Axcelis Technologies Inc (ACLS) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the Axcelis first quarter of 2008 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 conference over to Mr. Steve Bassett. Please go ahead.

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 first quarter of 2008. 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 Matthew Flynn, our Executive Vice President of Customer Operations. 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 expectations. We do not assume any obligation to update these forward-looking statements.

We reported a net loss for the first quarter of $11.1 million or $0.11 per share on revenues of $84.9 million, which included approximately $10 million of Optima HD revenue. Gross margins at 34.4% were in line with our expectations. Margins are being impacted negatively by the low volume in system sales reflective of the soft market conditions and by revenue recognized on new products. After market business, which includes the sale of spare parts, product upgrades and service labor remain stable, generating revenues of approximately $41 million. Our after market business continues to generate margins that are accretive to the business as a whole. New systems orders were $29 million, down from $44 million in the previous quarter. The low level of systems bookings reflects the overall soft market conditions, which are affecting both our base business and our new product revenues.

Based on the geographic location of the fab, Asia accounted for 44% of systems orders, with 33% coming from Europe and 23% from the U.S. Memory manufacturers accounted for 47% of new systems bookings with logic at 36% and foundries at 17%. R&D spending and SG&A expenses for the quarter were slightly lower than our original forecast at $39 million, down approximately $3 million from the first quarter of 2007, as we have started to realize some benefits from recent cost reduction actions. We will continue to challenge our spending levels if the depressed market conditions persist. The contribution from SEN in Q1 amounted to $1.1 million, all in royalties. Entering the quarter we had forecast SEN's contribution of $2.2 million in royalties and $4.8 million in equity income. The decline in the SEN contribution resulting from revenue from several systems moving to later in 2008 had the effect of increasing our reported net loss by $0.06 per share.

Looking forward to the second quarter, Axcelis' revenues are forecast to be in the range of $75 million to $90 million. Gross margins are projected in the range of 34 to 36%. As I mentioned earlier, we are experiencing margin pressure from the low level of systems volume and new products. As we recognize revenue on new products, we expect this pressure to continue throughout 2008 and do not see any significant changes until we enter 2009. Operating expenses for the quarter are forecast at $40 million. And the contribution from SEN is projected at $2 million, of which approximately 2/3 will be from royalties. With a lower revenue base and the depressed margins, we are projecting a net loss for the quarter of $0.11 to $0.15 per share.

Before I turn the call over to Mary, I want to take a minute to discuss the balance sheet. We have cash of $86 million and outstanding convertible debentures of approximately $81 million, which become payable in January of 2009. We expect to be cash flow positive for the remainder of 2008 and we recently closed a credit facility which provides for borrowings of up to $50 million. In addition, we are currently negotiating a sale leaseback transaction for our headquarters and manufacturing facility here in Beverly, Mass. As a result, we feel Axcelis has sufficient liquidity to repay the debentures when they mature and to fund ongoing operations. I will now turn the call over to Mary.

Thank you, Steve. I'd like to take a few minutes to share my views on current market conditions and provide an update on our progress. I will also give a brief summary of the SHI proposal and our recent proxy vote. On our last call, we shared our outlook for this quarter with you, which reflected our expectations that market weakness would continue to adversely impact our results, putting both our new product penetrations and our base business under continued pressure. In fact, market conditions and visibility in the first quarter not only remained challenging, but they have deteriorated further. This industry-wide market weakness has impacted our business as well as that of our customers and competitors. Many of our customers have delayed capital spending for semiconductor equipment and continue to push out major projects.

The market will rebound and strengthen but the timing is unclear, particularly in light of broad uncertainty in the global economy. At this point, we expect continued weakness through the balance of 2008. It is undoubtedly a challenging time right now in the semiconductor market. Turning to our Optima HD program, we continue to make good progress despite this very difficult environment. We won a new customer during the quarter and shipped that customer a first tool. In addition, the production data that we have receiving from customers for the Optima HD remains positive. For example, at one large memory customer, the Optima HD continues to achieve consistently higher productivity in production than our competitor. This customer recently added a fifth Optima HD, bringing the number of Optima HD tools to nearly one-half of the total number of high current tools in production in that fab.

Our market share in high current was adversely impacted over the last few years by our late entry into the single wafer high dose implant segment. However, we now have a proven tool in the market, the Optima HD is successfully competing. We recognized our first revenue from our Optima HD tools in the first quarter of 2008, and we believe that this is the beginning of regaining market share in high current, an implant segment in which we have a great deal of product experience and have historically held a leadership position. We also continue to make excellent progress on our new single wafer high energy offering, the Optima XE. We have shipped our first Optima XE and completed multiple demos for both existing and new high energy customers. Response has been very good and supports our expectation that we will maintain our leadership in this segment. We are ahead of market demand for the transition to single wafer high energy.

