Earnings Preview: Novellus Systems

Novellus Systems (NVLS) is expected to report Q4 earnings Wednesday with a conference call scheduled for 4:30 pm ET.

Guidance

The consensus estimate is 36c for EPS and revenue $361.39M, according to First Call. The company's Q4 is tracking in line with guidance provided during its mid-quarter update: Bookings forecasted up 5% to 15% over Q3, and trending closer to the high end of the range given the current order trends. Shipments are expected to be in the range of $365M to $390M, EPS expected to be 34c to 37c, revenues will range from $355M to $365M, all of which management said will trend towards the middle of the range. The gross margin is forecasted to be about 49%, the same as had previously been forecasted. DSOs will experience no noticeable change since Q3.

Regarding CapEx for 2008, management anticipated it to be flat to potentially up 5%, best case. CEO Rick Hill said PC demand is "quickly depleting DRAM memory chip inventories, thanks in part of interest in Microsoft's Vista operating system." He also said that wireless and telecom products are helping to boost demand. Consequently, foundries for producing DRAM and Flash memory chips are striving to meet existing demand.

Analyst analysis

On January 8, American Technology downgraded several semiconductor equipment stocks to Neutral, including Novellus, citing weak demand for chip making tools with the belief that the group will stay depressed given the weak macro environment and an expected decline in Q1 2008 bookings.

On January 22, Stifel reduced 2008 estimates and cut price targets for the group, as well anticipating worsening fundamental demand further into 2008. Regarding Novellus, Stifel said "current industry conditions will not provide any near-term boost for the company, and they suspect order flows are likely to worsen rather than improve over the next few months."

As for guidance: Recall that KLA-Tencor's (KLAC) March order guidance came in well below street expectations despite a tailwind from service orders and ASM Holding did not provide order guidance. Also, LAM Research (LRCX) and Varian Semi (VSEA) reported margin pressures stemming from pricing pressure in the service business and unfavorable customer mix.

Conference call issues: Update on product strategy, new CFO, additional savings from further outsourcing, CapEx commentary, and guidance.