Axcelis Technologies Inc (ACLS) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the Axcelis' second quarter 2007 earnings release conference call. As a reminder, today's call is being recorded. Later we will conduct a question-and-answer session and instructions will follow at that time. For opening remarks and introductions I would now like to turn the call over to Mr. Steve Bassett, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Good afternoon. This is Steve Bassett, Executive Vice President and Chief Financial Officer for Axcelis Technologies. Welcome to our conference call to discuss our results for the second quarter of 2007. If you have not received a copy of our press release issued earlier this afternoon, it is available on our Website.

With me today, are Mary Puma, Chairman and Chief Executive Officer; and Mark Namaroff our Senior Vice President of Strategic Marketing. After the prepared remarks there will be time for questions. Playback service will be available on our Website as described in our press release.

Please note, that comments made today about our expectations for future revenues, profits and other results are forward-looking statements under the SEC's Safe Harbor provision. These forward-looking statements are based on management's current expectations and are subject to risks inherent in our business. These risks are described in detail in our Form 10-K annual report and other SEC filings, which we urge you to review. Our actual results may differ materially from our current expectation expectations we do not assume any obligation to update these forward-looking statements.

Operating results for the second quarter were in line with our expectations. We reported net income of $4.7 million or $0.05 per share on revenues of $110 million. Net income includes tax benefits of approximately $1 million from the realization of foreign tax credits. Revenues from systems sales came in at approximately $67 million, in line with our projections. From a product perspective, our implant business accounted for 76% of total shipments.

Service revenues declined from Q1 levels to $41 million, while our overall service business remains strong and continues to generate margins that are accretive to the business as a whole, low fab utilization negatively impacted the sale of spare parts. We expect the service business to remain at this revenue level through the third quarter. The decrease in service revenues drove gross margins to slightly lower levels than originally forecast, resulting in margins of approximately 40% for the quarter overall.

New system orders were $34 million, compared to $55 million in the preceding quarter, reflecting the market slowdown that we commented on at the end of Q1. We expect the softness in the overall market to continue but we do expect systems orders to increase in Q3. Based on the geographic location of the fab, Asia accounted for 86% of systems orders with 7% coming from the U.S. and 7% from Europe.

Memory manufacturers accounted for 73% of new systems bookings, with logic at 9% and foundries at 18%. R&D spending and SG&A expenses were approximately $41 million, slightly lower than originally forecast due mainly to timing of material usage for research and development. The contribution from SEN, our 50% joint venture in Japan, consisted of $1.4 million in royalties and $1.9 million of equity income, representing Axcelis' share of its net earnings.

Looking forward to the third quarter, Axcelis' revenues are projected to be in the range of $110 million to $120 million, of which $20 to $25 million will come from Optima products. As we have said in our previous earnings calls, revenue from new products will result in margin pressure throughout the last half of 2007. As a result, we expect gross margins in Q3 to be slightly below second quarter levels.

Operating expenses are forecast to approximate Q2 spending levels. Equity earnings from SEN are projected at $1 million, as SEN's business is experiencing the affects of the market slowdown in Japan. And net income is forecast at $0.02 per share.

Before I turn the call over to Mary, let me make a couple of comments about the balance of the year. Although we don't provide specific guidance more than one quarter out, I'd like to give you some commentary on what we see for the fourth quarter. We expect earnings and revenues to increase over third quarter levels. However, we will experience continuing margin pressure from revenue recognized on new Optima products.

Although impacted by the softening semiconductor equipment market, our core products and service businesses continue to perform well. More importantly, however, and Mary will speak to this in more detail in a moment, we are making progress with the Optima HD. And we continue to expect the Optima platform, both HD and MD, to contribute meaningfully to our top line results in the back half of the year. I will now turn the call over to Mary.

Thank you, Steve. And thank all of you for joining us. As Steve just discussed, second quarter results came in within our guidance. As expected, weakness in the semiconductor market has resulted in some softness in our base business. Although market conditions have adversely impacted our short-term financial results, our most significant lever for profitable growth, and therefore, the most important issue on the minds of our shareholders, employees and the management team here at Axcelis, is the progress of the Optima platform.

So I will spend a few minutes focusing on this. We understand that there are many questions about our progress on the Optima HD program. We acknowledge that the pace of orders and shipments has not met expectations over the last few quarters. We want to assure you that we are aggressively executing against our program plans and we continue to believe that the Optima HD is a game-changer for both Axcelis and our customers. We remain truly optimistic about the opportunities that it presents.

