Axcelis Technologies Inc (ACLS) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies second quarter 2010 conference call. My name is Crystal, and I will be your operator for today. At this time all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the preventation over to your host for today's call, Mary Puma, Chairman and CEO of Axcelis Technologies. Please proceed, ma'am.

Thank you, Crystal. This is Mary Puma, Chairman and CEO of Axcelis Technologies. Welcome to our conference call to discuss the second quarter of 2010. With me today is Steve Bassett, Axcelis EVP and CFO; and Bill Bintz, Senior VP of marketing. If you have not seen a copy of our press release issued earlier today, it is available on our website. Playback service will also 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 Safe Harbor Provision.

These forward-looking statements are based on management's current expectations, and are subject to risks inherent in our business. These are described in our 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. Steve will begin today with the discussion of second quarter results, and provide more color on what we are seeing for the rest of 2010. Steve?

Thank you, Mary. We reported a net loss for the quarter of $0.04 per share, a significant improvement over the $0.11 loss we experienced in Q1. Total revenues increased to $58.2 million, up by 20% over Q1 at the higher end of our guidance. Revenue from new system sales was $22.1 million, up 38% quarter-over-quarter. We continue to see strong quote activity which has lead to a significant increase in order flow. New systems orders increased to $41.2 million, more than double Q1. Our book to bill ratio for the quarter was 154%.

While we don't provide bookings guidance, we do expect this trend of increased systems orders to continue throughout 2010 and into 2011 and are currently forecasting system revenues to increase 75% to 85% in Q3. The increased systems revenue was widespread across all product lines including legacy products our flagship Optima and Integra product lines.

The Optima DX gained good traction throughout the year and we expect this momentum to continue throughout the second half. Our after market business continues to show strength with the revenues of $36 million from the quarter up 11% from the first quarter. Our daily spare parts order rate remains strong and has increased 50% since the beginning of the year. We expect our after market business to continue to grow throughout 2010 and return to a more normal revenue run rate of $40 million per quarter by the end of the year. Gross margins for the quarter with 34.1%, higher than originally forecast due to changes in product mix and better than expected after market revenues.

Margins in Q3 are expected to be in the high 20%s while we continue to work through existing high cost inventory which is all scheduled to ship by the end of the year. Margins will also be affected negatively by the timing of system shipments falling at the end of the third quarter for which increases deferred revenues for installation service into Q4. Without the impact of the increase in deferred revenue, gross margins for the quarter would be in the mid 30%s. Beyond 2010 as volume continues to increase we expect margins to improve to more normal levels in the low 40%s. Looking at our expense base, operating expenses for the quarter were $23.5 million, slightly lower than originally forecast due mainly to the timing of R&D project costs. For the third quarter we are projecting operating expenses to increase to approximately $27 million.

The increase relates principally to the acceleration to certain R&D projects to enable us to take advantage of opportunities where we believe we have a technology edge. Many of the projects have been accelerated at the request of our customers. Turning to our cash position, we generated $12.1 million of positive cash flow from operations in the quarter and year to date we have generated $2.2 million of positive cash flow from operations. We accomplished this through effective inventory management . You should know that we have been successful in reducing inventory by more than 25% over the last12 months despite significant increases in revenue levels.

We will burn cash in Q3 as shipments are heavily weighted to the back end of the quarter, however we expect to make up any Q3 cash burn in Q4 and report positive cash flow for the year. The second half of 2010 looks promising for Axcelis. I expect we will operate at break even for the last six months with a small loss in Q3 and a profitable Q4. With our highly leveraged business model we will be well positioned going into 2011. I will now turn the call back over to

Thank you, Steve. The improvements we have seen in the second quarter in product penetrations, order backlog and financial results confirm that our investments in new product development and global infrastructure and our operating plans are yielding returns. We are particularly excited about the traction that we are getting with our Optima and Integra product lines due to the superior process performance, capital efficiency and productivity they provide our customers. Since our last call we have shipped Optima HDX's to three customers including multiple tool shipments to two repeat memory customers in Asia and our first system to a new Logic customer in Europe. This brings our total to nine fabs that are using the Optima HDX. We can now say with certainty we will burn through our Optima hdx systems in inventory and will begin shipping newly manufactured Optima HDX'S this quarter.

