Axcelis Technologies Inc (ACLS) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies fourth-quarter 2010 conference call. My name is Jeremy, and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mary Puma, Chairman and CEO of Axcelis Technologies. Please proceed, ma'am.

Thank you, Jeremy. This is Mary Puma, Chairman and CEO of Axcelis Technologies. Welcome to our conference call to discuss the fourth quarter and full year of 2010. With me today is Jay Zager, Axcelis EVP and CFO; Steve Bassett, EVP of Finance; and Doug Lawson, VP of Business Development. If you've 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 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.

I'd like to start by providing some insight into our 2010 performance, and also share with you our goals for 2011. Steve will then give more detail on 2010 fourth-quarter results, along with guidance for the first quarter of 2011. 2010 was a very positive year for Axcelis. Most notably, we successfully delivered on the major goals that we laid out at the beginning of the year, including -- number one, returning to profitability; number two, growing our top line faster than the market by significantly increasing system sales, and restoring our aftermarket sales to pre-downturn levels; number three, gaining traction with our newest generation flagship products, in particular the Optima HDX and Optima XEX single-wafer implanters, and the Integra, our high-throughput dry-strip product line. And while official market data has not yet been published, we believe we have gained share in implant, in particular the high-current and high-energy segments, as well as in dry strip.

We are pleased with the progress the Business has made. 2010 was a transition year in which we demonstrated that we have the right products and right organization to win back customers and business. We believe that our actions in 2010 provide a solid foundation for 2011, and will result in another positive year for Axcelis.

During the fourth quarter, I spent time with several key customers who shared their confidence in Axcelis based on our improving financial condition, and the ability of our flagship products to meet their manufacturing needs. Axcelis has benefited greatly by providing these customers with solutions to challenges that have stemmed from trends in the market associated with handheld requirements for high-performance, low-power devices. Our major goals in 2011 build on this momentum.

From a financial perspective, we believe that our results will continue to improve this year. We expect organic revenue growth year-over-year in excess of 30%, and expect market share gains across all flagship implant and dry-strip product lines. Additionally, it is our intention to leverage business development opportunities that will further strengthen Axcelis's portfolio. We will be very focused on enhancing margins. You should expect to see improvements throughout the year.

Finally, we anticipate being profitable throughout 2011, and generating strong, positive cash flow. We believe that demand for semiconductor equipment will remain robust throughout the year. We have visibility into several large customer projects, particularly in the first half of the year, that give us confidence in the strength of customer demand. We are well positioned to take advantage of foundry and flash opportunities, and to capitalize on additional investments in memory that we expect will resume later in the year. We are very excited about the opportunities that this provides for Axcelis in 2011.

With that, I'd like to turn it over to Steve.

Thanks, Mary. Results for the quarter continue to demonstrate improvement in our overall business. We reported net income of $4.3 million or $0.04 per share, of which approximately $0.02 came from a one-time tax benefit. Revenues increased to $93 million, up 24% from the third quarter. This was better than expected due to customer requests for accelerated shipments, moving several tools from January into December. System sales were very strong at $56 million, representing a 42% increase quarter-over-quarter. The increase was across all product lines, as we continue to gain traction and customer acceptance of our flagship Optima and Integra products.

Our aftermarket business also showed strength, with revenues of $38 million. In December, we realized revenues of $13.6 million, achieving our targeted $40 million quarterly run rate by the end of the year. Aftermarket business will fluctuate quarter-to-quarter in 2011, due mainly to the timing of system upgrades. We are currently forecasting aftermarket revenues for Q1 2011 to approximate Q4 levels. Due to the acceleration of shipments as discussed earlier, we are now projecting total revenues for the quarter to approximate what we realized in Q4.

We continue to see strong quote activity, which has led to an increase in order flow. New systems bookings for the quarter were $65 million, marking the fourth consecutive quarter we achieved a book-to-bill ratio greater than 1. We expect this strong trend to continue into 2011, leading to an increase in market share in both implant and dry strip. We ended the year with a systems backlog, including deferred revenue, of $68 million, positioning us well going into the new year.

Gross margins for the quarter were 34%, in line with our expectations, and up from 29% in Q3. As volume continues to increase, we expect to see margin improvement throughout 2011. Consistent with this, we expect a modest increase in gross margins in Q1.

Looking at our expense base, operating expenses for the quarter were $27 million, in line with our forecast. We are projecting spending levels to increase slightly in Q1, as a result of a moderate increase in R&D expense, and a return to market-based employee compensation.