When we kicked off the Optima HD program, we recognized that we were late to market with the single-wafer high dose tool. As a result, we set aggressive goals from the onset of the program. Our expectation was that these plans would significantly shorten our time to market. The reality is, that in spite of this, we have not closed the gap quickly enough. While we are shipping tools and have tools in volume production, we are taking actions to accelerate the Optima HD program, including assigning additional manufacturing resources, augmenting our strong technical team with experienced implant talent, and placing expert Axcelis resources at customer sites to ensure that equipment performance meets their needs.

These efforts are yielding positive results and will accelerate our performance moving forward. I would like to reiterate our expectation that our Optima HD penetrations will pick up in the third and fourth quarters and continue into 2008. We have full confidence in the Optima HD's performance and ability t to capture future business. We have customers already using multiple Optima HD's in volume manufacturing and others qualifying tools for production.

More customers are evaluating the tool and are telling us that it provides distinct competitive advantages. The major advantages are related to the more compact spot theme architecture of the Optima HD platform. As a result, the standard Optima HD has proven, in head-to-head competition, to have superior productivity due to higher beam current and faster tuning.

We're also hearing from numerous customers that they are very concerned about energy contamination and advanced technology nods caused by the required use of significant amounts of D cell in competitors' tools. The Optima HD only uses D cell in minimal amounts that are not detrimental to customers' yields. If you ask our customers directly, they will tell you that this inherent process difference will factor heavily into future device development and tool selection.

The Optima HD Imax incorporates leading edge molecular technology into a traditional beamline implant architecture. This provides significant productivity advantages at lower energies and higher doses, with minimal risk. Many customers are telling us that molecular implant is the wave of the future and we are working closely with them to develop emerging applications beyond dual poly gate on the Optima HD Imax. We expect that our significant investments and lead in time-to-market in the use of molecular implant technology will result in a competitive advantage.

Overall, customers clearly understand that the Optima HD platform's flexibility, extendibility and process capabilities will enhance their performance, productivity and ultimately yield. We are confident that the Optima HD is a winner. Before I turn to questions, I want to provide a few brief comments on dry strip and the performance of SEN, our Japanese joint venture.

We continue to make progress in dry strip. During the quarter, we received another high volume capacity order and shipped multiple RapidStrip and RadiantStrip tools to several key customers. Our outlook for dry strip is positive and we expect to maintain our momentum with new products that we will talk more about later this year. Products that will enhance process performance and productivity.

Despite competitive efforts and the fact that the Japanese market has cooled somewhat, SEN continues to dominate implant in Japan. SEN is making significant progress with their single-wafer high-current tool, the SHX. And has secured design wins for the SHX at large logic, flash and memory customers in Japan.

During the quarter, Axcelis and our joint venture partner, Sumitomo Heavy Industries, signed an agreement regarding dividend distribution. Yesterday, Axcelis received a $6.8 million dividend for SEN's last fiscal year. This amount brings total dividends received from SEN in 2007 to more than $12 million. This dividend agreement represents a new way for Axcelis to benefit from our investment in this very successful joint venture.

SEN is an important Axcelis asset, and we meet regularly with Sumitomo Heavy Industries to discuss the long-term strategy for SEN. We are joint committed to enhancing the value of SEN and we remain confident about its prospects.

In closing, I would like to emphasize that the Axcelis team is focused on accelerating the Optima HD program. We are working very intensely with key customers and our recent progress has been encouraging. We believe that the Optima HD will offer customers an extendible high-dose implanter that meets their needs as they address challenging current and emerging applications.

Later this year, we will launch the Optima HE, a single-wafer high-energy tool that will complement Axcelis' market share leading paradigm high energy implanter. The release of the Optima HE is well-timed to meet customer demand for a single-wafer high energy product. I look forward to updating you next quarter on our progress. And with that, Steve, Mark and I would be happy to answer any questions that you may have. Please open up the call for questions.

Thank you very much. (Operator Instructions) And we'll take our first question today from Jim Covello with Goldman Sachs.

Hi, this is Kate Kotlarsky on behalf of Jim Covello. I was curious if you may be able to comment on how much contribution you expect from the Optima platform in Q4? You said you expect revenues to be a little bit higher than Q3. I was wondering how much of that is driven built Optima? And if you can give us any guidance as to how we should expect Optima revenues to track over the next couple of quarters? Thank you.

