Novellus Systems Inc. F1Q08 Mid-Quarter Earnings Call Transcript

Novellus Systems Inc. (NVLS)

Q1 FY08 Mid-Quarter Earnings Call Transcript

February 28, 2008, 5:30 PM ET

Executives

Robin S. Yim - IR

Richard S. Hill - Chairman of the Board and CEO

Jeffrey C. Benzing - EVP and Chief Administrative Officer

Analysts

Brett Hodess - Merrill Lynch

Mahesh Sanganeria - RBC Capital Markets

Jagdish Iyer - UBS

CJ Muse - Lehman Brothers

Benedict Pang - Caris and Company

William Ong - American Technology Research

Timothy Summers - Stanford Group Company

Atif Malik - Morgan Stanley

Edwin Mok - Needham and Company

Presentation

Operator

Good day, everyone, welcome to Novellus Systems First Quarter 2008 Mid-quarter Update Conference Call. As a reminder, today's call is being recorded and that is today, February 28, 2008. I would now like to turn the conference over to Ms. Robin Yim of Novellus Systems. Please go ahead, Robin.

Robin S. Yim - Investor Relations

Thank you, Erica. Good afternoon, everyone. And thank you for joining the Novellus Systems first quarter 2008 mid-quarter update conference call. Joining me on the call today are Rick Hill, Chairman and Chief Executive Officer, who is currently traveling and here with me in San Jose is Jeff Benzing, Chief Administrative Officer.

Today's mid-quarter update call contains forward-looking statements about Novellus' business outlook. And these forward-looking statements and all other statements made on this call that are not based on historical factors are subject to risks and uncertainties that may materially affect actual results. Specific forward-looking statements include, but are not limited to, our expectations regarding semiconductor industry growth and capital equipment spending; our progress in securing bookings; the demand for, and competitiveness of our products; management's projected bookings, shipments, revenues, gross margins, tax rate, and earnings per share target for the first quarter of 2008 and our 2008 financial model. 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. Information concerning these risks are contained in our filings with the Securities and Exchange Commission, including our Form 10-K for fiscal 2006, our Form 10-Q for the first, second, and third quarters of 2007 and our current reports on Form 8-K. Forward-looking statements are based on information as of February 28, 2008 and we assume no obligation to update any of these statements.

Rick Hill will begin today's call with comments on the business environment followed by an update of our first quarter 2008 financial outlook and guidance, and then open the call for the question-and-answer session. And now, I’ll turn the call over to Rick.

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

Thank you, Robin. And, good afternoon, ladies and gentlemen. Thank you for joining the mid-quarter update. It was only three weeks ago that we had our fourth quarter ending conference call. Overall the market conditions are similar to what they were three weeks ago, although there has been some negative economic data tending to push the outlook to not very good, overall. However, computer demand remains relatively strong for the current season, and therefore we are seeing the rise we anticipated in DRAM prices. We’re also anticipating new entries for laptop PCs with significant Flash drives which will continue to support Flash demand.

We also see slower equipment capacity expansions for some of our customers is causing the excess capacity within the DRAM market and the NAND Flash market to be consumed relatively rapidly. So that’s a good note. On the other hand, global liquidity is affecting some of our customers’ ability to add capacity. However, we had anticipated that three weeks ago in our quarter-end call.

From the standpoint of microprocessor demand it remains strong and consequently investment continues in that area. Also from a standpoint of foundry business is the shift from captives and IDMs to the use of Fablight and Fabless companies continue. We do see some pick up in the foundry demand. Therefore, our first quarter guidance will remain unchanged.

Regarding bookings, the guidance remains flat to down 15% quarter-over-quarter. That’s a range of about $292 million to about $343 million. Shipments will be in the range of $325 million to $350 million. Revenues will be in the range of $315 million to $325 million. Gross margin is forecasted to be approximately 47% and earnings per share will be in the range of $0.21 to $0.24. As we continue to focus on operating expenses, we hope to push that to the higher end of the forecast.

With that I would like to open it up for any questions you might have.

Question and Answer

Operator

Thank you. [Operator Instructions].

The first question will come from Satya Kumar with Credit Suisse.

