Earnings Preview: Computer Sciences – Analyst Blog
Computer Sciences Corporation (CSC) is scheduled to announce its third quarter 2012 results on February 8, 2012, and we witness a negative bias in the analysts’ estimates.
Second Quarter Recap
The company reported modest second quarter 2012 results with earnings per share (EPS) of 94 cents, comprehensively beating the Zacks Consensus Estimate of 68 cents. The company’s second quarter 2012 revenues inched up 0.79% year over year to $3.97 billion.
The company witnessed year-over-year revenue growth in the Business Solutions & Services (BSS) and the Managed Service Sector (MSS) segments. Within the commercial segment, strong revenue growth in the BSS segment was somewhat mitigated by the weak MSS performance.
Across the three lines of business, new business awards in the reported quarter were $6.6 billion. North American Public Sector (NPS) contributed $3.1 billion, MSS registered $2.6 billion, and Business Solutions & Services closed $0.9 billion of new business.
CSC posted an operating loss margin of 1.89%, deteriorating considerably from the operating profit margin of 7.75% in the year-ago quarter. The margin was negatively impacted by higher cost of services and a significant goodwill impairment charge during the quarter.
The company exited the quarter with $978.0 million in cash and cash equivalents, down from $1.67 billion reported in the previous quarter. CSC had a total debt balance of $3.26 billion with a debt-to-capitalization ratio of 40.8%.
While guiding for fiscal 2012, the company included the contribution from the iSoft acquisition. CSC expects new business awards in excess of $17 billion; revenues of approximately $16.5-$16.7 billion; operating margin of 6.00% and EPS of approximately $4.05-$4.10. Free cash flow is expected to be equal to or greater than 90% of net income for the year.
Agreement of Analysts
Out of the 12 analysts providing estimates for the third quarter, only one analyst lowered the estimate over the last 30 days. Out of the 10 analysts covering the stock for fiscal 2012, one analyst lowered the estimate in the last 30 days, while none moved in the opposite direction. Similarly, for fiscal 2013, out of the 13 analysts tracking the stock, three analysts lowered their estimates in the last 30 days, while none moved in the opposite direction.
The company has recently resumed discussions with NHS and Cabinet officials regarding the memorandum of understanding (MOU), which included proposed re-negotiated terms of the contract. However, the company later on informed that neither the MOU nor the most recently discussed contract amendment would be approved by the UK government.
As a result of this new development, CSC would have to realize a material impairment in the third quarter of 2012 on its net investment in the contract. This impairment could be equal to CSC's net investment for the contract ($1.5B as of Nov. 30, 2011) and may also include some other costs, leading CSC to lower its previously provided fiscal year 2012 guidance.
Analysts are also of the opinion that issues other than the NHS contract may pose a considerable challenge to CSC. These include the Audit Committee investigation into CSC's accounting practices initiated in May 2011, which will lead to significant legal and accounting costs.
Secondly, the company is also entangled with a class action lawsuit by multiple shareholders who allege violations of securities laws in connection with business representation. A decision on the same issue is pending, and may result in potential losses if it goes against the company.
Magnitude of Estimate Revisions
The magnitude of revisions is also substantial since CSC reported its second quarter results. Overall, estimates for the upcoming quarter have gone down from $1.17 to 57 cents in the last 90 days.
For fiscal 2012, estimates have decreased to $3.68 from $4.30 in the last 90 days. Moreover, for fiscal 2013, the estimates have gone down from $4.62 to $3.71 over the same period.
Recommendation
We are apprehensive about the intense competition in the IT and cloud computing space from both big and small players such as Accenture (ACN) and Hewlett-Packard Company (HPQ). Moreover, with government orders expected to dry up to a certain extent and the NHS problem persisting, lingering legal issues are also making it difficult for Computer Sciences.
Moreover, the demand for the company’s products in Europe is not encouraging for the upcoming quarters.
The company has a Zacks #5 Rank, implying a short-term Strong-Sell rating.
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Nordstrom Reports Higher Comps – Analyst Blog
One of the leading fashion specialty retailers in the United States, Nordstrom Inc. (JWN), once again reported a robust growth in its comparable store sales for the four-week period ended January 28, 2012. The January results marked the 28th consecutive month of comparable-store sales growth.
