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Novellus tops forecast despite slumping sales

The chip-equipment maker keeps its word, surpassing estimates with earnings of 40 cents a share.

Novellus Systems executives kept their word Monday when they announced the chip-equipment maker tiptoed past analysts' estimates in its second quarter, earning $59.2 million, or 40 cents a share, on sales of $376.9 million.

First Call consensus pegged Novellus for a profit of 39 cents a share on sales of $372.3 million.

The $376.9 million in sales marks a 4 percent improvement from the year-ago quarter when the company earned $78.2 million, or 54 cents a share, on sales of $326 million. But sales declined 18 percent from the first quarter when Novellus earned 62 cents a share on sales of $458.7 million.

In May, Novellus executives reaffirmed their sales and earnings projections for the second quarter despite weak demand for equipment in North America and abroad.

"Overall, unfortunately, business conditions remain exceptionally weak," Chief Executive Richard Hill said during an analyst meeting after the bell. "Capacity buys just aren't happening at this time. However, we are seeing higher growth for copper and 300 mm (equipment)."

Novellus shares closed off $3.61 to $46.37 ahead of the earnings report before slipping to $46.30 in after-hours trading.

Novellus and other chip-equipment stocks were battered Monday after Applied Materials, the world's largest chip-equipment manufacturer, said it was uncertain whether or not demand would improve by year's end.

Applied Materials shares fell $4.41 to $41.95, while KLA-Tencor and Lam Research dropped $4.04 and $2.28, respectively.

This less-than-stellar news was reiterated by several semiconductor analysts, who warned that demand for chips and chip equipment may not improve until sometime in 2002 rather than later this year as some had predicted.

Shipments in the quarter fell to $247.6 million, down 40 percent from the $413 million in equipment shipped in the first quarter. Gross profit margins fell to 53 percent this time around, down from 55.6 percent in the first quarter and 55.5 percent in the year-ago quarter.

On the bright side, Novellus lopped off more than $25 million in operating expenses from the first quarter and Hill said that trend should continue in future quarters. He added that the company does not plan to trim its head count in order to reduce operating expenses.

Looking ahead
Hill told analysts to expect earnings of 24 cents a share in the third quarter, in line with the current First Call consensus estimate.

Bookings for the third quarter should come in around $190 million, but Hill cautioned that uncertain economic conditions and customer spending plans could result in bookings "up or down 15 percent" from that figure.

Shipments are expected to check in at $250 million in the quarter, roughly flat with the second quarter.

Last week, Deutsche Banc Alex Brown analyst Timothy Arcuri said the slumping shipments and orders this quarter at major chip-equipment companies may not be indicative of the sector's potential in the next couple quarters.

"Chipmakers have already reduced their capacity as much as possible," Arcuri wrote in a research note. "It should be clear there is precious little capex (capital spending) left into which to cut. We thus see Q2 orders as essentially irrelevant, and continue to maintain that fundamentals are aligning to make Q4 (December) the real swing factor."

Lehman Brothers analyst Edward White Jr. also chimed in last week, saying equipment companies may be nearing a trough and that many of them "represent a better value than the numbers might suggest." But he added that there is "little room" for prices to appreciate strongly in the near term.

Novellus shares rallied up to a 52-week high of $68.75 last July before sliding to a low of $24.94 in November.

Twenty-one of the 24 analysts following the stock maintain either a "buy" or "strong buy" recommendation.

Analysts expect Novellus to earn $1.48 a share in the fiscal year on sales of $1.46 billion.