I won't go our beyond Q4 but we do expect the revenues from the Optima product in the fourth quarter to be slightly higher than what we're realizing in Q3.

And just in terms of when you think about your customers over the next couple of quarters, clearly, there's been pretty significant weakness on the memory side. Just curious of what you think in how it's going to track over the next couple quarters and how long you expect the memory weakness to persist?

Well, what we're seeing, like most in the industry, is this general softening. And as you mentioned, there continues to be some slowing in the memory segment, which we think may continue through the remainder of 2007. Foundry spending has not revived in any significant way and many logic customers have also slowed their projects. So, I think the only thing that we've seen change since the last quarter is that some customers have officially announced the slowing of their capital investments. And at this point in time, we don't really see any signals that there will be a significant pickup in business, as I said, through the remainder of the year.

Okay. That's fair. So, it's fair to say that a lot of the growth that you're expecting to see over the next couple of quarters is really driven by share gains related to the Optima platform?

Absolutely. As we've been saying, we expect our Optima HD program to accelerate in the back end of the year. And as Steve mentioned in his prepared remarks, we will start recognizing revenue on Optima products in both the third and the fourth quarters.

Okay. Thanks so much, Mary.

You're welcome.

We'll go next to Peter Kim from Deutsche Bank.

Hi, thanks for taking my questions. First, I wanted to get an update on your meeting with SEN regarding whose going to supply high-current systems in Japan. Are you still planning to compete with SEN in the high-current space there?

No. Although SEN's SHX is successfully winning single-wafer implant orders in Japan, some Japanese customers have expressed their interest in the Optima HD and Optima HD Imax, the Optima HD Imax in particular. Until these products are licensed to SEN, Axcelis is engaging directly with these Japanese customers on those specific products.

Do you have sufficient infrastructure there to support customers directly without going through SEN?

Yes, we do. As you know, we go directly to market in Japan with our complementary products. So, we do have an infrastructure set up in Japan. And should we need to start supplying, at least initially, the Optima HD products directly, we our intention would be to strengthen that infrastructure.

And lastly, with regards to your revenue guidance, and comparing against your backlog, it looks like your guidance is about $20 million to $30 million greater than your backlog. I guess that means that you're expecting a lot of turns business in the quarter?

Over the last several quarters, we've seen a great deal of turns business. And yes, we do continue to see that. I think that that's become almost a standard now.

Right. Okay. Thank you.

We'll go next to a question from Timothy Arcuri with Citi.

Steve, I'm trying to understand hoe the Optima's going to flow through to bookings and things like that. So out of the $20 million to $25 million in Optima revenue that's going to come in September, how much of that has been booked so far? And how much of that will have to be booked, show up in orders in September?

Somewhere around 75% of that has actually been booked. And about 25% of that will show up in orders in the third quarter.

Okay. I think just a follow-up to that, I think you had said -- I had in my notes that you had only recognized in bookings before this quarter two HD's. So it sounds like included in this quarter's bookings number has been a lot more HD's, if you've already recognized bookings on a big number of those $20 million to $25 million. Is that correct?

No, the revenue that we were referring to is Optima platform revenue. It will include, as I said at the end of last quarter, includes both Optima MD's and Optima HD's. Significant amount of the Optima MD's were actually shipped against purchase orders and so they have been in the bookings. The Optima HD's, you're correct, we've booked very, very little of Optima HD business.

Because the rest of it is in evaluation and it will become a purchase order at the time that tool is accepted from the evaluation.

Okay. Well, Mary, can you give -- I'm a little confused on where HD stands right now. Because I think last quarter you said that there's been seven shipments, 12 orders to six different customers. So can you give us an update to those numbers? Because it sound like even though there's been 12 ordered, they haven't been recognized as orders.

Well, that's correct. We have secured 12 strategic design wins or orders at six customers and we've shipped a total of eight systems so far. And as Steve just mentioned, some of those have -- are orders and the remainder of those will turn into orders when the evaluation period is successfully completed, which we fully expect to happen.

So, the way to say it is, incrementally this quarter there was no change to -- there were no more HD's ordered, there were no more new customers and there was one more shipment?

That is correct.

Okay, thanks.

We'll take our next question from C.J. Muse with Lehman Brothers.