The company’s January same-store sales grew by 5% compared with 4.8% in the four-week period ended January 29, 2011. Total retail sales climbed 13.2% to $688 million from $607 million for the four-week period ended January 29, 2011. Strong sales of handbags and cosmetics along with better performance in the South and Midwest facilitated the company to post solid January sales results.
Fourth Quarter 2011 Sales
The company’s comparable sales for the fourth quarter increased 7.1% from the prior-year quarter. Total retail sales during the period surged 12.5% to $3.17 billion compared with a total retail sales of $2.82 billion in the prior-year quarter.
Fiscal 2011 Sales
Moreover, Nordstrom's fiscal 2011 comparable sales grew by 7.2% year over year. Total retail sales for the period increased 12.7% to $10.50 billion from $9.31 billion reported in the prior-year period.
As of January 28, 2012, Nordstrom had 117 Nordstrom full-line stores, 104 Nordstrom Racks, 2 Jeffrey boutiques, 1 treasure&bond store and 1 clearance store. Same-store sales at Nordstrom stores (including Nordstrom full-line stores and Direct) increased 5.3% in January, while Nordstrom Rack reported a rise of 1.3% for the four-week period ended January 28, 2012.
During the fourth quarter, the company’s same-store-sales increased 8.4% at Nordstrom Stores and 2.2% at Nordstrom Rack. For fiscal 2011, the company reported an increase of 8.2% in same-store sales at Nordstrom stores and a rise of 3.7% at Nordstrom Rack.
Peer Performance
One of Nordstrom’s competitors, Gap Inc.’s (GPS) registered a decline of 4% in same-store sales in January 2012, while its net sales came in at $833 million compared with $843 million in the year-ago period.
Conclusion
Nordstrom remains focused on expanding its store network to drive top-line growth. However, a sluggish discretionary spending environment, intense competition and exposure to seasonal fluctuations will keep us on the sidelines.
Based in Seattle, Washington, Nordstrom Inc. is a leading fashion specialty retailer in the U.S., offering high quality apparel, shoes, cosmetics and accessories for men, women and kids. The company offers both branded and private label merchandise, as well as a private label card, two Nordstrom VISA credit cards and debit cards for Nordstrom purchases.
Nordstrom maintains a Zacks #3 Rank, which translates into a short-term Hold rating. Our long-term recommendation on the stock remains Neutral.
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Nordstrom Reports Higher Comps – Analyst Blog
One of the leading fashion specialty retailers in the United States, Nordstrom Inc. (JWN), once again reported a robust growth in its comparable store sales for the four-week period ended January 28, 2012. The January results marked the 28th consecutive month of comparable-store sales growth.
The company’s January same-store sales grew by 5% compared with 4.8% in the four-week period ended January 29, 2011. Total retail sales climbed 13.2% to $688 million from $607 million for the four-week period ended January 29, 2011. Strong sales of handbags and cosmetics along with better performance in the South and Midwest facilitated the company to post solid January sales results.
Fourth Quarter 2011 Sales
The company’s comparable sales for the fourth quarter increased 7.1% from the prior-year quarter. Total retail sales during the period surged 12.5% to $3.17 billion compared with a total retail sales of $2.82 billion in the prior-year quarter.
Fiscal 2011 Sales
Moreover, Nordstrom's fiscal 2011 comparable sales grew by 7.2% year over year. Total retail sales for the period increased 12.7% to $10.50 billion from $9.31 billion reported in the prior-year period.
As of January 28, 2012, Nordstrom had 117 Nordstrom full-line stores, 104 Nordstrom Racks, 2 Jeffrey boutiques, 1 treasure&bond store and 1 clearance store. Same-store sales at Nordstrom stores (including Nordstrom full-line stores and Direct) increased 5.3% in January, while Nordstrom Rack reported a rise of 1.3% for the four-week period ended January 28, 2012.