We also shipped multiple Optima XEX'S for memory and foundry usage. These first tools have already resulted in capacity orders for shipment later this year. As a result our outlook for these tools continues to strengthen as our visibility into the remainder of the year improves. In our call last quarter, we talked about the inflection point that is imminent in the high current segment due to significant turbulence in device related process requirements. Customers have now told us that they are more heavily weighting the differentiated technical capabilities in their decision making process. We want to reiterate that this has created an opportunity for significant market share gains for Axcelis and High Current. We believe that our rapidly growing Optima HDX business reflects this shift and provides proof that the tools unique spot beam technology and short beam line delivers a set of processor based advantages that make it best able to suit customers emerging device related challenges.

Let's take a moment to discuss the impact on our industry caused by a significant shift in the consumer market over the last couple years. Smart phones, iPads and today's laptops and net books have created an insatiable demand for high performance, low power semiconductor devices. These hand held products must perform like desktop computers of a few years ago, but with battery life never before experienced. In order for semiconductor device manufacturers to meet the cost, functionality, and performance demands required by these new devices, they have continued to religiously follow Moore's law and shrink device geometries.

This conversion of high performance and low power and extremely small device size has created significant new device fabrication challenges for the new customers. Small semiconductor devices operated at high performance levels inherently suffering from increased levels of leakage current. This leakage increases the power consumption the semiconductor device, thus reducing battery of hand held devices. Traditional ion implantation technology increasingly compromises leakage current performance. As a result, new processing techniques must be employed to address this challenge.

Through advanced research in the area of materials modification, the industry has identified a processing technique often referred to as damage engineering to address the leakage current challenge. The primary implant process control parameters associated with damage engineering are dose rate and temperature. By lowering the temperature of the wafer during the ion implantation process, a process known as cold implant, the desired leakage current performance can be reduced, even on the smallest transistors even in these new high performance, low powered devices. The actual temperature of the cold implant required to deliver the desired device performance is directly related to the dose rate.

The high doses rate inherently found in the Axcelis spot beam architecture allowed the implanter to operate in a far less aggressive temperature regime than competing ribbon beam architectures. For example, for a typical carbon implant application, the Optima HDX can accomplish its process objectives at a wafer temperature of negative 40 degrees C compared to the negative 100 degree C required on the competing ribbon beam system. The Optima HDX's spot beam dose rate advantage allows for the use of a much simpler, lower cost, highly reliable and more conventional cooling system design. Competing ribbon beam systems require a complex, less productive and more expensive cryogenics based cooling system.

This provides a fundamental advantage for Axcelis and a compelling reason for customers to adopt the Optima HDX. Customer engagements over the past six months confirm this fundamental advantage as evidenced by our recently announced wins for the Optima HDX. We have shipped our first damage engineering upgrade kit and first Optima HDX system in damage engineering capability. There is a tremendous customer pull across memory logic and foundry segments for this technology, and we are planning for a ramp up through the remainder of this year in additional penetrations and shipments of damage engineering upgrade kits and Optima HDX systems with damage engineering capability. To reiterate, we believe this is a game changer for our customers and for Axcelis that will lead to significant high current market share gains beginning in 2010. We also continue to secure wins with the Optima XEX. The tool is in the field in production at multiple customer sites.

It remains the only tool on the market that can truly meet customers' high energy requirements with superior process performance, productivity, and extendibility. We expect to continue to add new customers which will secure our market leadership position in high energy over the long-term. Demos and evaluations of our Integra Dry Strip System continue at a brisk pace and we expect to add at least one new customer this quarter. Our outlook shows that our dry strip business will continue to grow through the remainder of 2010. In summary, we are pleased with the progress we made in the second quarter. We continue to penetrate new customers with our products and gain market share and have successfully managed cash balances in light of significant inventory ramp requirements. We continue to make adjustments to our business model to reflect the new normal in the industry and expect that this will allow us to deliver improving EPS performance through the cycle. I would now like to open it upfor Q&A.

