Varian Semi Beats Comfortably - Analyst Blog

Varian Semiconductor Inc. (VSEA) reported fourth quarter 2010 earnings per share (EPS) of 79 cents, substantially exceeding the Zacks Consensus Estimate of 74 cents. The quarter's results were significantly higher than the year-ago quarter and the company's guided range of 70–75 cents, attributable to higher revenues and margins, partially offset by an increased share count and a higher tax rate.

Revenues

Varian reported fourth quarter 2010 total revenue of $258.8 million, up 120.3% from $117.5 million in the year-ago quarter. This was within the company's guided range of $250.0–$260.0 million. The meaningful growth in revenue may be attributed to the increase in revenues across all its operating segments.

Product revenues jumped 128.3% to $240.9 million from $105.5 million in the year-ago quarter. The improvement was due to increased sales of memory and logic tools. Revenue from the Service segment increased 49.7% year over year to $17.9 million.

During the quarter, Varian witnessed unit shipments of 42.0% in Foundry, 36.0% in Memory and 22.0% in Logic. Geographically, Asia contributed 71.0% of total revenue, while North America and Europe contributed 17.0% and 12.0%, respectively.

Operating Results

The fourth quarter gross margin was 49.2%, compared to 45.4% in the comparable quarter last year. The improvement was attributtable to higher production efficiencies, partially offset by an unfavorable product mix.

Operating margin was 26.5%, compared to 8.6% in the year-ago quarter. Total operating expenses surged 35.8% year-over-year to $58.8 million. The increase in operating expenses was mainly due to higher investments in various projects to expand in the core market and tap new markets. An increase in headcount also raised expenses.

Varian reported net income of $59.2 million or 79 cents, up from $7.6 million or 10 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Total cash balance as of October 1, 2010, was $296.3 million versus $44.3 million as of July 2, 2010. Long-term debt was $1.6 million versus $1.8 million in the previous quarter.

Varian resumed its share repurchase program during the quarter and repurchased 672,000 of its outstanding shares for a total value of $18.0 million.

Guidance

For the first quarter of fiscal 2011, Varian expects total revenue in the range of $270.0 million to $280.0 million, gross margin to remain flat sequentially, operating margin to be up roughly 1.0% sequentially, the tax rate to be in the range of 16.0%–17.0% and diluted EPS of between 84 cents and 89 cents.

Recommendation

We believe that fourth 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, we remain slightly concerned about the slowing semiconductor equipment market, which could persist till fiscal 2011. It remains to be seen whether Varian's growing solar opportunities are able to outgrow concerns relating to the semiconductor market.

Currently, Varian has a short-term Sell recommendation, implying a Zacks #4 Rank.