VSEA Varian Semiconductor (MM)

Varian Semiconductor Inc. (VSEA) reported second quarter 2011 earnings per share (EPS) of $1.07, inching past the Zacks Consensus Estimate by a penny. The quarter’s results were significantly higher than the year-ago quarter and the upper end of the company’s guided range of $1.02–$1.07, attributable to higher revenues and margins.

Revenues

Varian reported second quarter 2011 total revenue of $330.0 million, up 61.8% from $204.0 million in the year-ago quarter. The revenue exceeded the company’s guided range of $315.0-$325.0 million and the Zacks Consensus Estimate of $321.0 million. The phenomenal growth in revenue may be attributed to the increase in contribution across all its operating segments.

Product revenues jumped 63.7% to $313.1 million from $191.3 million in the year-ago quarter. The improvement was driven by increased sales of memory and logic tools. Revenue from the Service segment increased 33.1% year over year to $23.0 million.

The company’s solar ion implant tool Solion continued to gain traction with solar cell manufacturers during the quarter.

Varian’s unit shipments were 52.0% from Foundry, 22.0% from Memory and 46.0% from Logic, compared to 53.0%, 28.0% and 22.0%, respectively, in the previous quarter. Geographically, Asia contributed 68.0% of total revenue, while North America and Europe contributed 23.0% and 9.0%, respectively.

Operating Results

Gross profit in the second quarter surged 62.1% year over year to $161.8 million. Gross margin was 49.0%, compared to 48.9% in the comparable quarter last year. The marginal improvement was attributable product mix.

Operating margin was 28.8%, compared to 21.3% in the year-ago quarter. Total operating expenses surged 18.1% year over year to $66.5 million. The increase in operating expenses was mainly due to higher investments in various projects aimed at growth in the core market and tapping of new ones. An increase in headcount and variable compensation also raised expenses.

Varian reported net income of $82.3 million or $1.07 per share, up from $38.6 million or 51 cents in the year-ago quarter.

Balance Sheet

Cash, equivalents and short-term investments as of March 31, 2011, were $421.9 million versus $329.3 million as of December 31, 2010. Accounts receivables were $222.1 million and inventories were $212.3 million.

During the quarter, Varian repurchased 543,000 of its outstanding shares for a total value of $20.0 million.

Guidance

For the third quarter of fiscal 2011, Varian expects total revenue in the range of $323.0 million to $333.0 million, gross margin to be 0.5% lower than the second quarter, operating margin of between 27.0% and 28.0%, a tax rate of between 16.0% and 17.0%, and diluted EPS of between 97 cents and $1.02.

Varian expects research and development (R&D) expenses to increase by approximately $1.6 million and marketing, general, and administrative expenses to increase $0.6 million from the previous quarter. Capital expenditure is expected to be roughly $6.5 million.

Varian commented that it will continue to commit significant R&D and marketing resources to the development of new products and markets.

Recommendation

We believe that second quarter results are encouraging given the solid year-over-year revenue growth and higher-than-expected EPS. Moreover, we are encouraged by the introduction of Trident, the new high current tool and Solion, the solar ion implant tool, which are expected to strengthen Varian’s existing market position and improve prospects in new markets.

However, we think that Japan issues and the Solion roll-out will keep a lid on the gross margin in the near term. Competitive pressure from Axcelis Technologies Inc. (ACLS) and Nissin Electric Co. Ltd. is also a concern.

Currently, Varian has a Zacks #2 Rank, which translates into a short-term Buy recommendation.

 
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