(Operator Instructions) Your first question comes from the line of Brian Walton with Sterling Capital Management. Please proceed.

Hi, guys, Good afternoon, how are you doing?

Good, how are you, Brian?

Good. As always, I guess two or three questions if I could. First off, Mary, I don't think you touched on in your comments, but maybe just a quick update if you would on some of your non implant initiatives . You know, maybe your relationship with AMAT and how that is progressing and any update on any other initiatives, Solar or whatnot, that would be the first question. And then I, guess, Steve, financially incorporating the market share gains I think you are expecting this year and into next year and relative to your comments last quarter about the ability of the business model to achieve earnings, you know, equal to or in excess of the Company's cost of capital. I wonder if you have been able to comment on whether or not that is achievable in 2011 given the strong backdrop we are seeing.

Brian, I will start. We have four initiatives I will comment on. The initiative with IBS, Kingstone, Applied Materials, and Solar or non implant related kinds of things. In terms of IBS just to remind people, IBS has a unique enabling technology that is in the plasma immersion technology area through a product they call Pulsion. We believe with our own IP and the strong global support infrastructure, mainly it is a contract surrounding sales and support for the Pulsion project. We hope to deliver customers an alternative solution to what is currently on the market.

We are excited about the potential for this partnership, but at this point there is really nothing further to comment on in terms of a short-term financial benefit. But you will be hearing more as we go throughout the year. In terms of Kingstone, things with Kingstone are on track, and we are working with them on a number of projects to provide innovative, accelerated implant solutions. Again, we will comment more on that as things develop.

The relationship with Applied Materials is going very well. Again, to remind people what Applied is doing is using their extensive support infrastructure in Japan to support and optimize the performance and productivity of Axcelis' process systems there. And we have started to see some revenues growing from this partnership and we believe this will continue to grow throughout the year. So that is going quite well.

And then in terms of other opportunities and specifically I'll comment on solar, we do have some early initiatives underway in solar that utilize elements of our core technology and that's moving along well and we expect to have some things to share with you again later in the year.

We are also additionally investigating some opportunities in some other markets such as LED. Specifically though, we are looking at opportunities that could take advantage of our core manufacturing and service infrastructure. So nothing specific to report other than those programs that are moving ahead quite well. You should start to hear some details surrounding some of those things before the end of 2010.

Okay, Brian. Regarding your own question, we are very happy with the progress we are making with the products right now, and we are very confident we are gaining market share and we will continue to gain market share through 2011. Whether the market overall will be big enough for us to get to $100 million a quarter in 2011 and that isn't determinable. If the market cooperates, our product penetration will allow us to attain those goals. Whether that's 2011 or 2012 at this point isn't necessarily determinable, but I'm quite confident that we can manage the margins and we can control the costs to produce the bottom line profits we talked about last quarter.

Thanks, guys.

Okay.

(Operator Instructions). And your next question comes from the line of Eric Singer with Singer Capital. Please proceed.

Hi, Mary, hi, Steve. If we circle back to Op EX is the increase in the September quarter, is that going to be a run rate now into the back half of 2010 and into 2011? Or was it customer specific to the September quarter?

No, it is probably going to be a run rate through the end often year. I don't expect -- I think it is going to level out at $ 27 million in the fourth quarter. You could possibly expect that it could come down depending on the status of projects and what new projects we put on our plate into 2011 , but we have -- we don't have that determined

And on the gross margins for Q3 of -- you know, I think you said 29% or 30%, somewhere in that neighborhood, is that solely a function of the higher cost Optima inventory that will be sold out, is that correct?