Overall, our business remains strong, but as expected growth has moderated as we move into 2011; however, we do believe, with the product penetration we experienced in 2010, we will continue to grow faster than the overall wafer-fab equipment market and sustain profitability. We are forecasting earnings for Q1 2011 to approximate $0.02 per share. Note that we will not repeat the tax benefit we realized in Q4.

Turning to our cash position, as expected we experienced a cash burn of $7 million, as we ramped the business and added inventory to accommodate first-half 2011 shipments. We expect to burn cash in Q1 based on the timing of shipments and the building of inventory to support our 2011 plan, but we are projecting strong positive cash flow for the year.

We have accomplished many positive things in 2010. Most importantly, we have achieved solid market penetration, which has paved the way to sustainable profitability and strong positive cash flow that will support the continuing growth of our business. With our highly leveraged business model, we are well positioned going into 2011.

I will now turn the call back to Mary.

Thanks, Steve. As you know, Steve will be retiring from Axcelis at the end of the first quarter, and I want to take a moment to thank him for the substantial contributions he has made to Axcelis over the last seven years. Steve provided exceptional financial leadership during a critical time in our history. As a result, we have become a better company, one that is well positioned for strong growth and profitability. Steve, we wish you all the best.

I'm also very pleased to welcome Jay Zager to Axcelis as our new CFO, replacing Steve. Jay brings a wealth of experience with global high-technology firms to Axcelis. I'm going to turn it over to Jay to introduce himself.

Thanks, Mary, and good afternoon, everyone. After a six-year hiatus, it's a pleasure to return to the always-interesting semiconductor capital equipment markets. Over the past few weeks, I've been able to meet with the team here at Axcelis and review the plans for 2011. I'm excited about the opportunities that have been identified, and I look forward to accepting Axcelis achieve its business and financial goals. I also look forward to meeting with many of you either by phone or in person in the weeks and months ahead to discuss our progress.

Mary.

Thanks, Jay. The Axcelis team and I are looking forward to working closely with you to execute against our 2011 goals. We are excited about the success that we believe we will achieve this year.

I'd now like to open it up for Q&A.

(Operator Instructions)Christian Schwab, Craig-Hallum Group.

Great. Thank you, and good luck, Steve. As it relates to DRAM, can you speak to what you are seeing as far as sales to DRAM customers? And what you expect of sales in the first half, and what you are hearing in regard to demand in the second half?

Okay. Well, we believe that the market looks strong. And most importantly, the customers remain positive about their outlook and are on track with investments and plans. Foundry and flash segments are very healthy and we expect them to grow in the first half of the year, but we also expect memory customers to resume their investment in the second half of 2011. So, we believe that we're well positioned to take advantage of business across all of the segments. If you look at our bookings in the fourth quarter, which would be indicative of where our future sales are going to come from, it's really spread out almost across the three segments that we break out--foundry, logic and memory. And that evenness across the three segments actually shows that there's been a moderation, at least in Q4 bookings, from what had been a more predominantly heavy memory bookings activity that we had seen. So, I do think that the first half is going to be foundry and flash, as you said. Again, I think we're very well positioned, but we certainly should not count the DRAM folks out. We do believe they will be spending later on in the year.

Great. And then on the OpEx line, where do you see that leveling off? Do you expect that to creep up throughout the course of the year, or up slightly from the $27 million in Q4? Do you expect that to flatline out?

I think that the increase that we'll see in Q1 will pretty much flatline out for the rest of the year.

Okay. And then we've done a fabulous job of, in essence, crushing it on the top line, but the leverage at the bottom line is not been as spectacular. As we go out to through course of the year, is there a quarterly revenue range where you think that we see significant leverage to the bottom line, or is that a function of both revenue in gross margins as we get better at working on some of these new products and putting them back together, et cetera?

Yes, I think it's a function of both. I think the revenue should be strong for us throughout 2011, and we've got very focused attention on improving our margins. We think that we have plans in place that we can show significant improvement throughout 2011, which will provide the leverage that you're talking about.

And you guys, are you still thinking about exiting the year somewhere in the 40% to 42% range? Well our targets -- our internal targets are in the low 40%s, yes. And we've got some work to get there, but we've got a lot of focus internally on working that out.

Right. So, it will be a function of volume. It will be a function of executing against the plans we have, and then also mix. That's going to be a big factor in it as well.

Great. All right. No other questions. Thanks.

Weston Twigg, Pacific Crest Securities.

Hi. This is Monica for Wes Twigg. Thanks for taking our questions. A couple of questions here. Can you talk about your market share exiting in 2010. You gave us some idea, but if you can give us a better idea on the percentage wise, and where do you think they will trend in 2011? And if you can speak on the different segments and the market share in each segment? Thanks.