We're also making headway with our Integra RS dry strip system. We are continuing to work with existing and potential customers to demonstrate the innovative design of our tool. The Integra RS combines productivity advantages from the fastest wafer handling available in the market today with superior process performance, performance that is validated by over 90 dry strip tools in our install base that use the same process chamber technology. We believe that the Integra RS will become the benchmark for all dry strip systems and we expect to increase our overall market position in the cleaning space.

In summary, the market remains challenging and has deteriorated further throughout the first quarter. However, we continue to make progress across our product portfolio, particularly with our Optima HD and Optima XE tools. While we do not know when the market will improve, we believe we are well positioned to take advantage of these opportunities once it does. Before I open up the call for questions, let me comment briefly on two matters, our recent proxy vote and proposals made earlier this year by Sumitomo Heavy Industries. Let's start with SHI. As you know, in early March, SHI made an unsolicited proposal to acquire Axcelis for $6 per share. Our Board of Directors concluded that this price significantly undervalues Axcelis and rejected the proposal. At the same time, we communicated our willingness to enter into confidential discussions with SHI to explore whether we could reach a mutually beneficial transaction to optimize return to our shareholders. As we have stated we are seeking to enter into an appropriate nondisclosure and standstill agreement. If and when we do so, we will inform shareholders.

Let's turn to Axcelis' recent proxy vote. At Axcelis' annual meeting of stockholders on May 1st, Steve Hardis, John Fletcher and Brian Thompson were reelected to the Board of Directors although they received less than a majority of the vote in support of their election. After talking with a number of investors, we believe that a few wish to send a message to the Axcelis Board, encouraging them to sit down with SHI. Many other investors indicated that their vote was driven by the ISS withholds recommendation relating to the failure of the Axcelis Board to recommend in favor of the proposed declassification of the Board. Under Axcelis' corporate governance policies, each of these directors will offer to resign from the Board. The nominating and governance committee will consider each of these offers of resignation and make a recommendation to the Board on the acceptance or rejection of each offer of resignation. The Board will then act on the recommendation as they determine appropriate and in the best interest of the Company and the shareholders. We expect a determination by the Board in the next few weeks and will report on that decision once it's made. In the meantime, these deliberations will have no impact on the normal course of business or on our efforts to engage in discussions with SHI. I'd now like to open up the call for questions.

Thank you. (OPERATOR INSTRUCTIONS). We'll pause for just a moment to assemble the queue. We'll take our first question from Satya Kumar from Credit Suisse.

Hi, this is for Vishnu Luni for Satya Kumar. Mainly just going back to the SHI offer. Is there fundamentally, is there something holding back ACLS to go ahead or is this primarily a pricing issue?

I've already addressed this in my prepared remarks and there's really nothing further for me to comment on on this matter. So do you have any other questions that relate to operations?

Okay. So you talked about Optima XE, so what gives you the confidence about this one? Are you able to maintain share in this, in the high energy space?

In the high energy space? Matt, do you want to take that one?

The Optima XE is our newest offering in the high energy space. We've dominated that -- the high energy segment for a number of years and the Optima XE is the single wafer evolution of that industry-leading RF technology. We fully expect our competitive advantages to continue. The ease of transferability of customers production processes is a key feature and we are engaged with a number of new and existing customers. We've shipped our first tool to a customer and we are very confident that we're going to continue to lead that market segment.

Okay. Thank you.

Next we'll hear from Jim Covello with Goldman Sachs.

Mary, one quick question. It didn't sound like you're too anxious to chat about. Can you just answer what valuation metric you and the Board are using to think about the fairness of the offer.

I already said what I'm not -- I already said what I'm going to say in my prepared remarks. I'm not going to respond to that question.

Can I just ask why? What's wrong with us understanding which valuation metric you're using.

It's not something I'm going to discuss on this call. If you would like to call us back after the call, we'd be happy to chat with you further. Although, again, that's not something we're going to disclose.

Okay. So on the operations of the business, then, can you lay out -- obviously we're in a tough cycle and it's tough to gain share back in a cycle. What metrics are you setting within the company and time lines to achieve those metrics, to know that you're kind of back on the right track. Obviously you believe you have the right technology. The market needs to adopt that technology in a big way. What time lines or what metrics are you setting internally for the company to achieve those share gains in order for you to be happy with the progress the company is making?