It is primarily a function of that and also as I said we are in a very steep ramp . I gave guidance of increased systems revenues of 75% to 85%

Right.

The revenue recognition , accounting rules, have a significant impact on margins when you are ramping that steeply. We are deferring revenue. Revenue deferralsare over 10% of what the shipment is. We won't get to recognize most of that revenue until the fourth quarter. Eventually that will level out when your growth rate levels out. It is having a significant impact on our

Right. When you start to recognize revenue from what is clearly an enormous hockey stick-type ramping system in Q4 ,should we get a similar hockey stick-type move in gross margins where we will see margins toward the 40% range then in the December quarter?

No, we still have some inventory that will ship out of Q4 that will depress margins. I think that you will see marginal improvement, but not dramatic improve meant. I am not expecting and I have been saying consistently all year long, I don't expect margins to get that close to the 40% until we get into 2011.

Okay. I am just trying to understand the dynamic clearly based on the system's order guidance, when you begin to recognize the revenue, or when you fully recognize the revenue of Q4, you are operating from a top line standpoint significantly above your break even level, and it is an issue of when you sell out the remaining inventory and when you get the benefit of higher production at your facility, right, in terms of the margins coming up.

It is both of those, right. But we have been consistent in saying we are going to get to -- we are going to get to profitability in the fourth quarter. The revenue levels will be greater than what we said is our break even because of some of this inventory. We should generate profitability in Q4.

And just directionally, I know you commented on the after market business, the growth you expect off the base we saw this quarter throughout the end of the year, any comments that you could make on revenue levels for the September quarter that you will be able to recognize?

The revenue levels in the September quarter, I didn't put those into my economist, but they will be slightly up. Most of the increase in revenue in the September quarter will come from systems. Part of that is a big increase that we had in Q2. Some of that was pulling upgrades from Q3.

Okay. So then looking into Q4 based on the systems guidance that you provided , we should see a stair step function of revenue into the December quarter,

I would expect you would see an increase, we would see another increase in the December quarter, yes.

Great.

And I would expect that would be in both after market and in systems. We are not at this time prepared to provide any specific guidance, but we should see a healthy increase.

Great. Thanks a lot, guys.

And your next question comes from the line Satya Kumar with Credit Suisse.

This is Wiji calling in for Satya. You mentioned that you had three customers, two repeat repeat customers in memory and logic and Optima DX. Can you give us the number ever for Q2 and the shipments in Q3 andQ4? What is your forecast for shipments in Q3 and Q4?

We don't really split out any details on Optima. I can tell you we have 40 Optima's in the field right now in logic, memory, and foundry customers. We haven't talked specifically numbers in terms of number of units throughout the year.

Okay. But like if you look at first half to second half you see an increase in your number of shipments for the Optima SDX.

We expect the Optima overall across all of the product lines will be greater in the second half than it was in the first half.

Thank you. A follow-up question, what portion of the high current is for cold implant?

That's not determinable at this point in time. It is new technology that is just starting to get adopted. So I don't think that is determinable. I don't know, Bill, if you want to comment on that.

This is Bill Bintz. I can add a little more color . As we just mentioned, this tremendous pull for the technology from a host of customers in foundry, logic and memory segments, but these engagements in the experimentation with the technology is still in the early stages, and so it is not clear yet to our customers to what extent in terms of the number of applications this technology will be incorporated in manufacturing. Some customers are further along than others. I think the situation will become much clearer over the course of the next six to 12 months. The technology shows tremendous potential and there is a lot of interest out there to investigate the merits of

I think the part that is certain just to add on to that is the fact that our system definitely has some advantages that customers have already acknowledged versus the completing ribbon beam technology compared with the spot being technology. It definitely has advantages. I think that part we can say with certainty. The other part in terms of what that will translate to from a production standpoint is what remains to be seen.

Thank you.

And this concludes the Q&A portion of the call. I will now turn the call back over to Mary Puma for closing remarks.

I would just like to thank you all for joining us and please feel free to call us if you have any further questions. Thank you.