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Novellus Blames SARS

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By Matt Richey (TMF Matt)
April 15, 2003

From the department of lame excuses, Novellus (Nasdaq: NVLS) last night blamed its weak business outlook on sudden acute respiratory syndrome. Are we really to believe that SARS is delaying sales of semiconductor capital equipment? The market apparently isn't buying it. Today, shares of Novellus are down 3%, while its peers on the Philadelphia Semiconductor Index are up 0.5%.

The fishy comments from Novellus management came on last night's earnings conference call, where CEO Richard Hill said the following in his prepared statement (courtesy of FDfn):

The war and SARS has had an adverse effect on people's confidence in the future; so they are very cautious. Asia has been particularly affected by SARS. There is a reluctance to interact amongst our customers ... even amongst our employees. We are finding it difficult to continue to conduct training seminars, and needed meetings, in the course of actual business. As a result, in the last two weeks, we have had a significant decrease in our forecasted bookings.

And then this amplification by Hill in the Q&A portion of the call:

People have to stop worrying about, you know, getting on an airplane, and thinking that somebody's going to breathe in the airplane and give them SARS. I mean, I'm sure everyone on this call has heard that travel to Hong Kong is down, you know, significant numbers. … When my team goes out to talk with customers, the first hours of the meeting are spent on the war and SARS, rather than on business. So, obviously, there are other things preoccupying people. And, I think that is across the globe. And it is affecting our business.

Let's get real. Semiconductor capital equipment is sold based on long-term investment considerations, not how people are feeling at the present moment. Novellus' true woes are much more fundamental: Its customers -- the semiconductor companies, such as Intel (Nasdaq: INTC) -- are in a record slump because after building massive capacity in the late '90s, there's currently no killer app driving demand for more powerful chips. And that means low demand for Novellus' technology-enhancing chip equipment.

But Novellus seems too bent on rosy thinking to suggest that the current business trends are anything other than an anomaly. When management was asked about the outlook for the second half of 2003, Hill responded with this weak attempt at optimism:

I think [with] everyone in our industry hope springs eternal. …We have been down for a long time, and the question is how long can we continue to be down? And so I think, overall, I think everyone thinks, going forward, things are going to improve.

Maybe so, maybe not. But Fools would do well not to hang their hopes on a stock that's valued at 4.5 times sales.

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