Well, I think if I put this into perspective and we've talked about this before, we've recognized minimal 300-millimeter high current revenues over the past several years and in the first quarter this year, we recognized more 300-millimeter high current revenue than we have over the last three years combined. So I think it's fair to assume that this should result in increased high current market share in 2008, which will translate into increased market share overall. What you need to remember is for every tool that we're selling, every Optima HD that we're selling, we're taking a spot away from our competitor.

Okay. Thank you.

Next we'll hear from [Bill Prayeridges] with [Rapnarude] Capital.

Yes, I have a question about the mechanics of the resignation and possible readmittance of the Board members who were voted down. And I note that Mr. Hardis is on the nominating committee. Is he going to decide whether he is going to be readmitted or not or has there been a change in the nominating committee.

No, he will not be a part of that process as the nominating and governance committee deliberates on the offer of resignations.

Okay. And there was only one other director on the nominating committee, has he been replaced or is it some other director taking that role or is it going to be a one man committee?

Yes, Pat Nettles, who is the Chairman of the nominating and governance committee will act on the offers of resignation.

By himself?

By himself.

Okay. Thank you.

We'll hear next from Matt Petkun from D.A. Davidson & Company.

Hi, good afternoon. Mary, on the order book this quarter, can you share any news in terms of incremental HD orders and are you seeing any activity on the Optima MD front?

Yes, on the Optima HD we talked about how we got two new orders. One was from a new customer. The other was shipping a fifth tool to a customer that is already using the other four Optima HDs in production. On the Optima MD front, we did receive a new design in order and we continue to work to gain market share in that segment as well.

So that fifth tool for that existing customer was booked and shipped this quarter? I think that's what I wasn't clear on.

It's been booked and shipped since our last call.

Okay. And then when you're kind of looking at the remainder of this year, obviously the guidance for next quarter would imply using almost all the backlog. It's obviously tough to gauge how the end markets are going to trend but can you talk about how backlog could trend through the course of this year?

Not specifically. I think that we don't see -- have visibility that we're going to see any significant uptick in order activity. A very large part of our business, and it has been for a number of quarters, is churn business in which we get the order and ship the system during the same quarter. So the backlog itself is less significant than it has been perhaps in the past or that it is in times of an upturn. So I don't know if that answered your question or not. You can come back with me with another question, but I don't have any good indication of what the backlog will be throughout the rest of the year.

Okay. And then Steve, just one other question. In your guidance, what are the expectations from SEN, both from kind of a royalty as well as an equity income perspective?

Let me get to what I said exactly. We are expecting --

$2 million. Sorry. I just found it.

I'm sorry. I said it. I was just pulling out what I said. Yes. We're expecting from SEN, $2 million. Two-thirds of that will be from royalties.

Maybe it's escaping me, but there's a $16 million increase in the investment on SEN in the balance sheet, but there obviously weren't earnings from SEN to that extent. What did that come from?

Translation.

Okay.

That's a translation gain. The yen strengthened fairly dramatically during the quarter.

Right. Okay. Thank you.

Next we'll hear from Peter Kim with Deutsche Bank.

Hi, thanks for taking my questions. First, I wanted to ask about this $10 million Optima revenue recognition. I thought you said last quarter that you were expecting to recognize about $12 million.

I was. We did have one tool that's moved into Q2.

Could you tell me how many tools this represented?

Four.

Four tools, okay. Do you have a guidance for what you expect in terms of Optima revenue recognition next quarter?

I expect that we'll recognize two or three tools in Q2.

Okay. What was your quarter ending head count?

Quarter ending head count? It was 1,565.

And last quarter you said that you were expecting about 7% headcount reduction and that's only about 1%. I was wondering, what is the schedule for head count reduction?

I don't think we said that. I don't believe that we said we expected a 7% headcount reduction.

Okay. What do you think is the -- given that the current outlook, what do you think is a reasonable operating model for the company? And do you have an idea about what you think is a break-even revenue level?

Well, the break-even revenue level is dependent very much on gross margins. If we were in a normal position where our tools were mature, the revenue recognized on new products were for mature tools, I think we can generate -- at $90 million, we can generate a margin in the low 40s, 40 to 41%, which would give us a break-even level of somewhere around $90 million, I think. With obviously the break-even levels are a little bit higher than that with the margins averaging in the 34 to 36% range. We're challenging costs and we're trying to drive as much cost as we can out of the business. We also have a product road map, a margin road map, to take costs out of the product, both from a design side and from the sourcing side.

Okay. Do you have a time line for that?

Yes, we do. We expect that early 2009 we'll be at where we want to be with respect to the product costs for the Optima HD and that's the critical one. And we also expect that the Optima HD, because of the way it's been designed, will actually end up having margins than what our historical legacy -- margins higher than what we've seen from our historical legacy products.