During the fourth quarter, the company’s same-store-sales increased 8.4% at Nordstrom Stores and 2.2% at Nordstrom Rack. For fiscal 2011, the company reported an increase of 8.2% in same-store sales at Nordstrom stores and a rise of 3.7% at Nordstrom Rack.
Peer Performance
One of Nordstrom’s competitors, Gap Inc.’s (GPS) registered a decline of 4% in same-store sales in January 2012, while its net sales came in at $833 million compared with $843 million in the year-ago period.
Conclusion
Nordstrom remains focused on expanding its store network to drive top-line growth. However, a sluggish discretionary spending environment, intense competition and exposure to seasonal fluctuations will keep us on the sidelines.
Based in Seattle, Washington, Nordstrom Inc. is a leading fashion specialty retailer in the U.S., offering high quality apparel, shoes, cosmetics and accessories for men, women and kids. The company offers both branded and private label merchandise, as well as a private label card, two Nordstrom VISA credit cards and debit cards for Nordstrom purchases.
Nordstrom maintains a Zacks #3 Rank, which translates into a short-term Hold rating. Our long-term recommendation on the stock remains Neutral.
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J.B. Hunt Raises Dividend – Analyst Blog
J.B. Hunt Transport Services (JBHT) recently announced that its board of directors has increased the quarterly cash dividend payment by 7.7% to 14 cents per share paid previously in 2011. This represents an annual dividend of 56 cents per share. The increased dividend will be paid on February 24 to shareholders of record on February 14.
Despite the ongoing upheaval in the truck market, J.B. Hunt continues to maintain its yearly growth in shareholder returns. The company paid quarterly dividends of 10 cents, 11 cents and 12 cents per share in 2008, 2009 and 2010, respectively. Further, it increased the quarterly dividend payment to 13 cents per share for 2011.
Besides dividend payment, the company also repurchased 6 million shares for a total cost of $246 million in fiscal 2011 and initiated a new share repurchase program of $500 million. As of December 31, 2011, the company had $503 million remaining in its share repurchase authorization.
We believe that the increasing returns to shareholders follows from stronger freight demand, thanks to the company’s diversified business model and improving price mix.
In the recently concluded fourth quarter of 2011, J.B. Hunt gave a superior earnings performance that surpassed the consensus estimate and grew approximately 23% from the year-ago level. The current growth trend in freight rates arising from a tighter truckload market along with the growing demand for intermodal and higher fuel surcharges remained the key growth drivers for the company.
However, volatility in fuel prices remains a key concern for J.B. Hunt. The company’s fuel surcharge revenue program enables it to recover the majority of fuel price hikes from customers. However, the company incurs costs when fuel price increases cannot be fully recovered due to engines being idled during cold or warm weather or due to empty or out-of-route miles that cannot be billed to customers.
Additionally, the changing environment in the trucking industry due to highway-to-rail conversion also has an adverse impact on the company’s truck segment. J.B. Hunt also remains exposed to competition from transportation and logistics companies like YRCW Worlwide (YRCW) and Con-Way Inc. (CNW).
Consequently, we are maintaining our long-term Neutral recommendation on J.B. Hunt, with a Zacks Rank of #3 (Hold).
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J.B. Hunt Raises Dividend – Analyst Blog
J.B. Hunt Transport Services (JBHT) recently announced that its board of directors has increased the quarterly cash dividend payment by 7.7% to 14 cents per share paid previously in 2011. This represents an annual dividend of 56 cents per share. The increased dividend will be paid on February 24 to shareholders of record on February 14.
Despite the ongoing upheaval in the truck market, J.B. Hunt continues to maintain its yearly growth in shareholder returns. The company paid quarterly dividends of 10 cents, 11 cents and 12 cents per share in 2008, 2009 and 2010, respectively. Further, it increased the quarterly dividend payment to 13 cents per share for 2011.
Besides dividend payment, the company also repurchased 6 million shares for a total cost of $246 million in fiscal 2011 and initiated a new share repurchase program of $500 million. As of December 31, 2011, the company had $503 million remaining in its share repurchase authorization.
We believe that the increasing returns to shareholders follows from stronger freight demand, thanks to the company’s diversified business model and improving price mix.
