both geographically and from a standpoint of additional applications. So I think that can get us out.

Clearly the growth rate of the market is not the 20% it once was. We are not seeing that, that rate of growth, but we do believe we can grow and of course, we obviously have the financial resources on the balance sheet as well as the cash generation capability to continue to use that to enable us to grow beyond the $1.8 billion, and on to $2 billion and above.

Mark Fitzgerald – Banc of America Securities

Just a follow-on to that, if you look in terms of the share buyback, it has been incredibly aggressive and has contributed to the bottom line performance, but when you have to make this decision whether to buy back or to pay out dividends, what drives you to be so aggressive on the buybacks as opposed to paying out a dividend?

William H. Kurtz

We have a strategy, we highlight what we are doing, we tell the shareholders what we are doing. We announce it every quarter, and that is about as deep as we go into. We have chosen to do buybacks as opposed to dividends. We feel that is the best way. It is like making investments, we decided to put our cash in A, B or C and buying back the stock is just like an investment, or putting additional money into a product. And at this time, certainly during the last quarter, we chose to buy back quite a bit of stock.

Mark Fitzgerald – Banc of America Securities

If you just look though, relative to the S&P 500, Novellus’ stock has drastically underperformed here over the last three or four years. If you had given that money back to shareholders, they could have better performance. I am wondering if you ever look at it from that vantage point?

William H. Kurtz

We look at it from that vantage point all the time. We focus on increasing earnings, making the earnings line stable and creating an ability to grow those earnings. We have continued positive cash flow, and we anticipate that with the strategy that we have, in the long run the value to the shareholders will be far, far greater.

Operator

Your next question comes from Suresh Balaraman – ThinkEquity.

Suresh Balaraman – ThinkEquity

Regarding the memory bookings in Q4, is that a significant chunk of that, that would ship in Q4? Or would the shipments of those memory bookings be in Q1?

Richard S. Hill

We don’t talk about what specific bookings and which ones are shipping, but the ability to be able to respond quickly and book and ship within a quarter are definitely within the realm of possibility for us.

Operator

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

Mahesh Sanganeria – RBC Capital Markets

Thank you. I want to go back to the industrial application question. You said Q3 was strong. Was that in terms of bookings or shipments?

Richard S. Hill

I said in terms of shipments.

William H. Kurtz

You recall, earlier in the year, Mahesh, we had noted that the bookings were particularly strong for the industrial applications group, and now those bookings that have a longer lead time are showing up in increased shipments as we finish the year.

Mahesh Sanganeria – RBC Capital Markets

I have a question on the product cycle. As we go to advanced technologies, surface compression and wafer compression, that deposition becomes a lot more important. I was wondering if you can tell us if your vector architecture, multi-stage and sequential deposition gives you any advantage? Will that enable you to gain some market share?

Richard S. Hill

I think if you are talking about our Gamma Express product in the area of strip, there is no question that the sequential nature of the process has enabled us to develop some capabilities that are very crucial in advanced technologies and has contributed to our increase in market share in the strip area.

In addition to that, the productivity gains that we have been able to develop has set a new standard in that particular industry. Otherwise, the numbers on the top line would be a lot bigger. But we believe that to ultimately compete in the business, we have to improve the productivity of our customers, so we are committed to do that. As a result, when we introduce new products we basically shrink the market and have been doing that for a long time and anticipate will continue to do that.

Certainly what you have described as the capability of surface preparation, it is something that we have. I am sure your channel checks have indicated the importance of that capability going forward, and I think we are obviously being rewarded because of it.

Mahesh Sanganeria – RBC Capital Markets

Again, I am restating the same question here. It is difficult to get to your EPS number unless we make some other assumptions like share count going down. What kind of share count are you taking into the EPS guidance?

William H. Kurtz

When we provide the guidance, Mahesh, we don’t forecast the share count into the guidance. We basically assume the share count is as it was at the end of the quarter.

