Novellus Systems, Inc. F3Q08 Mid-Quarter Update Call Transcript

Novellus Systems, Inc. (NVLS)

F3Q08 Mid-Quarter Update Call Transcript

August 28, 2008 4:30 pm ET

Executives

Robin Yim – IR

Rick Hill – Chairman and CEO

Analysts

Satya Kumar – Credit Suisse

Brett Hodess – Merrill Lynch

Jagdish Iyer – UBS

Brett Piira – Caris & Company

Edwin Mok – Needham & Company

WingeO [ph] – Oppenheimer

James Covello – Goldman Sachs

Timothy Arcuri – Citi

Mahesh Sanganeria – RBC Capital Markets

Peter Kim – Deutsche Bank Securities

Eliot Glaser [ph]

Presentation

Operator

Welcome to Novellus third quarter 2008 mid quarter update conference call. As a reminder this call is being recorded today, August 28, 2008. I would now like to turn the conference over to Ms. Robin Yim of Novellus Systems; please go ahead.

Robin Yim

Thank you, operator. Good afternoon everyone and thank you for joining the Novellus Systems third quarter 2008 mid quarter update conference call. Joining me on the call today are Rick Hill, Chairman and Chief Executive Officer and Jeff Benzing, Chief Administrative Officer.

This mid quarter update call contains forward-looking statements about Novellus business outlook, these forward-looking statements and all other statements made on this call that are not based on historical factors are subject to risk and uncertainty that may materially effect actual results.

Specific forward-looking statements include, but are not limited to, our expectations regarding semiconductor capital equipment spending and industry growth. 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 third 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 2007, our Form 10-Q for the first and second quarters of 2008 and our current reports on Form 8-K.

Forward-looking statements are based on information as of August 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 third 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.

Rick Hill

Thank you, Robin. Good afternoon, ladies and gentlemen. As Robin stated I’ll provide you with a very short summary of our view of the current business conditions followed by an updated guidance for the quarter. The business continues to be very challenging, since the second quarter conference call we’ve seen weakening in Japan, Korea and Singapore. It is largely been driven by reductions in flash CapEx forecast by the customer. Despite these changes our guidance remains unchanged.

The guidance for the third quarter, I will remind you was bookings the guidance is down 15% up 5% quarter-over-quarter. That’s a range of $200 million to $246 million. Shipments will range from $225 million to $250 million down 6% up 4%. Revenues will range from $240 million to $252 million which is down 2% to 7%.

Our gross margin is forecasted to be approximately 45% to 46% and earnings per share will be in the range of $0.01 to $0.05. So there is no change in the guidance for the third quarter and I will now open it up for any questions you might have. Thank you.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Satya Kumar, Credit Suisse.

Satya Kumar – Credit Suisse

Yes, can you hear me?

Rick Hill

Yes.

Satya Kumar – Credit Suisse

Hi Rick thanks for taking my question. I am curious as to why you are able to maintain your guidance despite the weakness in the market, are you gaining market share in the semi business or is the strength coming from the industrial or is there some operating spend that you are seeing from other customers that you are able to maintain the guidance?

Rick Hill

I think that (a) when we began the quarter we had forecasted certain technology wins that we would achieve. We’ve highlighted the transition of memory from aluminum to copper. I think this is helping us and while the weakening in Japan and Korea and Singapore was not announced based on our forecasting we had factor that into our overall guidance.

Satya Kumar – Credit Suisse

As a follow up in terms of the weakness you are seeing in flash, are these push outs that you are seeing, I presume these are order push out that you are seeing. Can you give some clarity on if they are getting pushed out of the second half for orders into the first next year orders something that getting pushed out further into ’09 and on the non-memories is there something to talk about particularly on some of the hire in terms of what you are seeing for demand?

