Novellus Sticks to Its Knitting

Yesterday Novellus Systems (NVLS), another leading semiconductor equipment manufacturer for thin film deposition, surface preparation, and chemical mechanical planarization, announced their Q2 results.

Quarterly revenues of $258 million beat the market’s expectations of $252 million. However, revenues were sequentially down by 18% from the $315 million reported in Q1 and a staggering 38% lower than the $416 million reported a year ago. By region, China contributed 36% of revenues, followed by United States with 27%, Europe with 12%, Korea with 17% and Japan with 8%.

EPS of $0.06 also beat the market’s expectations of $0.04. Sequentially, EPS recorded a reduction of 60% over the quarter and 87% over the year.

During the quarter, Novellus repurchased 500,000 shares at an average price of $22.00.

Their Q3 revenue outlook is $240 - $252 million, with an EPS of $0.01 to $0.05.

Novellus is following a two-pronged approach to tackle the weak market conditions. First, they are managing margins by controlling operating expenses. They have streamlined their R&D programs to ensure focus on their core businesses. These activities have also resulted in write-downs of related laboratory assets and headcount reductions.

Novellus is also focusing on product development by both increasing the breadth of applications their tools address and improving the productivity and technological performance of their systems. They realize that customers are seeking lower cost of ownership; improved technological performance has become a key parameter in a customer’s decision to purchase.

In the recently released VLSI Customer Satisfaction Survey for 2008, Novellus was ranked second, up from fifth a year ago. The company also saw major customer acquisitions in their PECVD business and continued to retain market leadership in the tungsten business.

Despite a solid quarterly performance, the stock reached a new 52-week low of $18.89 last Friday. It is currently trading at $20 levels.

I have talked about the need for semiconductor equipment manufacturers to find adjacencies in other industries. Novellus is still scouting for private players in the semiconductor or industrial application space with potentially complementary technologies and the ability to leverage distribution channels or market spaces. They aren’t really looking at merging with Advantest (ATE), nor are they considering bigger adjacencies which could make the market space exciting for the moment.