Okay. And lastly, what is your deferred revenue at this point?

I'm sorry, I didn't understand what you said.

Deferred revenue. You gave backlog but I was wondering what your deferred revenue was within that backlog.

$25 million.

Great.

$21 million.

$21 million. Great. Thank you.

(OPERATOR INSTRUCTIONS). We'll hear a follow-up from Matt Petkun.

One other question, Steve, just on the profitability of SEN and your equity earnings there. Using historic royalty metrics and your guidance for next quarter, it would look like you're doing -- or SEN will do sales in the kind of high 50s, mid-to high 50s range. Historically when SEN has had those types of numbers, and I know a lot of it's mix dependent, they've had equity income for you -- you've had equity income of almost $2 million. In this quarter it looks well under $1 million. What's going on from the profitability or at least your participation in the profitability at SEN?

I think it's the -- SEN's profitability level, it really is dependent on mix, both product mix and customer mix. So it's the -- there's nothing significant that has changed at SEN. It's just the revenues are at a lower level and their gross margins will be affected by product mix.

I just can't find a quarter where they've had revenues even lower than that level and they've had such a low contribution.

Well, they have some new product introductions in Japan also, which is impacting that.

Okay.

Which they haven't had for -- that level for several years.

Okay. Thank you.

Thank you. Next we'll hear from Patrick Ho with Stifel Nicolaus.

Thanks a lot. Can you guys give an update in terms of the Optima XE and what you're seeing in the marketplace in terms of the transition from batch high energy to single wafer high energy?

Sure. This is Matt again. We are seeing a transition to single wafer. I mean, the general trend in -- over the long-term has been for implant energies to come down as devices shrink, particularly in the logics segment. So we have seen that accelerating a little bit recently. The thought is that as people move to single wafer high energy, they are seeing some benefits in terms of device counts per wafer and in yield and, in fact, it was reported recently that this is a real driver for that trend. And the early work that was done at customers to prove that out was actually done on the Optima XE, so it's a market driver that we're well aware of and taking advantage of and I think that the Optima XE is well positioned to do that. Longer term, though, we expect the high energy market is going to remain a significant segment of the implant business. I mean, there are a number of application drivers in flash or image sensing or embedded memory, SOC type devices where high energy plays a significant role and will continue to do so. So even as it transitions to single wafer, we feel like the Optima XE will be a compelling product and we can build on the tradition we have of winning what the RF technology.

Just to add to that, we're still obviously selling a significant number of our multi-wafer, high energy tools. Customers are still buying those. The transition is happening, as Matt mentioned, but it's happening slowly over the course of the year and I just want to make it clear that Axcelis is very well-prepared for this transition. Everybody I think questions it because of the fact that we were late to market with the Optima HD and so we had that miss in the high current market, but this is a very different situation for Axcelis and in terms of the actual speed with which the market will transition to single wafer in this segment.

Okay. Fair enough. Would it be I guess -- could I characterize it as your initial customers for the XE will be the ones that you are trying to transition over from your batch customers right now over to the XE? Would that be a fair assessment?

Well, actually, it's interesting you should say that. It's a little bit mix of both. If you look at what happened in high energy market share last year, even though the market overall declined for a number of reasons, our share went up significantly. So you can only conclude from that our competitor is losing momentum and we are engaged with both existing and new high energy customers now, with the Optima XE.

Yes, and I think an important point is that we're not trying to transition anybody. Customers have specific demands and specific applications and needs and requirements and as they require a single wafer tool, we are working with them to transition that. But as I mentioned before, there will be a large number of customers that will continue to buy the multi-wafer tools.

Great. Thank you very much.

We will here a follow-up from Peter Kim with Deutsche Bank.

Hi, thanks again. With regards to the IMAX, you had three IMAX out there, I believe. I was wondering, do you anticipate a significant increase in your percentage of market share in the ultra high -- the new category of ultra high dose this year? Or do you expect these IMAXs to maybe be recognized later on, maybe in 2009?

Well, as you mentioned, we do have multiple tools in the field now. They're being used in both the memory and logic space for a variety of different processes. I guess you could categorize that as the ultra high dose. That's sort of a name that data quest has put on one particular application that the plasma tools are used for. We expect the IMAX to have much broader adoption than that and actually be part of the overall high current market as well.

Okay. But you do anticipate recognizing several of these tools this year, then?

Yes.

Yes.

Okay. And with regards to the royalty, does SEN offer a single wafer high energy tool today?

No. They don't. And Axcelis is working with customers in Japan to offer our Optima XE.