Rick Hill

I think that the answer to your first question relative to the push out, the only one I can comment on is because it was publicly announced that the IM Flash Technologies that pushed out until the end of 2009 potentially earlier 2010. The other push outs that we’re seeing, the other weakening in demand are not publicly announced, so I cannot say anything about those and the second part of the question was…

Satya Kumar – Credit Suisse

Is there anything to talk about in terms of non-memory demand particularly for a high-end logic chips like microprocessors and the like?

Rick Hill

I think you’ve seen the recent announcements of both Intel and Dell and HP with there strong PC demand and so certainly for all the indications we have and you have from publicly available market information. That demand continues to be robust, hence it give us hope that the excess capacity that has been in the DRAM market and also the Flash market will begin to slowly be eroded and resulted in a favorable rebound in the industry and then not just in future. Thank you.

Satya Kumar – Credit Suisse

Thank you.

Operator

We’ll go next to Brett Hodess, Merrill Lynch.

Brett Hodess – Merrill Lynch

Good afternoon Rick. Further along the same kind of line, when you commented that’s the offset to some of the weakness on the insight came from a little bit of MIX memory and TECH wins and may be factored in some of the weakness that you’re seeing. Do you see that the memory transition to copper and the TECH wins when you talked about, are those lines continue at the pace that you expected in this environment, do you think that there could even be some either moderation or acceleration on those?

Rick Hill

I do not expect to see a moderation in the changes in technology as it is the single biggest lever for the company that can afford to do it to gain a differential advantage IE cost or performance advantage in their devises, which will ultimately be reflected in their gross margins and profitability. So I don’t see that slowing down.

Brett Hodess – Merrill Lynch

Okay, great. Thank you.

Operator

We’ll go next to Stephen Chin with UBS.

Jagdish Iyer – UBS

Hi, this is Jagdish on behalf of Stephen. Quick question Rick, there is couple of your competitors have heard that clearly the third quarter seems to be the top in orders. As you standard out today, what is your view on that situation in terms of likely your third quarter could be the drop before things start to get better?

Rick Hill

We’ve said in previous calls, our expectation was that the some of Q3 and Q4 would be above that the sale of Q1 and Q2 from our perspective we haven’t change that.

Jagdish Iyer – UBS

Thank you.

Operator

We’ll go next to Ben Pang with Caris & Company.

Brett Piira – Caris & Company

Hi, thanks for taking my question. This is Brett for Ben Pang. I was just wondering if you could give us an update on your view of solid state drive adoption, has it change at all?

Rick Hill

I think, if there is any area where I’ve seen the market not evolve as I would have anticipated, it’s in the uptake of solid state drives. I think that’s driven by the fact that the performance of the solid state drive has not been to the level that most people think the capability of solid state drives can achieve from the standpoint of speed performance, from the standpoint of battery life certainly the ruggedability is there, but you still need to get the speed both from an access time and a right time as well as power consumption. I think those have falling short with the early implementations and is going to require another round prior to see that up tick and I think that would be the one area where its not playing out as we forecast.

Brett Piira – Caris & Company

Thank you.

Operator

We’ll go next to Edwin Mok, Needham & Company.

Edwin Mok – Needham & Company

Hill, can you here me?

Rick Hill

I can.

Edwin Mok – Needham & Company

Just a question on, you guys have a number of new product that was out in the market, I’m just curious how many of those have you kind of qualify and can you kind of putting color on the customer progress you have made on those products?

Rick Hill

Well, we have stated before that the new products are being widely accepted in the marketplace. These new products offer unprecedented productivity and value to the customers and in an environment where they are keenly interested in it as well as unprecedented performance on device performance and so I can’t disclose the specific number. We don’t have a tabular sheet with us, but I think across the Board the products have been extremely well received.

Edwin Mok – Needham & Company

Great and just one quick follow-up regarding the foundries, it looks like you have new (inaudible) has been up for a while, but there is talk that your litigation [ph] might come down. What’s your view on that, anything has changed is there any thing has changed regarding the review or regarding the foundries?