Good afternoon. Thanks for taking my question. First question, for the $20 million to $25 million for the Optima, the expected revenue in Q3, can you provide what kind of mix that will look like between the MD and the HD?

Not specifically but the majority will be MD.

Okay. And then you talked, Mary, about your high energy single-wafer tool. Can you provide a little more granularity as to when you expect to launch that product, when you expect to have eval tools out there?

Yes, customers are looking to begin transitioning to single-wafer high energy later this year, and we expect to launch the Optima HE to very closely meet their needs from a timing perspective. We think that we have some significant advantages with the Optima HE because it uses our market share-leading LINAC technology, which is currently used in our multi-wafer paradigm platform, which is going to ease the transferability of production processes from the multi-wafer to the single-wafer tools. So because of the timing, the benefit that -- at this point we're not going to talk about, but some additional features that are built into the actual Optima HE product itself, including the RF LINAC technology, we're very confident that we will have a successful launch later on in the year.

Great. And then last question for me, on the service, that fell 7% in the quarter and you attribute that to lower utilization rates at your customers. What happens to service in a steady state environment? Does that naturally just degrade at a certain percent based on ASP erosion? Or how should we think about service off of your current installed base, looking forward?

I think that you can project over time that service revenue and the service base will continue to expand as the installed base expands. We have had periods of time, if you go back over the past three years, you'll see quarters where we have had declines. And it is attributable to low fab utilization, which results in a reduction in sales of spare parts and consumables. But if you actually track the growth curve over the past actually 10 years, you'll see we've grown at a compounded rate of about 8% and we expect that to continue in the future.

Perfect. Thank you.

We'll take our next question from Weston Twig with Pacific Crest Securities.

Thanks, just a quick question. Regarding SEN, the sales that you mentioned, are they actually selling it to Japanese customers with the SHX tool or just making penetrations or sending eval tools?

No, they're actually selling tools to Japanese customers. SEN has made significant progress penetrating the Japanese high current market with the SHX. And although neither Axcelis or SEN makes specific announcements, for example put out press releases on SHX orders or shipments, SEN has penetrated, as I mentioned in my remarks, large logic flash and memory customers in Japan. And has shipped a significant number of the tool. So, Axcelis and SEN are very confident about SEN's high current product portfolio and positioning.

Great. And then, your comments regarding the dividend payments from SEN, does that resolve the arbitration?

No, the arbitration has nothing to do with dividend payments. The arbitration with SEN is to resolve the royalty due on SEN's high current single wafer implant of the SHX. And that continues to progress amicably, And we expect the process to result in a license of Axcelis' technology to SEN to manufacture and sell the SHX at a royalty rate similar to SEN's other products. And as I mentioned in my prepared remarks, SEN is a very important asset to Axcelis, and we meet regularly with our joint venture partner SHI to discuss the long-term strategy for SEN. We are continuously seeking new ways for Axcelis to benefit from its investment in this very successful joint venture.

Okay. Great. And then, just wondering if Axcelis partners are selling the Optima line in Japan, does that provide an opportunity for SEN to market the SHX outside of Japan?

No. The only reason Axcelis will go into Japan with the Optima HD and Optima HD Imax is at the request of customers. There's a very strong pull from Japanese customers, as I mentioned, especially for the Optima HD Imax and the molecular implant technology. So as I mentioned, until these products are licensed to SEN, Axcelis is engaging directly with those Japanese customers on the Optima HD products.

Okay. Thanks.

We'll go next to Gavin Duffy from A.G. Edwards.

Thanks guys, I had a question about, you said there were no more customers using the HD in production and evaluation. Did you say even like last quarter how many customers are actually using the HD in production?

No. It's a mix right now.

A mix, okay.

There are several using it in production and several that are still under evaluation. And as I said, we have full confidence that those evaluation tools will translate into orders.

Okay. And on SEN going forward, you said something like $1 million next quarter, is that going to become like the baseline or can that fluctuate up to a little bit more as conditions improve in Japan?

Well, as conditions improve in Japan we expect that SEN will maintain its implant position in Japan and we would expect SEN's financial results to reflect that. The market is slow in Japan, at least for the first -- particularly the first three to six months of their fiscal year beginning April 1. Market picks up, we expect SEN's financial performance to reflect its -- what we've seen historically.