In the recently concluded fourth quarter of 2011, J.B. Hunt gave a superior earnings performance that surpassed the consensus estimate and grew approximately 23% from the year-ago level. The current growth trend in freight rates arising from a tighter truckload market along with the growing demand for intermodal and higher fuel surcharges remained the key growth drivers for the company.
However, volatility in fuel prices remains a key concern for J.B. Hunt. The company’s fuel surcharge revenue program enables it to recover the majority of fuel price hikes from customers. However, the company incurs costs when fuel price increases cannot be fully recovered due to engines being idled during cold or warm weather or due to empty or out-of-route miles that cannot be billed to customers.
Additionally, the changing environment in the trucking industry due to highway-to-rail conversion also has an adverse impact on the company’s truck segment. J.B. Hunt also remains exposed to competition from transportation and logistics companies like YRCW Worlwide (YRCW) and Con-Way Inc. (CNW).
Consequently, we are maintaining our long-term Neutral recommendation on J.B. Hunt, with a Zacks Rank of #3 (Hold).
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When "Insider" Greed Is Good – Weekend Wisdom
What do Michael Dell and Sam Susser have in common?Both are CEOs who bought shares of their own companies in 2011 just before the share prices moved higher.
You have probably heard of Michael Dell, the CEO of Dell Corporation. In 2010 and 2011, he made a big statement by buying $250 million worth of shares in Dell, including a single $150 million transaction, even though he already owns a gazillion shares. Dell shares were up 5% within 5 days of the news of his $150 million buy.
But who is Sam Susser?
He's the CEO of Susser Holdings Corporation, which operates convenience stores in Texas, New Mexico, Oklahoma and Louisiana. On Dec 7, 2011 he bought 25,000 shares worth $543,750. It was his largest open market share purchase since October 2006, when he bought 68,750 shares.
Since the day of his purchase on Dec 7 through the close on Feb 2, Susser Holdings stock has risen 14.1%.
Clearly it is beneficial for investors to follow insider buying activity. But digging below the surface to find the obscure purchases by folks like Sam Susser is a worthwhile pursuit. Read on to learn how to do this on a regular basis.
Insider Buying Sends a Strong Signal
Why would these two CEOs spend their own hard-earned cash on their own companies' stock when they already own a ton of shares already?
Greed.
Pure and simple.
---------------------------------------------------------------------------------
Insider Trading Edge Until Sunday
Insiders must report major buys and sells of their own companies' stocks. Tests show that if you follow selected officers and transactions, you can actually TRIPLE Zacks #1 gains. Even during the Great Recession, such gains reached double digits.
Don't worry, this approach to insider trading is legal and ethical. Extreme demand closed it to new investors last September, but it's now open to you again until Sunday, February 5.
---------------------------------------------------------------------------------
The opportunity to make more money motivates people -- even people who are already billionaires like Michael Dell.
If top insiders are buying, it's because they know something very good is going on at the company. Maybe it is a new product. Or contract. Or pending merger. Whatever the reason, they are very confident that shares will be on the rise. After all, who would buy more stock in a company if they knew it was sinking???
Buy When the Insiders Buy
When high level insiders buy, they are required to report the purchases to the SEC within 48 hours of the trade. The trade then becomes public information.
Hedge funds and other professional investors routinely use this information to get an edge on their trades.
For most of us, though, it's not easy to get access to the insider information. While the media will trumpet huge insider buys like Michael Dell's $150 million purchase, did you hear anything about Sam Susser's $543,750 purchase?
The challenge is getting easy and reliable access to all the insider trades and then figuring out which ones to buy.
Where to Find the Insider Buys
Anyone can go on the SEC website and get the insider trading information, but it's time consuming to search by individual companies.
Some investment firms collect the insider buying data and can provide it to you as a weekly list. Have you ever seen one of those lists? The sheer number of companies can be overwhelming.
And then when you get the list, if there are 100 companies on it, how do you know which companies are the best to invest in?
We'll Give You the Trades
To solve this problem, our Zacks research team developed a strategy that monitors selected insider buying activity at companies that already show strong earnings momentum and attractive valuations. Tests show that this Insider Trader approach can triple the performance of even Zacks #1 Rank Strong Buy stocks. It even produced impressive profits during the heart of the bear market in 2008.