Now the share count at the end of the quarter, as it ended the quarter, was approximately 118 million shares outstanding at the end of the quarter on a fully diluted basis.

Mahesh Sanganeria – RBC Capital Markets

So that is what we should use for December numbers?

William H. Kurtz

As I said, we are not forecasting any change in the share count when we provide the guidance, so yes. If you were to use anything, I would suggest you use the ending share count at the end of the quarter, which as I said, was about 118 million.

Mahesh Sanganeria – RBC Capital Markets

One more question on the share buyback. I apologize for beating a dead horse here, but let me try to get to a more specific question. You have called yourselves opportunistic buyers, and you have given us two recent data points that you bought 1.8 million shares at $31 and you bought 6 million shares at $27.60. If I draw a line through that, does that describe your opportunistic share buyback view?

William H. Kurtz

Well certainly, you can conjecture what you would like. What we have told you about the buyback we have told you. We are not going to give any more information than that. We basically have $350 million left in our buyback. We have through September of ’09 in order to complete that buyback. We are confident that we will complete that buyback, and that is the best we can tell you.

Operator

Your next question comes from Steven Pelayo - HSBC.

Steven Pelayo – HSBC

Rick , your answer to the question on secular growth and managing utilization rates, that seems to match the overall themes of chip makers – consolidation and rational deployment. Foundries have been weak for quite a while here. Some early indications are that next year foundry CapEx is flat to down, more so. So two questions on foundries from a timing and managing perspective next year.

If your industry growth is flat to up, what are your assumptions for foundry, memory and logic, if you were to break them out for the industry?

Secondarily, from a timing perspective, given the short lead time, does that mean we have to wait until mid-’08 before we see a more meaningful foundry pickup?

Richard S. Hill

Well I tend to think – and this is conjecture on my part, based on what I see the trends in the industry – I think foundries will tend to be stronger next year than they anticipate, as more and more people go to a fab light model, and more and more of the world’s output of semiconductors is done by foundries.

I think foundries will tend to spend more than they think to expand capacity. They are certainly trying to wring every dollar out of the capacity they have and be the efficient producer, but when I think you look at the movement to fab light models, and given the number of foundries that are available, I tend to think foundries are going to have to buy more capital. So I am voting that they are up.

In the memory arena, I think there will be clear manufacturers who will end up being up, even when currently they tend to point somewhat downward. I would tend to think that companies that are not pegged to the U.S. dollar would be well-positioned to invest their currency in U.S. equipment, because it gives them the biggest expansion of their capacity for the dollar. So I tend to think that people will see that, so in areas where the currency isn’t pegged to the dollar, you will tend to see an increase in the capital spending in order to create more capacity, and hence, be able to grab more market share in a time when some companies are, in fact, pegged to the dollar. So they don’t see the advantageous buying power of their currency.

Steven Pelayo – HSBC

So net-net, memory you expect up or down, and then your outlook for logic?

Richard S. Hill

In the area of memory, I said there will be some areas that will be up substantially that probably at this juncture aren’t necessarily forecasting that.

Steven Pelayo – HSBC

The last question is really on logic and the timing for the foundry orders. Do you think it is more mid-’08?

Richard S. Hill

I think in the foundries you will see it in the beginning of the second quarter.

Steven Pelayo – HSBC

Bill, just a quick one. CapEx and depreciation for my cash flow model?

William H. Kurtz

Let me just get that for you here. The depreciation and amortization for the quarter is $17 million, and the CapEx was $6 million.

Operator

Your next question comes from Patrick Ho – Stifel Nicolaus.

Patrick Ho – Stifel Nicolaus

Thanks a lot. With your statement that customers are reducing or taking equipment at more incremental levels and at later times, can you discuss what your lead times and cycle times are now to adjust to your customer demand?

Richard S. Hill

If we take our lead times relative to our longest piece of material, then obviously in the four to six months range. But through planning and if you talk about our cycle time once we have parts in-house, our cycle times are substantially shorter than that, sub a quarter. So our ability to be able to work with the customer and understand what their needs are going to be and when they are likely to order allows us to efficiently plan materials and consequently shorten cycle times for them with minimum exposure to us.