Well I understand why you would be asking that question because we've been saying all along that we've been gaining market share. And we do expect to be see some market share growth in implant in 2010, driven by the new penetrations that we made in high current and high energy. 2010 was really a year that we seeded the market for future market share gains, but at this point we're not giving specific guidance on where we think we've gone for implant overall, or by each of the segments. We're waiting for the official dataquest report, which will be issued in April of 2011. But again, based on the internal numbers that we've crunched, what we know about our results and some of our competitors results and the overall size of the market, we feel comfortable saying that we know that we did gain share.

Okay. Thanks. Other question, just kind of wondering on industry trends, if you look at the industry, as the industry moves toward the CD transistor structures. Can you talk about how the share of implant as a percentage of WFE would change? Do you think it will remain the same, go high, or any of your thoughts on that?

Monica, this is Doug. I think one thing to think about with implant is implant has typically grown as people have used more advanced devices. And so, with some of the structures you're talking about, there is other techniques and other processes that are being adopted. We're seeing more uses of implant in other functions within the processing steps. So, we continue to see it growing.

Okay. Thanks. Perfect. I think I had just a couple of housekeeping questions. We noticed that accounts receivable went up. If you can, talk about when you expect the customers to pay off on those shipments. And also we noticed the share counts went up by like 4 million or 5 million. If you can talk about that too?

The accounts receivable has to do with the timing of shipments, and how much shipped in the last month of the quarter. And after that, that will fluctuate up and down as we go forward. Though, nothing unusual in that other than just the timing of the shipments and several -- a number of tools shipping in December.

Okay.

With respect to the number of shares, two things. We did have a number of options exercised during the quarter. That's number one. The other is that they return it profitable, we have a number of dilutive shares related to outstanding stock option grants that get added into the fully diluted calculation.

Okay. That explains it. Thanks. Just another question on industry trends, looking at the 450 millimeter wafer, like Intel, CMC, Samsung, they have talked about moving to the fabs at 450 millimeter wafer size. So, can you talk about your R&D expenditure, or what do you think when that transition happens?

Yes, Monica, the 450 millimeter plans and discussions are all part of the road map that industry follows. There is discussion on when the proper time for when that move will happen. It's not for several years. And we will be positioned to participate in 450 millimeter, and we'll expend the R&D resources that are needed to play there as the time is appropriate.

We are engaged in discussions with all of those players. So, we have a clear understanding of what the expectations are. As Doug said, it's really going to be a function of the timing.

Okay. Just last question for me is you have talked about the damage entering at land in the past. So, if needed for better device performance, do you think that Axcelis 2 can be ran below minus 40 degrees for better devices?

Well let me explain a little bit in terms of the temperature. The device performance that the customer requires with the Axcelis tools, with the Optima HDx, we can achieve that device performance at minus 40 degrees. We do not need to go lower than that to achieve the device performance that the customers require. If needed to be, we can always put a different cooling system on that can go lower, but at this point there is no device reason to go lower. And so, by allowing us to run at minus 40 versus the minus 100 degree temperature that the competitor speaks of, we're able to run with a better system from a cost of ownership perspective.

That's really driven by the beam line that we have, our spot beam technology versus our competitors' ribbon beam technology. There are specific advantages to the spot beam which allow us to run at that relatively warmer temperature, which provides a lower cost of ownership for the customer and much less risk associated with running the process.

Okay. Thanks. Just if I can ask one more question. In the past, you've talked about the run rate of about $100 million -- $100 million quarters at run rate. Intel has increased and other companies are coming with more CapEx numbers, and the WSC is supposed to be 15% plus, minus, give or take some percentage up from 2010 levels. So, do you think your target revenue run rate is higher than $100 million a quarter?

That was not a target, or revenue run rate. That was a hypothetical example of what the leverage would bring us at the bottom line if we achieved $100 million. So, we were not intending, when I answered that question a couple of quarters ago, to project that we would have $100 million run rate. The market progresses forward. We have said it's reasonable for us to expect that we can get our revenues up into the $100 million range, but we do not provide forecasts out beyond the quarter. So, I'm not going to respond any more than that.

Okay. Thank you so much. And good luck to you, Steve.

Thanks.

(Operator Instructions)Brian Walton, Sterling Capital Management.

We would certainly like to echo our thanks and best wishes to Steve. We've been owners as you know for a long time and, Steve, you've been involved in a very difficult scenario and have handled it well and professional. So, we thank you very much and best of luck.

Thank you.

