Novellus edges estimates

July 16, 2001: 5:52 p.m. ET

Semiconductor equipment maker beats Street's earnings forecast by a penny

NEW YORK (CNNfn) - Novellus Systems, a leading supplier of the equipment used to manufacture semiconductors, logged a second-quarter profit that was slightly ahead of expectations on sales that were up 3.6 percent from the same quarter a year ago.

And while they acknowledged that the semiconductor market is still under pressure, Novellus executives said they expect to meet the Street's current profit expectations for the third quarter.

Shares of Novellus fell $3.61 to $46.37 on Nasdaq ahead of the earnings news, which was released after the close of trading. They slipped another 28 cents to $46.09 in extended hours trade.

During the quarter ended June 30, Novellus said its net income was $59.2 million or 40 cents per share. That's down 25.9 percent from 54 cents per share during the second quarter of 2000, but a penny better than the 39 cents per share profit analysts had expected, according to a survey conducted by earnings tracker First Call.

At $376.9 million, the company's second-quarter sales were up 3.6 percent from $364 million in the second quarter of 2000 but down 17.8 percent from $458.7 million for the first quarter of 2001. Analysts had expected sales of $372.3 million, according to First Call.

The company said shipments totaled $274.6 million in the second quarter, reflecting a 40 percent decline from the $413.1 million in shipments it reported during the first quarter.

At the same time, executives said bookings totaled $210 million, where they had anticipated bookings of about $220 million.

Chip equipment makers' ordering patterns are key indicators for analysts, who use them to gauge the broader conditions in the semiconductor industry. Faced with a sharp drop in demand, most chipmakers have pared back their spending in an effort to maintain profitability, and many have either deferred or cancelled their capital-equipment orders.

The semiconductor industry historically has been characterized by boom-and-bust cycles, with periods of undersupply and high prices followed by spells of overcapacity and slumping profitability. On the down slope of that cycle, chipmakers will move quickly to decrease their manufacturing capacity, which in turn weighs on chip-equipment makers' profits.

Focus on cost-cutting
Executives at Novellus acknowledged that the conditions in the industry remain weak, and they expect bookings to decline further in the current quarter. "Capacity buys are just not happening at this time," Richard Hill, Novellus' chairman and chief executive officer, told analysts gathered at the SEMICON West trade show taking place in Silicon Valley this week.

He said he anticipates bookings in the third quarter to decrease to about $190 million, give or take about 15 percent.

But at the same time, Hill said the percentage of orders for equipment used to manufacture more advanced chips – such as those that use copper wiring instead of aluminum – is encouraging.

"While capacity purchases have slowed considerably, we continue to see a strong interest in our advanced technology products," Hill said.

Hill also said he expects Novellus to log a profit of 24 cents per share in the third quarter, which is in line with the current consensus estimate of analysts polled by First Call.

Robert Smith, Novellus' executive vice president and chief financial officer, highlighted the company's focus on cost controls, which he said resulted in an 8.8 percent decrease in operating expenses from the previous quarter, excluding one time merger related charges.

These efforts helped us to post a sequential increase in cash and short-term investment balances for the quarter," Smith said, noting that the company expects its expenses to decrease even further in the third quarter.

Novellus ended the second quarter with cash and short-term investments of $1.25 billion, a 4.5 percent ,or $54.4 million, increase, over the first quarter 2001 balance of $1.2 billion.

The company ended the quarter with $272.3 million in inventory, up about $36 million from the prior quarter.