Axcelis Technologies Inc (ACLS) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies first quarter 2011 conference call. My name is Lacy and I will be your coordinator for today. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Ms. Mary Puma, Chairman and CEO of Axcelis Technologies. Please proceed, ma'am.

Thank you, Lacy. This is Mary Puma, Chairman and CEO of Axcelis Technologies. Welcome to our conference call to discuss first quarter results. With me today is Jay Zager, Axcelis EVP and CFO and Doug Lawson, VP of Business Development. 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's Safe Harbor provisions. 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 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.

Axcelis executed as planned and delivered a solid first quarter. Results were $93.2 million and earnings $0.02 per share in line with our guidance. Our cash balance at the end of the quarter was slightly under $45 million, better than our forecast. In a few minutes Jay will provide additional details on our Q1 financial performance and will share our projections for Q2. Before I talk more about the quarter I would like to take a moment to comment on Axcelis' 2010 market share. Our assertions regarding market share gains in 2010 were recently born out by Dataquest.

Our share in implant overall has increased from below 10% in 2009 to over 12% in 2010, moving us into the number two implant supplier position. These gains were driven by increases in both the high current and high energy segments. In the high current segment our share improved from less than 7% in 2009 to over 10% in 2010, driven by key customer penetrations and volume buying. In high energy we more than doubled our market share to approximately 70% in 2010, demonstrating that our Optima XEx allowed us to maintain our strong market share leadership in this segment. We continue to gain 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. We will continue to benefit from trends in the market associated with hand held requirements for high performance low power devices.

Our customers are faced with delivering chips that will enable these products to achieve near desktop performance while maintaining extended battery life. I would like to take the next few minutes to highlight the strengths that Axcelis' products provide customers in meeting these emerging challenges. The Optima HDx's unique spot beam technology and short beam line continues to differentiate us from the competition because it allows to us deliver a set of process related and throughput advantages that best address customers' emerging device related and manufacturing needs.

Customers are taking advantage of the Optima HDx's spot beam architecture and high dose rates to achieve their desired device performance. In particular, the Optima HDx offers customers a solution to leakage current issues using a processing technique called damage engineering. The Optima HDx can control implant damage at a relatively warmer temperature than competing ribbon beam architectures, providing a solution with an overall lower total cost of ownership. Bottom line the Optima HDx has a fundamental architectural advantage for emerging technologies that will be difficult for our competitors to overcome.

Another significant advantage of the Optima HDx is faster setup times due to our spot beam architecture. This architecture provides a significant throughput advantage, as much as 140% for the foundry customer running small lot sizes and requiring frequent recipe changes. Another potential advantage relates to source lifetime and we will talk in the coming months about the significant productivity advantages that the Optima HDx offers customers as a result of our patented technology in the area of source enhancement. The architectural advantages of the Optima HDx provide a lower fundamental cost of ownership for customers that is driving further adoption and market share gains.

The Optima XEx, our single wafer high energy product is enjoying strong adoption by DRAM Flash and Foundry customers. Our market share gains confirm that the Optima XEx has the highest throughput, broadest energy range and unmatched reliability due to the RF LINAC accelerator technology. Most customers already buy this tool and those who don't are currently evaluating its advantages. We believe that the Optima XEx will allow us to maintain our leadership in the high energy implant segment.

The Optima MDx offers Axcelis an opportunity to expand our offering in medium current implant, a segment in which we do not the have significant share. Earlier this month we secured a new customer penetration for the Optima MDx and we expect to continue to broaden our customer base further with the upcoming launch of the Optima [MDxt]. This product leverages the strength of the Optima MDx while incorporating a more efficient end station process, thereby significantly increasing wafer throughput. With several key penetrations planned in 2011 Axcelis expects to realize solid market share gains in the medium current segment beginning next year.

With respect to Dry Strip, the Integra's advanced plasma strip process, addresses emerging difficult strip requirements that can cause substrate loss. The Integra avoids leakage and other device defect damage created by alternative Dry Strip systems. While our market share in 2010 remained essentially flat at about 6% we expect that as the rapid adoption of the tool continues our market share will more than double in 2011. We saw substantial evidence of this in the first quarter.

In terms of the industry environment we believe that demand for semiconductor equipment overall remains robustalthough several customers are revisiting their 2011 investment plans. This has resulted in reduced second half visibility. We will continue to monitor this situation closely and will take appropriate actions. We are already taking steps to align our spending with market conditions. Despite this, we continue to be positive about the opportunities that lie ahead for Axcelis.

However, we have recently seen pricing play more heavily into negotiations for new penetrations. While this may add some headwinds to our margin efforts, we take this as a sign that the competition believes that pricing actions are required to offset the technical advantages that Axcelis brings to our customers. We fully expect to weather this turbulence and deliver increased market share and improved margins in the future.