Three questions. So, as the parting chat, Steve, I'll try and get you to comment one more time and probably not even do a good attempt of going about it a different way. But I think what a lot of us are trying to figure out again are what is normalized potential here at Axcelis? What is the business model capable of generating? And I think very recently, in fact through December, the commentary was that the business model as it is structured has the capability in this cycle to generate earnings that are somewhere in the $0.40 to $0.60 range. And again, just repeating the fact that since that time, the level of capital spending in the industry, expectations has improved. We've seen an uptick in all of the major players. So, I guess my question is, do you guys still feel as though the business model in this cycle has that capacity in a realistic expectation to generate those types of earnings? That's the first question. I'll do the two other ones and then I'll get off. But second one, would just be as we look into 2011, you talked about being cash flow positive. I wonder if you could just give us a sense of, as a percentage or relative to net income, whatever that level might be, how much of that net income in 2011 might we expect to fall down in terms of free cash flow after CapEx and everything? So, flow to the balance sheet. And then lastly, the third question, perhaps it might be for Doug but again any update, any more specificity that you might be able to provide on some of the other adjunct or adjacent initiatives, solar or whatever they may be. Thank you.

Okay, Brian. Let me start on this. I'll take the first two, and then I'll have Doug take the third one. Yes, I believe that our business model will allow us to achieve those levels of profitability. We mentioned earlier that we have some work to do on margins. We're very focused on that. We get the revenue levels up to what we think could be reasonable levels and achieve the margin targets. Most of that increase in margin is going to fall right through to the bottom line and we can generate positive earnings. I believe that going forward, once we do this, that we can demonstrate that we can return our cost to capital. I said that a couple of quarters ago and I still believe it. On the cash flow situation, the way our business is built is we should return more than 100% of earnings in the form of free cash flow. Our capital requirements are pretty limited still. So, we do not have significant CapEx requirements. I think that we have fairly significant noncash expenses in the form of depreciation, amortization and stock compensation expense. So, when you look at those, I think it's reasonable to expect that we'll return more in the form of a positive free cash flow than what we show on the bottom line, which is quite frankly what we did this year. I think that our loss was just over $17 million, but our negative cash flow from operations was around $5.9 million.

And Steve, if I could, just real quickly on the margin improvement, again, is the movement from low 30%s, where we are now, to that low 40% target, is it strictly, or 80%, 90% just a product of flow-through and top line?

It's going to be mostly cost-related. In fact, the work we'll do to reduce the cost of the products.

So, we in theory could see movement through 2011 from the $93 million level we're at today towards the $100 million, $105 million hypothetically, and achieve or move towards achievement of that low 40% gross margin on improved revenue, but not giant leaps in revenue growth.

Right. Yes, we should have revenue growth in 2011. And as I say, we think we'll go faster than the overall wafer fab equipment market, but they're not going to be the giant leaps like we've seen over the last two quarters. But with our targeted margins, yes, we can achieve the bottom line performance that we've been talking about. It's going to be mainly taking cost out of the product though. It's not reliant on significant increases in volume.

I think last quarter you did provide guidance that you thought you would exit 2011 achieving that low 40%s gross margin. Do you guys still feel that way?

That's our target internally. That's what we're working towards. We cast a lot of people in the organization to work on that. So, that is our internal target.

Okay.

Brian, on your other markets and alternative markets, adjacent markets question, let me start with the LED market, which we haven't talked about in the past. Some interesting things are going on in LED outside of the MOCVD world. There is a move from 2-inch to 4-inch substrates that is starting to happen, and moving beyond 4-inch. For us, that means that there is some interesting opportunities that are beginning to appear in the area of dry strip, UV curing as well as some interest in implants within the LED markets. And so, we expect over the course of 2011 to really vet those out and working with several customers to identify the need. The interesting part of this is this plays very much to our Legacy products. So, these are 4-inch and 6-inch tools in the UV curing dry strip and older implant models that could have a rebirth and a new role in the LED market. Switching over to the solar side, really it's the same thing that I said on the last conference call. We do believe that implant has a strong future in the solar market. We believe that occurs when the solar cell manufacturers switch to boron doping and N-type silicon start material. We still think that while they are experimenting with that now, that the manufacturing and production level volumes are still a couple of years out, and we do expect to play in that market. So, I think there is opportunity in these adjacent markets, but I will reiterate that we do continue to focus on regaining our share in semiconductor. We think that's the primary objective right now. And we'll participate in the adjacent markets as they develop.

Thanks, guys.

Thanks, Brian.

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

We appreciate your taking time today to learn more about Axcelis, and please feel free to call us with any further questions. Thank you.

This concludes the presentation. Thank you for your participation in today's conference. You may now disconnect. Have a good day.