Operator

Your next question comes from Tim Arcuri – Citi.

Tim Arcuri – Citi

A couple of things. Bill, do you think it is possible to sustainably run the business at less than three months of backlog?

William H. Kurtz

Our normal trends are to have about three months of backlog at any point in time. There are points where we get below that, and then times where we obviously go above that. But on average, no. We would expect to have about three months of backlog to run the business.

Tim Arcuri – Citi

Rick, I have asked you this the last three or four calls so I will ask it again. Can you give us some idea of what you are looking at in the CMP business? What the targets are, how you are executing to the targets? I guess I would have thought, given the performance of the business, I would have thought it would have been abandoned by now.

I am wondering what the target is to become a go/no go target, if you will.

Richard S. Hill

Well, I don’t do that on the calls. Our decision to be in what product is part of our overall strategy as a company. As I said before, the decision to be in CMP is both defensive and offensive. We continue to be committed to that business. The results we get with that business benefit us both from a standpoint of what we can do for some customers and what we can do for ourselves in the development of other films. So we are committed to CMP.

I think from a financial performance standpoint, it benefits us having it and understanding it, are extremely beneficial to some of our other businesses and our plans are to stay with it. We are not abandoning it.

Operator

Your next question comes from Tim Summers – Stanford Group Company.

Tim Summers – Stanford Group Company

Thanks. On the fourth quarter order guidance, not to slice an onion too thin, but third quarter orders were a little bit weaker, and now fourth quarter seems to be a little more optimistic. How much of the quarter to quarter gain is coming from just the timing issue as opposed to real, organic growth?

William H. Kurtz

I think clearly some of it is a push of Q3 into Q4. Depending upon how strong it is, at the end of the quarter, the closer it gets to 15% growth I think there is some serious organic growth in there. To the extent that it is down at the 5% level, it is probably more pushing from the third.

Tim Summers – Stanford Group Company

Just to follow up, Rick, did I hear you say correctly early in the call that you expected DRAM prices in the first quarter to rise?

Richard S. Hill

That would be my guess, yes.

Operator

Your next question comes from Elliot Glazier.

Elliot Glazier

Rick, I want to compliment you on the way you are running the company and all of your associates, particularly on your restraint. If I were you, I think I would grab a 2X4 and I would hit the analysts between the eyes and I would say, wake up. Was anyone on the conference call with Samsung two weeks ago at 3:00 in the morning when they increased their Q4 capital expenditures by $1.37 billion?

It seems to me that your increase in orders for Q4 is about 70% from Samsung, about 20% from the joint venture in NAND Flash by Micron and Intel, and the remaining 10% is from everyone else.

That is my question.

Richard S. Hill

Well thank you, Elliot. I am sure they listened and it is always good to get differing views. I know we don’t always agree, the analysts and Novellus and everybody else. I think the ability to be able to hear differing points of views – this is not an exact science – and we just try to get as much data as possible. So I don’t take offence to the questions and I do know that they listen to the customers, just as I try to listen to the customers. But sometimes, coming at it from a different angle you may get a different piece of data.

But thanks for summarizing it all right there. Thank you.

Operator

Your next question comes from Steven Pelayo – HSBC.

Steven Pelayo - HSBC

Rick, I am sorry, I didn’t get that. Your outlook for logic next year? Was that an assumption for flat to up as well?

Richard S. Hill

Yes.

Steven Pelayo - HSBC

Fair enough, thanks.

Operator

We have no further questions at this time. I would like to turn it back to you for any additional or closing remarks.

Richard S. Hill

Thank you very much for joining us at the third quarter conference call. We look forward to talking with you at the mid-quarter to update these numbers and then again in January for the end of fiscal year ’07.

Time really does fly when you are having fun. Thanks very much for taking the time with us today, and I look forward to talking to all of you one on one.

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