One final note. As we have discussed with many of you one on one we have not been significantly affected by the unfortunate events in Japan. As you know, we are actively working with applied materials to increase our business there. While it is possible that the current disruptions in Japan could slightly delay our timing to penetrate this market, we believe that we will continue to make progress in 2011. Furthermore, our Japanese suppliers have not flagged any potential disruptions in material flow. We will, of course, monitor the situation closely for further developments. With that, I would like to turn it over to Jay to provide more color on our first quarter results and second quarter guidance.

Thank you, Mary, and good afternoon, everyone. Q1 was a solid quarter for Axcelis and built upon the momentum that we established in Q4. Consolidated sales for the quarter were $93.2 million, in line with our previous guidance, essentially unchanged from Q4 2010 and 92.2% higher than a year ago. Net income for the quarter was $1.8 million or $0.02 per diluted share. This compares with net income in Q4 of $4.3 million or $0.04 per diluted share. However, it is important to note that the Q4 results included a one-time $2.1 million or $0.02 per share tax benefits. System sales in the quarter were $54.8 million while sales for aftermarket business which we call GSS were $38.3 million. And systems shipments were $51.3 million.

Within these totals Ion Implant shipments were $31 million or about 60% of the total and shipments for our cleaning and curing systems which reflect primarily our Dry Strip business were $20.3 million or about 40% of the total. This was an unusual quarter for us in that normally we would expect that implant shipments would be about 70% to 80% of the total. And with respect to customer segments our Q1 business was almost evenly split with about a third of our shipments for memory, a third for logic and a third for foundries.

Systems bookings in the quarter were $34.3 million. So our book to bill ratio was 0.67. This was the first time in more than a year that our book to bill ratio was less than 1. Our growth rate is moderated from the steep ramp we experienced in 2010 in line with the industry. And we ended the quarter with a systems backlog including deferred revenues of $48.0 million.

Our gross margin in Q1 was 33.4%, slightly lower than our Q4 gross margin of 33.7% and lower than our guidance. The primary reason for this decline was the unusual mix of systems revenue with a much higher proportion of Dry Strip sales than we had anticipated. As you may know, our implant products have greater complexity than our Dry Strip products and usually command a higher gross margin in the marketplace.

Q1 operating expenses were $28.7 million compared with $27.3 million in Q4. This sequential increase was in line with our guidance and was due primarily to several one-time charges including the majority of the 2011 state employment taxes and executive severance costs. Within total operating expenses R&D expenses were $11.8 million compared with $11.0 million in Q4. The increase was due to ongoing requests from customers to meet emerging technology requirements. SG&A expenses were $16.9 million compared with $16.3 million in Q4.

Ending head count on March 31 was 1,137 people including 1,047 regular and contract employees and 90 temporary staff. The overall head count was essentially unchanged from Q4. As a result of these factors our Q1 operating profits were $2.4 million or 2.6% of sales. Other expenses net of other income were $400,000 compared with $1.9 million in Q4. We saw a $900,000 reduction in foreign exchange losses and we had lower bank fees. We accrued $133,000 in taxes this quarter compared with a $2.1 million tax credit in Q4. Net income was $1.8 million and with 110 million diluted shares outstanding we reported earnings of $0.02 per diluted share.

Looking at our balance sheet we ended the quarter with a cash balance including restricted cash of $44.9 million. During the quarter, we used $1.2 million in cash to fund our operations. This was a lower cash burn than we had expected due primarily to favorable collections in the quarter. During Q1 we reached an agreement with our commercial bank, Silicon Valley Bank on a new four year line of credit. This line of credit is for $30 million compared to our prior line of credit of $20 million and has significantly lower initial and ongoing costs. The agreement was signed earlier this week, and as with our last line, we do not expect to tap into this cash to fund operations. Accounts receivable were $49.9 million, a reduction of $8 million from Q4.Consistent with these data, our DSO improved from 56 days to 48 days. Our inventory at the end of the quarter was $123.4 million, an increase of almost $14 million from Q4. This increase was planned and reflects expected product shipments for Q2 and beyond.

Now, I would like to provide some insights into the current quarter and briefly comment on the second half of the year. We are currently projecting Q2 revenues to be between $85 million and $92 million. In recent weeks we lowered our Q2 forecast as some of our customers indicated that tool shipments would be delayed. We should note that in all cases we fully expect to ultimately realize these potential sales. We have not lost any of this business to competition. Within this overall revenue forecast, we expect the potential sequential revenue decline to come entirely from new system sales as we expect GSS or the aftermarket sales to remain essentially flat with Q1.

We do expect that a greater percentage of system sales in Q2 will be for implanters as opposed to Dry Strip tools. As a result, we should see a solid improvement in gross margins in the quarter. And with a slight sequential reduction in operating expenses we should see improved operating margins as well. As a result, earnings should be about $0.02 per share. We also expect to use approximately $5 million to $10 million of cash in the quarter primarily to fund second half product shipments.