Rick Hill

I think to relative to foundries, the foundries have a great model and I think there is no turning back so companies that use to have wafer fabs are going to go back into the wafer fab business, so I continue to be very optimistic on the foundry model and I think that I don’t see major changes in that business in fact I see opportunity in that business.

Edwin Mok – Needham & Company

Great. That’s all I have. Thanks.

Operator

We’ll go next to Gary Hsueh, Oppenheimer.

WingeO – Oppenheimer

Hi, this is WingeO [ph] for Gary. AMAT actually guided plus 30% for their October quarter orders, versus you minus 15% to plus 5% and what do you see as the discrepancies between those two numbers that seems to be quite a bid difference between those two order numbers.

Rick Hill

I can’t comment on what base the, I can only say what we see and we’re commenting on the third quarter. They’re fourth quarter actually is one month into our fourth quarter, so we’ll be able to comment in October what we see in the fourth quarter, but that’s all I can say about that. I really can’t reconcile other than mathematically those numbers.

WingeO – Oppenheimer

Okay.

Operator

We’ll go to James Covello Goldman Sachs.

James Covello – Goldman Sachs

Good afternoon, guys. Rick thanks so much. If I can just follow on that topic a little bit maybe not just AMAT, but also Tokyo electron and implicitly Lam Research all guided orders up pretty significantly and without asking you to comment about any one competitor? Do you think there is some potentially some issues with regard to customer exposure or process technology or what you think more broadly, because it does seem like more broadly couple the other competitors are seeing some differences even one set of the same calendar that you do.

Rick Hill

Yes and as I highlighted before, in our forecasted information we were pretty conservative and what we thought was going to happen within Japan, Korea and Singapore potentially some of the other people work quite as conservative. I think from a standpoint of exposure on a customer base, there is not going to be a big difference time around and it would be a timing difference, it would have to be October issue relative to it falls in our fourth quarter versus potentially their third quarter it’s the timing issue. So, those are the only things that I can think of.

James Covello – Goldman Sachs

It’s helpful. Thank you.

Operator

We’ll go to timothy Timothy Arcuri, Citi.

Timothy Arcuri – Citi

Hi Rick. If you look at all the way wafer side date, you look at all the capacity data and if you look at what going to – really does a big upturn next year in 2010. It seems like the uptake of solid state drives have to be the kind of killer app that really drive the significant upturn going forward.

You’ve been talk about this now for a longtime, but it seems like the customers keep on pushing that out and it seems like even Samsung has talked about that probably not being a 2009 issue more than 2010 issue. So, I’m wondering what does your market intelligent say around when sold state will really to come a significant driver for new capacity and then I got a follow up.

Rick Hill

Yes, whatever we had forecasted, and your accurate in our description of founding this solid state drives drawn. We do think that that is a killer application and as I mentioned little bit earlier, it is not meeting what our expectations are. Now, whether it’s a one design cycle on the controller or a two design cycle on the controller, I’m not sure of that. I would ventured to say although I don’t have specific information of anybody in particular, but I would have to believe the controller are in redesign that seems to guiding items on it, but I think overall the largest catalyst in the market is PC demand that continues to be robust.

So, from a standpoint of expansion into 2009 I think that if that computer end market demand can be maintain that will drive two legs of the three legged stool. It will drive logic and micro processors and DRAM and the big question mark will be, will take two quarters or three quarter were solid state drives to come out with the very competitive product from a standpoint of speed, power consumption and ruggedability at the right price and that I can’t answer, but that’s our assessment.

Timothy Arcuri – Citi

Okay, I guess just kind of looking at ’09 and looking at CapEx for ’09, if you take orders right now and then you kind of flat line them though ’09 you have kind of down roughly 10% your CapEx next year, so CapEx will flat you have to see some slight pickup in booking, but I guess do you think that CapEx next year can be up without sold state really becoming the big killer Cap next year.