So you don't anticipate SEN to offer a high energy tool going forward? That was a pretty large market for them in the past so I'm kind of surprised to hear that.

No. We don't expect them to offer a single wafer high energy tool moving forward. Axcelis can meet that demand with our Optima XE.

Okay. Thank you.

We'll hear another follow-up from from Bill Nasgovitz with Heartland Funds.

Yes, hi, I'm sorry I got disconnected. Just candidly here, we're long-term investors. We've held this 3% position here in the company for about two years. And we originally got in because we thought there was a turn and my partner made the decision, fine. But just looking at your record, the record over the last eight years, we lost -- we're going to lose money this year. We lost money in '07. We lost money in '05. We lost money in '03, '02, '01. So six out of eight years. We're batting 250. Three out of four years we lose money. On top of that, over the past eight years, we have spent -- Axcelis has spent close to $70 million a year on average or over $0.5 billion, is that correct, $550 million on R&D, and we've got a net loss. So why shouldn't we sell this company? Why shouldn't we take six? We're burning capital. We have a negative return. Not for one year, for eight years. Why don't we just -- ?

I appreciate your input. You've made the public statement now. The Board is obviously going to hear this. We take all input from our shareholders and we pass it along to our Board. So we appreciate that. If you're not happy with Axcelis' performance and I can honestly tell you that we're disappointed as well as and we're very happy to turn that around. But again, we'll pass that information along to the Board and you're going to have to make a decision about your future ownership of the stock.

Right. Well, that's what we do. But it's just the logic. I'd love to know your metrics as well. So we'll call you separately and we'd love to hear what your rationale is.

Well, we'll look forward to talking to you. We spent quite a bit of time with Brad in the past. So we're happy to do that. Thank you.

Next we'll hear from C.J. Muse with Lehman Brothers.

Good evening. Thank you for taking my question. I guess I was hoping to probe a little bit deeper on the high energy side and considering that we've seen, I guess, heightened pricing pressure there and looks like more DRAM oriented. What do you think that market size looks like here in '08?

Well, we did see a decline last year and more than two-thirds of that drop happened in Japan and it was a result of, we believe, buying patterns at some major memory suppliers there and some transition of lower energy well implants to medium current tools. And interestingly enough, we benefited from that particular trend as SEN gained market share in Japan in medium current last year. The memory market dominates the high energy purchasing and so it's going to be lumpy and it's going to depend on how that market recovers. It's really hard to put a number on what the overall high energy market's going to be this year. As I said earlier, there are a number of key drivers that are -- it's not going to go away. It's going to remain a significant portion of the implant business going forward.

I guess if you were to -- if I were to tell you that overall CapEx would be down, say, 25%, how would you think about it off of that number, considering some transition to medium current as well as the fact you've got more exposure to memory there? Does high energy decline 30%, 35%? How should we think about that?

Again, it's hard to predict what the memory market's going to do in the latter half of the year. It definitely is going to be linked to that. As far as the erosion to the medium current, I think that is balanced with a lot of the -- as things like flash memory and image sensor applications continue to grow in popularity, like solid state memory drives and notebooks for instance is going to drive a lot of flash consumption, I think they can offset each other. So the high energy market won't be as stable and large -- not large, but similar to what it -- the size it's been overall. Again, it's hard to predict what's it's going to do relative to the other two segments unless you know what the memory market's going to do. And sitting here today, I couldn't tell you that.

Okay. And I guess when you look at the market, how do you think of the mix will be between batch and single wafer in 2008? Will you see single wafer become a more meaningful percentage or is that more of a 2009 event?

Yes, I actually agree with my competition on this one. It's going to take at least another year for the evaluations that are going on now to take hold. But multi wafer high energy tools will continue to ship in volume this year and they're going to with us next year too.

Okay. Thank you.

Next we'll hear from [Stella Young] with [Ramius].

Hi, it's [Han Johnson] for Stella. Mary, I just wanted to address this question to you. We got the sense that what one of the things that's been preventing discussions and sitting down with Sumitomo has been a lack of trust between the parties and perhaps rightfully so. And so it seems that perhaps there has been improvement on that front recently. And I just wondered if you could comment on that and whether or not you think there's been an incremental improvement in the level of trust between the parties recently, particularly from the perspective of the Board and your membership on the Board?

Yes, I don't really have anything to say regarding that point. So I can't comment on it.

On the level of trust?

Right.

Okay. Well, then, I'd echo Bill's comments from Heartland. Thanks.

Okay. Thank you.

That does appear we have no questions. This does conclude our conference call. We do thank you for your participation on today's conference. Have a great day.