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Is a Slowdown Coming at Novellus?

By Dan Bloom – Updated Nov 15, 2016 at 12:34AM

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The chip equipment supplier had a decent quarter, but memory prices may continue their descent.

Chip equipment supplier Novellus Systems (NASDAQ:NVLS) reported results on April 18 for its first fiscal quarter of 2007, ended March 31. Whether Novellus looks attractive right now probably depends on your opinion of the memory markets.

Revenue came in at $397 million, good for a gain of 7.8% from the previous year. Gross margin also rose to 49.1% from 45.8% last year. The higher revenue and gross margin drove operating margins significantly higher, to 17%, up from just 8% a year ago. The effect on its net income and earnings per share is encouraging -- net more than doubled to $54 million from $25 million last year and EPS rose to $0.42 from $0.19.

The year-over-year performance looks impressive, but Novellus's outlook for the future is more important. Unfortunately, that future looks hazy at best. If you've been paying attention, you know that memory customers' spending has driven the chip-equipment industry, but memory prices -- NAND Flash, NOR Flash, and DRAM -- are in the toilet this year.

Novellus doesn't disclose what fraction of its business comes from memory customers, but at Lam Research (NASDAQ:LRCX) the number was around 70% during its most recent quarter. A significant slowdown would be painful -- and it may be starting. Novellus has seen some push-outs from the memory segment, meaning one or more customers don't want the equipment dropped on their doorsteps as early as originally planned.

While Lam claims that the outlook for memory spending is bright, Novellus seems less sure. Although management tilted toward bullishness, as you would expect. CEO Rick Hill is encouraged: NAND Flash prices have stabilized a bit, and he expects Microsoft's (NASDAQ:MSFT) Windows Vista operating system to drive DRAM demand. Of course, he hasn't put his money where his mouth is. Novellus has an ongoing share repurchase plan, but it didn't make any buys during the quarter.

We'll have to wait and see what happens. NAND flash pricing should stabilize, since it's used in gadgets like Apple (NASDAQ:AAPL) iPods and memory cards for digital cameras. Retailers will need a lot of these gizmos on the shelves for Christmas shoppers, so if memory prices continue their descent, the chip equipment industry may feel some pain.

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Fool contributor Dan Bloom has no financial interest in any company mentioned in this article. He welcomes your comments. The Fool has a disclosure policy.

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