Today, you're welcome to share these insider stocks, but access must be limited. Unusually high demand from the Zacks community forced us to close the strategy to new investors last September, and it must close again Sunday, February 5.
Learn more now about Zacks Insider Trader>>
Best,
Tracey Ryniec
Tracey is Zacks' value strategist and is the Editor in Charge of our Insider Trader.
To read this article on Zacks.com click here.
Zacks Investment Research
When "Insider" Greed Is Good – Weekend Wisdom
What do Michael Dell and Sam Susser have in common?Both are CEOs who bought shares of their own companies in 2011 just before the share prices moved higher.
You have probably heard of Michael Dell, the CEO of Dell Corporation. In 2010 and 2011, he made a big statement by buying $250 million worth of shares in Dell, including a single $150 million transaction, even though he already owns a gazillion shares. Dell shares were up 5% within 5 days of the news of his $150 million buy.
But who is Sam Susser?
He's the CEO of Susser Holdings Corporation, which operates convenience stores in Texas, New Mexico, Oklahoma and Louisiana. On Dec 7, 2011 he bought 25,000 shares worth $543,750. It was his largest open market share purchase since October 2006, when he bought 68,750 shares.
Since the day of his purchase on Dec 7 through the close on Feb 2, Susser Holdings stock has risen 14.1%.
Clearly it is beneficial for investors to follow insider buying activity. But digging below the surface to find the obscure purchases by folks like Sam Susser is a worthwhile pursuit. Read on to learn how to do this on a regular basis.
Insider Buying Sends a Strong Signal
Why would these two CEOs spend their own hard-earned cash on their own companies' stock when they already own a ton of shares already?
Greed.
Pure and simple.
---------------------------------------------------------------------------------
Insider Trading Edge Until Sunday
Insiders must report major buys and sells of their own companies' stocks. Tests show that if you follow selected officers and transactions, you can actually TRIPLE Zacks #1 gains. Even during the Great Recession, such gains reached double digits.
Don't worry, this approach to insider trading is legal and ethical. Extreme demand closed it to new investors last September, but it's now open to you again until Sunday, February 5.
---------------------------------------------------------------------------------
The opportunity to make more money motivates people -- even people who are already billionaires like Michael Dell.
If top insiders are buying, it's because they know something very good is going on at the company. Maybe it is a new product. Or contract. Or pending merger. Whatever the reason, they are very confident that shares will be on the rise. After all, who would buy more stock in a company if they knew it was sinking???
Buy When the Insiders Buy
When high level insiders buy, they are required to report the purchases to the SEC within 48 hours of the trade. The trade then becomes public information.
Hedge funds and other professional investors routinely use this information to get an edge on their trades.
For most of us, though, it's not easy to get access to the insider information. While the media will trumpet huge insider buys like Michael Dell's $150 million purchase, did you hear anything about Sam Susser's $543,750 purchase?
The challenge is getting easy and reliable access to all the insider trades and then figuring out which ones to buy.
Where to Find the Insider Buys
Anyone can go on the SEC website and get the insider trading information, but it's time consuming to search by individual companies.
Some investment firms collect the insider buying data and can provide it to you as a weekly list. Have you ever seen one of those lists? The sheer number of companies can be overwhelming.
And then when you get the list, if there are 100 companies on it, how do you know which companies are the best to invest in?
We'll Give You the Trades
To solve this problem, our Zacks research team developed a strategy that monitors selected insider buying activity at companies that already show strong earnings momentum and attractive valuations. Tests show that this Insider Trader approach can triple the performance of even Zacks #1 Rank Strong Buy stocks. It even produced impressive profits during the heart of the bear market in 2008.
Today, you're welcome to share these insider stocks, but access must be limited. Unusually high demand from the Zacks community forced us to close the strategy to new investors last September, and it must close again Sunday, February 5.
Learn more now about Zacks Insider Trader>>
Best,
Tracey Ryniec
Tracey is Zacks' value strategist and is the Editor in Charge of our Insider Trader.