Satya Kumar - Credit Suisse

Hi. This is Visva Luis [ph] for Satya Kumar. Just one quick question on… do you see any stabilization in the push out in the memory segment particularly in DRAM and are we anywhere closer near to the bottom in orders?

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

I think that, from a standpoint of DRAM, you can classify customers into two categories. Those that will continue to spend and have the cash flow in order to support that spending and they are continuing to do so as we anticipated. And due to liquidity crisis and over capacity in some areas that expansion of capacity is completely dried up. So, it’s very, very bifurcated. Thank you.

Unidentified Analyst

Okay. Thank you.

Operator

And our next question will come from Brett Hodess with Merrill Lynch.

Brett Hodess - Merrill Lynch

Rick, two things. On the expense reduction to the trying to get OpEx to about $110 million, can you clarify the timing of when you expect to be seeing that on a full quarterly basis and if you start to see a recovery in revenues in the second half would you stay in that operating expense range for a while before you needed to add additional?

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

Well, we're working hard to drive down our operating expenses, as I had said, to the $110 million level with a target to exit the second quarter. Our plan would be to maintain that level even as orders and shipments and revenues began to expand and we would try to then very carefully control operating expenses such that we continue to have a much lower breakeven than we have in the past.

Brett Hodess - Merrill Lynch

And just a quick follow-on. Rick, can you comment on when you are looking at the delayed customers in your two groups, one that are spending and not spending. Do you think the ones that aren’t spending and some of those obviously fall into the trench capacitor group, are they at risk of falling far enough behind that you’ll finally, do you think see some consolidation or do you think they will be able to come back at some point?

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

I think the biggest limit in this market is going to be the availability of capital to continually compete in a market that has really become maybe a little bit over competitive. And so, I would tend to think that due to the companies that will fall behind are those that are… have an inability to have access to capital.

Brett Hodess - Merrill Lynch

Thank you.

Operator

And our next question will come from Mahesh Sanganeria with RBC Capital Markets.

Mahesh Sanganeria - RBC Capital Markets

Rick, I just want to just follow up on that one. If you can give us what is your exposure to these two… DRAM. I would say we can say regionally Europe and Taiwan is slightly weaker than Korea and Japan, so how would you describe your exposure to these two kinds of customers, DRAM customers?

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

Well we don’t comment really customer by customer, but from a regional standpoint I think as was noticed in the first quarter and second quarter of last year we had limited exposure to DRAM manufacturers in Taiwan which caused us to fall behind on a bookings rate a year ago. So that can sort of lead you to where our exposure is greater. Thank you.

Mahesh Sanganeria - RBC Capital Markets

Okay. That would… the second one just on OpEx. When you say exiting second quarter, that means your second quarter OpEx will be higher than $110 million, so we should be thinking about $110 million level for the third quarter.

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

That’s correct. That is correct.

Mahesh Sanganeria - RBC Capital Markets

Okay. All right. Thank you very much.

Operator

Next our question will come from Stephen Chin of UBS.

Jagdish Iyer - UBS

Yes. This is Jagdish on behalf of Stephen. A quick question. Can you comment on what is the status of the upgrade of 200 mm to 300 mm activity ongoing, given the pricing concerns on the DRAM? Are the tier two DRAM customers aggressively migrating to 300 mm? Can you give us an update?

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

Well, I think, every customer is largely driven by cash. And to the extent, their cash cost on 200 mm is positive, that capacity is not going to be arbitrarily discarded and increase capital spending. However no new 200 mm capacity either from used equipment or new equipment is really going into place for DRAM, it’s all 300 mm. And I think that that trend is forever. And to the extent that you can still make money on a 200 mm factory which is difficult but there are some that can or are transitioning that equipment over to logic application, that’s how that will play out. But there’s not a wholesale discarding of factories and replacing it with 300 mm capacity going on.

Jagdish Iyer - UBS

I had just a quick follow-up.

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

Sure.

Jagdish Iyer - UBS

About six weeks ago from the time that you had your earnings call and now, has there been any shift in the dynamics of regional pull-in of orders or push-outs. Is there some color that you can provide to us, please?

