Varian Beats on Revenue Growth - Analyst Blog

Varian Semiconductor Inc. (VSEA) reported first quarter 2011 earnings per share (EPS) of 95 cents, fairly beating the Zacks Consensus Estimate of 87 cents. The quarter's results were significantly higher than the year-ago quarter and the company's guided range of 84–89 cents, attributable to higher revenues and margins.

Moreover, Varian benefited from a reduction in tax rate due to discrete items, including the retroactive benefit of the research and development (R&D) tax credit.

Revenues

Varian reported first quarter 2011 total revenue of $282.6 million, which nearly doubled from $141.3 million in the year-ago quarter. The revenue exceeded the company's guided range of $270.0–$280.0 million. The meaningful growth in revenue may be attributed to the increase in revenues across all its operating segments.

Product revenues leaped 103.6% to $259.6 million from $127.5 million in the year-ago quarter. The improvement was due to increased sales of memory and logic tools. Revenue from the Service segment increased 66.7% year over year to $23.0 million.

During the quarter, Varian witnessed unit shipments of 53.0% in Foundry, 28.0% in Memory and 22.0% in Logic, compared to 42.0%, 36.0% and 19.0%, respectively, in the previous quarter. Geographically, Asia contributed 70.0% of total revenue, while North America and Europe contributed 19.0% and 11.0%, respectively.

Operating Results

Gross profit in the first quarter surged 102.3% year over year to $139.0 million. Gross margin was 49.2%, compared to 48.6% in the comparable quarter last year. The improvement was attributable to production efficiencies, partially offset by an unfavorable product mix.

Operating margin was 27.9%, compared to 14.8% in the year-ago quarter. Total operating expenses surged 25.7% year over year to $60.1 million. The increase in operating expenses was mainly due to higher investments in various projects intended to expand in the core market and tap new markets. An increase in headcount and variable compensation also raised expenses.

Varian reported net income of $71.9 million or 95 cents per share, up from $16.6 million or 22 cents in the year-ago quarter.

Balance Sheet

Cash, equivalents and short-term investments as of December 31, 2010, were $329.3 million versus $296.3 million as of October 1, 2010. Accounts receivables were $212.0 million and inventories were $188.9 million.

Long-term debt was $1.43 million versus $1.6 million in the previous quarter. Capital expenditure for facility and IT improvements came in at $6.0 million.

During the quarter, Varian repurchased 608,000 of its outstanding shares for a total value of $19.0 million.

Guidance

For the second quarter of fiscal 2011, Varian expects total revenue in the range of $315.0 million to $325.0 million, gross margin of roughly 49.0%, operating margin to grow roughly 1.0% sequentially, tax rate of 14.0% and diluted EPS of between $1.02 and $1.07. For the second quarter, Varian expects R&D expenses to increase by approximately $2.4 million and marketing, general, and administrative expenses to rise $3.1 million from the previous quarter. Capital expenditure is expected to be roughly $5.5 million.

Recommendation

We believe that first 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 increase prospects in new markets in fiscal 2011.

However, the semiconductor equipment market appears to be peaking, so overall growth in 2011 will likely be muted. It remains to be seen whether Varian's growing solar opportunities are able to offset the concerns related to the semiconductor equipment market.

Currently, Varian has a short-term Hold recommendation, implying a Zacks #3 Rank.