Rick Hill

I do because depending upon the up tick right now we’re had a very, very high rate of computer purchases and that market is really proliferating into a much larger volume market going after a lower parts computers and various parts of the world and that’s going to dramatically drive DRAM, and again we are speculating on the future so I’m only sharing you what goes on in my mind. I can’t forecast the future any better than you can, but how I think about it. So I don’t think it’s totally impossible that it could be up in ‘09.

Timothy Arcuri – Citi

Okay, great. Thanks Rick.

Operator

Our next question comes from Mahesh Sanganeria with RBC Capital Markets.

Mahesh Sanganeria – RBC Capital Markets

Hi, Rick. I just want to follow-up on the comment you made earlier, I just want to make sure that understood clearly, did you say that order in the second half is going to be better than the first half?

Rick Hill

The combination of orders in quarter three and quarter four will be above quarter one and quarter two.

Mahesh Sanganeria – RBC Capital Markets

So that would imply even if I make it flat that would imply your order will be up 40% in December quarter?

Rick Hill

You’re free to do any math you would like.

Mahesh Sanganeria – RBC Capital Markets

Okay, that answers my questions. Thanks.

Rick Hill

Thanks, Mahesh.

Operator

(Operator instructions) We’ll go next to Peter Kim with Deutsche Bank Securities.

Peter Kim – Deutsche Bank Securities

Hi, thanks for taking my question. I was just wanted to back to your earlier comments about your perceived weakness in Japan, Korea and Singapore since the beginning at the quarter. I was wondering if that has changed your outlook or timing of recovery for the full year business.

Rick Hill

As I just said a few minutes ago it has not changed our outlook for quarter three, we have not changed our guidance and we don’t comment beyond that.

Peter Kim – Deutsche Bank Securities

Okay, given that maybe the continued weakness that you’re observing and the fact that you’ve reached your goal of hitting $110 million per quarter in OpEx. Do you think that there is room or any inclination to the drive that lower going forward?

Rick Hill

Well, we don’t comment on any of that, we are just updating you on the market outlook and whether or not were change in the guidance, but we’ll talk about that more at the end of the third quarter.

Peter Kim – Deutsche Bank Securities

Okay. Thank you.

Rick Hill

Thank you.

Operator

We’ll go next to Eliot Glaser [ph] (inaudible).

Eliot Glaser

Rick, can I assume that busy as you are you did not see this morning’s online Wall Street Journal article about Samsung?

Rick Hill

I did not.

Eliot Glaser

Then can may I please, summarize us very quickly this is at 7:02 am, August 28, online Wall Street Journal by Evan Ramstad, Samsung Electronics according to its Investor Relations Chief Chu Woo-sik saying that third and fourth quarter is sweeping up worse than expected and its full year profits are likely below last years, the company it is not experiencing the normal seasonal bump in orders, this is chorus by retailers loading up an electronic goods ahead of a holiday season.

Mr. Chu and other Samsung Executives said memory chip profit margins were at risk of turning downward again, what’s also newly said is that sales from important electronics like TVs and cell phones are not turning out as strong as hoped. May I suggest that your market intelligence is better than some of your competitors that you are being more conservative, more realistic and their estimates of a 30% order gain probably is not accurate and your estimates of 15 to five probably is more accurate?

Rick Hill

Eliot, I’d rather be lucky than good. I appreciate that but projecting the future is tough, but I’ll take it as a compliment. Thank you very much.

Eliot Glaser

You’re welcome.

Operator

And it appears there are no further questions at this time. Mr. Hill, I’d like to turn the conference back over to you for the additional or closing remark.

Rick Hill

Thank you very much for joining us for the mid-quarter update. I’d look forward to talking to you at end of the third and of quarter and hopefully we can report our more robust future going forward. Thanks very much.

Operator

That does conclude today’s conference. Thank you for your participation. You may disconnect at the time.

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