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

Unfortunately, we only had our call, I think, it was about three weeks ago, because it was our year-end. And as I said when I started, there’s really been no fundamental change from that period of time. So, sorry I can't give you any more than that.

Jagdish Iyer - UBS

Thank you.

Operator

And next our question will come from CJ Muse with Lehman Brothers.

CJ Muse - Lehman Brothers

Hi. Thanks for taking my call. I guess I was hoping to probe a little bit in pricing pressure as well as delay in payment terms that appear to be coming up more and more often, I guess. How should we think about that impacting cash flows for you guys and any other commentary you can provide would be very helpful? Thanks.

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

Certainly from a standpoint of the competitive nature of the market we're continually trying to provide our customer more value, which means more wafers per capital cost dollar. There is very, very limited from the standpoint of delayed payments due to revenue recognition issues. There are some, but not a significant amount. So I don’t think it has a huge impact on our overall cash flows. Okay, CJ?

CJ Muse - Lehman Brothers

Thank you.

Operator

And we’ll move on to Ben Pang with Caris and Company.

Benedict Pang - Caris and Company

Thank you for taking my question. Similar question in terms of the foundries. Are you also seeing a difference between the different foundries in their ability to spend or do you foresee, I guess, the entire foundry industry getting healthy here?

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

I definitely see that the foundries with strong cash flow from operations can expand their capacity very rationally. There are some foundries that have limited access to capacity and they are not yet participating in that capacity expansion.

Benedict Pang - Caris and Company

Thank you. And a second question on the follow up on the DRAM. You mentioned that DRAM pricing is trending towards what you expected on your conference call at the end of January. If you look into 2Q, can you make any comments or do you have any vision on what the DRAM pricing looks like in 2Q?

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

Well, I am expecting… our expectation is that we will see stronger than most people anticipate an overall computer demand in the first quarter. And we see that continuing to be pretty constant in the second quarter and then followed by the build up for back to school and Christmas in the third and the fourth quarter. And with the lack of capacity coming on place for DRAMS, we do expect a rise in overall DRAM prices. Projecting exactly what they are… virtually impossible, but it is very difficult to see them going any lower...

Benedict Pang - Caris and Company

Thank you very much. Thank you.

Operator

Our next question will come from Bill Ong with American Technology.

William Ong - American Technology Research

Yeah, Sun [ph] Standard Company had a week long shutdown last week, presumably to save costs. Any plans for additional shutdowns this year other than Thanksgiving and Christmas.

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

We have no plans at this point in time. We wouldn’t do shutdowns as required in order to meet our operating expense goals and also to continue to provide a profitable company.

William Ong - American Technology Research

Okay. And then my second question is, we saw recently LAM and Kelly [ph], I think who acquired some firms to sort of supplement their business growth. So, any plans for you to seek out M&A aggressively just to go into different markets on your positing steps?

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

We have been pretty aggressive in that the best investment in that market has been Novellus stock, and currently that’s what we see. We have made acquisitions that… we’ve made acquisitions in the past. We continue to focus on driving market share wins there and continue to try to grow our market share with the existing product portfolio.

William Ong - American Technology Research

Okay. Thank you very much.

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

Thank you.

Operator

Our next question will come from Jeannie Yun [ph] with JP Morgan.

Unidentified Analyst

Hi, I know there are a lot of moving pieces, but could you give us a sense of what the second half order environment could look like compared to the first half?

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

We only comment on the existing quarters. We don’t try to project further out. As you well know, it’s very, very difficult. I think the biggest wildcard is going to be consumer demand, what happens to consumer demand, and liquidity. I think the liquidity crisis has expanded much more than most people have anticipated. And, with the high amounts of capital required for our customer base, that will be an essential ingredient to a rebound in the second half. So we have to wait to see that that plays out.

Unidentified Analyst

Okay. And then on the $110 million OpEx for the quarter, like, what revenue run rate is that? Or is that just as you ramp up throughout the year?

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

Well, $110 million is where we’re trying to target it at this current rate. And we would hold that up through about the $400 million run rate is what we have said. We are obviously below that at this time.