To read this article on Zacks.com click here.
Zacks Investment Research
Another Deal Win for Accenture – Analyst Blog
Management and technology consulting major Accenture plc (ACN) announced a deal with 12 southeast Minnesota counties for the development of a human services delivery model focused on shifting them from a county-based to a regional approach. This is partially funded by the Bush Foundation.
Accenture would be instrumental in laying out a strategic plan, including the business case, redesigned operating model and implementation roadmap for the development of a multi-county framework for human services delivery.
Although the terms of the deal were not disclosed, we believe that this is an innovative venture, which may also work for other counties of the US, thereby generating a new line of business for the company.
Moreover, the company also introduced “Accenture Citizen Self-Service Portal Version 2.0,” which will enable the citizens to electronically access their caseworkers as well as the benefit application process. The portal is expected to provide greater self-sufficiency for social service beneficiaries, thus facilitating further agency expansion and opening up a new channel for citizens to interact with government case workers in a secure environment.
This software is specially designed for public service to help meet the needs of social service agencies and the people served by those agencies. This will enhance the company’s Public Service Platform and will help public agencies better manage human services delivery costs.
The deal flow and new business initiatives continue to flow for Accenture, and we expect the momentum to continue based on the company’s decision to continue to invest in priority industries (such as communications and public services) and emerging markets, where it will focus on further building its brand value. We believe that the company’s confidence in adopting such a strategy in the backdrop of lingering global concerns is powered by its five consecutive quarters of outperformance.
However, increasing competition from IBM Corp. (IBM), a strained spending environment and Accenture’s broad European exposure may temper growth prospects to some extent.
Currently, Accenture has a short-term Hold rating, denoted by the Zacks #3 Rank.
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Another Deal Win for Accenture – Analyst Blog
Management and technology consulting major Accenture plc (ACN) announced a deal with 12 southeast Minnesota counties for the development of a human services delivery model focused on shifting them from a county-based to a regional approach. This is partially funded by the Bush Foundation.
Accenture would be instrumental in laying out a strategic plan, including the business case, redesigned operating model and implementation roadmap for the development of a multi-county framework for human services delivery.
Although the terms of the deal were not disclosed, we believe that this is an innovative venture, which may also work for other counties of the US, thereby generating a new line of business for the company.
Moreover, the company also introduced “Accenture Citizen Self-Service Portal Version 2.0,” which will enable the citizens to electronically access their caseworkers as well as the benefit application process. The portal is expected to provide greater self-sufficiency for social service beneficiaries, thus facilitating further agency expansion and opening up a new channel for citizens to interact with government case workers in a secure environment.
This software is specially designed for public service to help meet the needs of social service agencies and the people served by those agencies. This will enhance the company’s Public Service Platform and will help public agencies better manage human services delivery costs.
The deal flow and new business initiatives continue to flow for Accenture, and we expect the momentum to continue based on the company’s decision to continue to invest in priority industries (such as communications and public services) and emerging markets, where it will focus on further building its brand value. We believe that the company’s confidence in adopting such a strategy in the backdrop of lingering global concerns is powered by its five consecutive quarters of outperformance.
However, increasing competition from IBM Corp. (IBM), a strained spending environment and Accenture’s broad European exposure may temper growth prospects to some extent.
Currently, Accenture has a short-term Hold rating, denoted by the Zacks #3 Rank.
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Novellus Sees Improving Trends – Analyst Blog
Novellus Systems (NVLS) reported fourth quarter earnings that missed the Zacks Consensus by 2 cents, or 4.4%. Both revenue and margins were better than guided, although the tax rate was much higher.
Shares were up just 0.32% in after-hours trading, as the upside is likely to be short-lived, given that semi capex spending is not expected to be exceptional this year. In line with market expectations, heavy-weights Intel Corp (INTC), Taiwan Semiconductor Manufacturing Company (TSM) and Globalfoundries are expecting to spend less this year.
Revenue
Novellus reported revenue of $306.7 million, down 7.8% sequentially and 26.4% year over year, better than management’s guidance range of $$260-290 million and street expectations of $277.2 million.