Okay. And our last question, the -- on the single-wafer high energy tool, it seems obviously you guys dominate that market right now for high energy tools. What would you think the split could be at the end of next year in terms of single versus batch wafer tools for high energy?

There will still be a strong preponderance of batch tools. It's going to take, I would think, at least several years for customers to transition from Axcelis' paradigm implanter to Axcelis' Optima AG.

Okay. Thanks a lot, Mary.

Our next question comes from [Robert Rodnick] with [Eaton Corp.]

Can you comment on Axcelis' IPO stock price versus its current and future stock price? Thank you, have a nice day.

Well, the IPO price is history. That was back in the year 2000. On the current price, we believe it is undervalued. We believe the success of the Optima HD and new products that we are developing provides for significant upside to our stock price going forward.

As we have said, it's very difficult time for Axcelis right now, given the softening in the market and the fact that we're just at the beginning in terms of gaining traction with the Optima HD. So we believe, as Steve said, that there's significant upside in terms of our performance to gain market share, both in implant and in our complementary products. And we fully expect, as we gain this market share, that our stock price will reflect this increase very nicely.

Thank you.

We'll go next to Matt Petkun with D.A. Davidson and Company.

Most of my questions have been answered but a quick question. Steve, you said, I think $1 million in equity income from SEN in Q3 that you're expecting. Sometimes when you guys break out that item, you're including both the royalty revenues, as well as the equity income. So, I just wanted to be clear, is the total consideration from SEN this next quarter a $1 million or just the equity income?

Just the equity income. We include the royalties in revenues. So when I gave the forecast for the revenues for the quarter, we don't break the royalties out separately. But they won't be significantly -- equity income is typically 2/3 of the total contribution.

Right. Okay. That's clear. That's all I had, thanks.

And we'll take a follow-up question now from Timothy Arcuri with Citi.

Hi. Mary, in your mind, what's the primary reason why HD is being pushed out? What's the -- is it a reliability problem? Is it that the tool was targeted at the wrong customers? Is it a technology insertion issue there? Obviously, it's being pushed out. That much us clear. So the question is why?

Well, Tim, as I explained in my prepared remarks, despite the fact that we've set and executed against aggressive goals, we have not been able to fully make up for the fact that we were late to market. And there's no one reason that we can point to, other than the gap we had to close was large. The reality is that it takes awhile to mature a new innovative implant platform.

And areas that are always under continuous improvement for implanters, regardless of where they are in their life cycle, include enhancements to uptime, throughput, beam currents and functionality. And the things we're focusing on in our Optima HD program today are consistent with this. So, we're continuing to focus on it and shift and augment resources, both at the factory and in the field, to accelerate the program. And we're very confident that we're going to do this. And we're very confident about the fact that our penetration will increase as we move forward.

Okay. Mary, before you were talking about maybe $60 million that was already in the pipeline for HD in the second half of this year. What's your new thinking on that number?

Tim, we didn't say that. What we said is we had $60 million of Optima business that hadn't been reflected in our reported revenues. Most of that had shipped and a majority of that was going to be recognized in the second half of the year. We -- I said in my prepared remarks that we forecast Optima platform revenues in the third quarter to be $20 million to $25 million. And then there was a question about Q4 and I said they would be slightly up from that in the fourth quarter, we expected.

Okay, Tim, does that answer it?

We'll most of now to a question from Mark Fitzgerald with Bank of America Securities.

I was curious if there's any new Optima HD evaluations that you've placed this current quarter, the quarter just reported?

No, we said that -- well, we had shipped one additional system during the quarter, but beyond that, there were not any specific tools placed at customers. However, we have a very full demo schedule here in the factory and we have a number of customers that we have been running evaluations and demos for here in Beverly. So, the activity is quite high but in terms of actually placing additional tools at customers, there was only one. We mentioned that you will start to see that accelerate now moving into the third and fourth quarter, Mark.

Is this broadening out the customers or is this additional systems at the same customers?

It's going to be both. There are -- there's some capacity buying going on at some of the existing customers, as well as the fact that we will be adding new customers.

Okay. Thank you.

You're welcome.

And our final question today is a follow-up from Peter Kim at Deutsche Bank.

My question was answered, thank you.

Okay.

And there are no further questions.

Okay. Well, we'd like to thank you very much for joining us and we look forward to updating you on our progress next quarter. Thank you.

And this concludes today's conference call. Thank you, everyone, for joining us.