Unidentified Analyst

Okay. So if you assume that revenues are in the midpoint of your guidance, let’s say, $320 million that your OpEx by the end of the second quarter should be around $110 million?

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

We’ll exit the second quarter at a $110 million run rate.

Unidentified Analyst

Even if you keep revenues at these levels?

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

Correct.

Unidentified Analyst

Got you. Thank you.

Operator

And your next question will come from Tim Summers of Stanford Group Company.

Timothy Summers - Stanford Group Company

Yes. Thanks for taking my question. Hey Rick, On Tuesday LAM said that DRAM demand was increasing faster than new DRAM supply was hitting the market, therefore eating into the over capacity. Is that something that you can confirm?

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

We see the exact same trend.

Timothy Summers - Stanford Group Company

Okay. Great. Thanks Rick.

Operator

[Operator Instructions].

Your next question comes from Timothy Arcuri with Citigroup.

Unidentified Analyst

Hi, this is Srini [ph] calling in For Timothy Arcuri. One question I have is on the expense reduction actions that you will be taking to reach $110 million, could you give us some color on that.

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

No, we won't go into any detail on that. Okay. That’s totally internal.

Unidentified Analyst

Okay. Are you facing any driving pressure in your sales right now? Like, is it rising pressure on account of competitors or is it more from like the customers themselves?

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

Well I think, that this industry has always have pricing pressure. I’ve been around 15 years now and I've never not seen it. We continue to try to focus on giving more value to the customer in order to be able to try to maintain our pricing. And we’ll continue along with that strategy.

Unidentified Analyst

And last question that I have is, how much revenue will you be expecting from the eval tools that you have already put at various places?

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

We didn’t break that our on what that was. Jeff, do you know or have we commented on it before?

Jeffrey C. Benzing - Executive Vice President and Chief Administrative Officer

No, we haven’t commented on that in the past, Rick.

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

Okay. Then we won’t give any more…

Unidentified Analyst

You can comment on it now.

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

I know, but I can’t, sorry. But good for asking.

Unidentified Analyst

Thanks.

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

All right.

Operator

[Operator Instructions].

We’ll hear next from Atif Malik with Morgan Stanley.

Atif Malik - Morgan Stanley

Hi, this is Atif on behalf of Harlan [ph]. Thanks for taking my question. Question on NAND. Have you seen any movement in the NAND projects in the last three weeks or so? And then a follow-up, basically a couple of your customers, NAND customer SanDisk-Toshiba have positively revised their CapEx outlook for 2008. And my question is, like if you kind of back-calculate what kind of capacity or orders need to be placed to meet that CapEx target, is your expectation that most of those orders are already sitting in the backlog or are you expecting incrementally more orders?

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

So we commented about this quarter that we’re seeing NAND Flash continue to be relatively good. And it’s our anticipation that it will increase. If we’re seeing anything from a NAND standpoint, we’re seeing a tendency to try to accelerate some of the existing backlog. But given the forecasts of some people wanting to ramp a little bit more than what we expected, I would not say that it’s currently in the backlog.

Atif Malik - Morgan Stanley

And you have not seen any movement in the four NAND makers more recently?

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

Other than accelerating the current backlog to be shipped, I can’t say that I have.

Atif Malik - Morgan Stanley

Thank you.

Operator

Our next question will come from Edwin Mok with Needham and Company.

Edwin Mok - Needham and Company

Hi, a question on the linearity of your shipments this quarter, is this quarter pretty linear or are you more backend loaded?

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

We don’t comment on that. But I don’t see this as out of the ordinary.

Edwin Mok - Needham and Company

Okay, that’s fair. A follow-up question, regarding your buybacks, have you guys done any buyback this quarter or--?

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

We don’t comment on that in the mid-quarter update, sorry.

Edwin Mok - Needham and Company

Okay, that’s fair. Thanks.

Operator

[Operator Instructions].

And we have no further questions in the queue. I’d like to turn the conference back over to our speakers for additional or closing remarks.

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

Thank you very much for joining our mid-quarter update. We appreciate your interest in Novellus and we look forward to speaking with you at the end of the first quarter. Thank you very, very much.

Operator

That does conclude today’s conference. We thank you for your participation. Have a great day.

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