Revenue by Geography
Asia remained the largest contributor to Novellus’ revenues in the last quarter, with a 53% revenue share. However, revenues from Asia were down 7.8% sequentially and 37.1% from a year ago. The sequential decline was due to weakness in Japan and Korea, which were down 44.7% and 12.2%, respectively.
The Greater China region rebounded after a weak third quarter, growing 13.1%. Overall, Greater China, Korea and Japan contributed 27%, 20% and 6% of quarterly revenue, respectively.
Approximately 35% of revenue came from the U.S., which was down 10.4% sequentially and up 3.0% year over year. Novellus is very strongly positioned here and should see improvement as market conditions improve.
Europeaccounted for the remaining 12% of revenue, which was flat sequentially sequentially and down 32.1% year over year.
Sequential fluctuations in revenue from different geographies is not that indicative of Novellus’ performance, since a certain amount of lumpiness is natural given the high-value low-volume equipment that it sells.
Orders
Orders were up 26.4% sequentially and down 30.1% year over year. In the last quarter, Novellus saw its orders touch $286.9 million. Backlog increased 4.6%. Novellus did not mention the lead time, so we assume that it remained at 12-16 weeks, slightly higher than the normal 12-week range.
Margins
The pro forma gross margin for the quarter was 46.8%, down 145 basis points (bps) from the previous quarter’s 48.2% and at the higher end of the guided range of 46% (+/- 1%). Novellus’ long-term target of 52-54% seems very far away right now and given that the semi capex market is likely to remain depressed, there may not be much improvement until the back half of 2012.
Operating expenses of $89.2 million were down 3.6% sequentially and 6.0% year over year. The operating margin was 15.2%, down 282 bps from 18.0% recorded in the previous quarter and down 1,113 bps from 26.3% reported in the year-ago quarter. As a percentage of sales, all expenses except R&D increased both sequentially and year over year. R&D was flat sequentially after increasing very significantly in the previous quarter.
Net Income
Novellus reported pro forma net income of $30.8 million or a 10.9% net income margin, compared to $50.5 million or 16.5% in the previous quarter and $94.3 million or 24.5% in the year-ago quarter.
Including restructuring charges, a one-time gain from the trial with Linear Technologies (LLTC), gain on the sale of an IAG building, merger-related costs and the associated tax impact, the GAAP net income was $38.5 million or 56 cents a share compared to $51.1 million or 73 cents in the September 2011 quarter and $81.5 million or 89 cents a share in the December quarter of 2010.
Balance Sheet
Inventories were down 1.4%, with inventory turns going from 2.9X to 2.8X. Days sales outstanding (DSOs) went from 66 to 61. Novellus ended with cash and short term investments of $918.7 million ($13.80 per share), up $182.1 million during the quarter. In the last quarter, Novellus generated $84.7 million in cash from operations, spending $10.0 million on capex and $9.4 million on share repurchases.
Guidance
For the first quarter, Novellus expects orders to be up 20-30%, with shipments coming in at $300-330 million. Revenues are expected to grow 6-17% to $300-330 million, much better than street expectations of around $288 million. As a result, gross margins will go up to 47% (+/- 1%).
Based on a tax rate of 10% (+/- 2%) and a share count of 76 million, the GAAP earnings are expected to come in at 71 to 86, including a one-time tax benefit of 21 cents. Therefore, the non-GAAP EPS of 50 to 71 cents is much better than the Zacks Consensus of 50 cents.
Our Take
Novellus’ fourth quarter results were better than expected, due to stronger demand from both foundry and logic customers. Management appeared optimistic on account of the upcoming PC refresh cycle driven by the adoption of solid state drives for notebooks. Novellus expects these trends, along with 3D NAND and mobile DRAM to drive demand at both logic and foundry customers.
While the increase in orders is welcome at any time, the more encouraging takeaway was the growth in backlog, which saw double-digit declines in the two preceding quarters.
Add to this, the company’s strong market position, and broad exposure to both Asian and U.S.-based manufacturers. We think this positioning will play a key role in 2012 and beyond.
We therefore have a short-term (1-3 months) Strong Buy recommendation on the shares.
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