Thursday, January 25, 2007

Color on quarter: Novellus (NASDAQ:NVLS)

Couple of interesting comments on Novellus Systems (NASDAQ:NVLS) following earnings:

- RBC Capital is maintaining their neutral stance on NVLS following its earnings call. The stock was trading up in after hours in spite of disappointing 1Q07 revenue and EPS guidance on short covering, in our view. Firm expects the stock to drift lower over next few days. Notes they will be more constructive on the NVLS and the semi-cap sector when they start to see meaningful orders from foundries.

EPS was higher by 8 cents primarily due to higher non-operating income and lower taxes. Higher gross margin contributed a penny to EPS upside. Orders and revenues were in-line; shipments of $390M were significantly lower than the guidance of $410- 420M. Order guidance of down 5% to 10% was slightly better than firm's expectations. As they expected, the Company guided for sequential increase in shipment. Firm is still disappointed as the increase is primarily coming as result of push-outs from 4Q06.

Management commented that second half would be better than first half, in sharp contrast to Lam Research's commentary. Although it is possible for NVLS to a have better 2nd half due to lower exposure to memory, the firm is not ready to step in and buy the stock.

- Cowen notes NVLS's Q4 was at the high-end of guidance on most metrics excepts for shipments which were 5%light given some industry push-outs/reschedulings. Bookings (-6%) were in line despite some order push-outs in logic. While commentary acknowledged a modest ST slowing, NVLS suggests a pick-upin H2 and suggested that push-outs had more to do with in sourcing/outsourcing decisions than the industrybeginning to roll-over. Given an increasing number of IDMs (TXN...) shifting more to foundries and shifting partner strategies (Freescale and others) this makes sense. NVLS suggests a foundry pick-up in H2. Still optimistic on the overall memory cycle - both DRAM and flash though there's a lot riding on Vista and new flash applications. Reduced shipments and a one Q impact from NVLS global biz structure (reduces taxes) drive Q1 below expectations. Still, given the recent sell-off, NVLS will probably be up a bit. Though NVLS has done a nice job tightening operations, increasing leverage etc., the firm will remain on the sidelines given industry cross currents and a stock lifted by merger talk which seems unlikely.

Notablecalls: Think NVLS may squeeze a bit higher before fading. No more than $32 range, though.

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