Looking at the second half of the year, recent events both within our industry and beyond our industry have made a cloudy view even cloudier. Several of our key customers have indicated that they are reevaluating their second half CapEx spending projections and the unfortunate events in Japan have also had an impact on overall industry forecasts.

Additionally we are seeing for the first time in several quarters increased focus on pricing by our competitors. As Mary indicated, pricing competition is often a sign that our competitors are feeling pressured. This will have an unfavorable impact on gross margins in the second half of the year. As we have said previously, gross margin improvements are a key objective for Axcelis. We've also said that a significant part of our executive compensation for 2011 is tied to achieving at least a 40% overall gross margin by the fourth quarter. The current environment and the competitive pricing landscape will more than likely delay our ability to reach this goal.

However, we remain encouraged by our efforts to reduce manufacturing costs and improve supply chain efficiencies. Our gross margin results will ultimately be significantly impacted by the mix in volume of system sales in the second half which are difficult to forecast in the current market environments.

In summary, Q1 was a solid profitable quarter for us and Q2 should also be a solid profitable quarter. And while there is greater uncertainty about the second half of the year, we at Axcelis are taking all of the appropriate steps to ensure that we will be profitable throughout 2011 and beyond.

And now I would like to open up the meeting to questions. Operator?

Thank you. (Operator Instructions). Our first question will come from the line of Christian Schwab with Craig Capital Group. Please proceed. Christian Schwab: Great. Thank you. Can you just remind us were there any 10% customers in the quarter?

Yes, we had three 10% plus customers in the quarter.

Okay. There is all kinds of commentary in the channel regarding spending of a couple of the largest guys, redressing CapEx, there is also some chatter that a large, I think historically large, customer out of Korea is delaying a retrofit of a memory fab to a logic fab. Is that part of, I guess, the squishiness in the second half that you are seeing as well?

Well, we can't comment on specific customers, but I will say that it has actually been more than one customer that has contacted us about moving several pieces of equipment around. I think the other thing that has obviously impacted Axcelis is the fact that it is no secret that we don't sell implanters to Intel and so we are not benefiting from any of the increases that they recently announced. So I think it's a mixture of things right now that have impacted us both today and moving into the second half.

And when you guys talk about gross margin -- we'll start with Q2. When you talk about solid improvement in gross margins on a sequential basis, can you give a little bit more clarity on what that means?

I would expect we would see at least a one point improvement in the quarter.

Okay. And then if gross margins are going to potentially track down given pricing actions and mix that we talked about, what should we be thinking regarding gross margin? How many points is that going to go down potentially in the second half? Just a broad range.

First of all, we never said gross margins would go down. What we said or what I tried to say was that our ability to achieve the improvements that we have been talking about will be impacted by pricing. So, at this point we feel fairly comfortable that we are going to show significant improvements in Q2, and frankly, with all of the shifting and movements with tools in the industry it is very hard to be more precise in the second half of the year. We expect in general you will see a positive trend upwards of gross margins, but I would rather wait until the end of the second quarter and then give you some better clarity on Q3 when we have at least another three months of better insight. Because I will tell you, Christian, just in the last three weeks or so as we looked at our Q2 forecast almost daily, tools are moving in and out based upon various customer requirements, so it becomes more challenging to get any kind of clarity beyond the current quarter.

And then your inventories bumped up on a sequential basis and sounds like you are going to add to inventories as a cash drain potentially in Q2. Is that because the boxes are already in process of manufacturing and you just can't stop it with all of the lack of visibility? I guess I'm just surprised that you want to add to inventory again.

Well, I mean it becomes fairly simple. There is so many different customers who are moving tools both in and out of a quarter that our philosophy is we are not going lose an order because the product is not available. We have the cash, we have the strong balance sheets, so if it means that in a month or in a quarter we add a little bit to inventory to make sure that all of our customer requirements are met we will do that. And as we said in the call, we are not seeing customers cancel orders. We are seeing customers delay. And so ultimately, all it is going -- cause a little bit of disruption to our inventory. Maybe it will be a little bit harder than we would like to see for a couple of months or so, ultimately we are confident that our customers will be buying our products and our inventory levels will return to a more normal level.

Great. Thank you.

And our next question --

Thanks, Christian.

(Operator Instructions). Our next question will come from the line of Weston Twigg with Pacific Crest Securities. Please proceed.

Hi. Thanks for taking my question. This is [Monica] for Wes. Just a quick question. You talked about the cash burn of $5 million to $10 million in the quarter. Can you give more details because you are building more tools and also for the full year 2011 do you think you would be cash positive or cash flow negative? You will be burning cash for 2011?

First of all, with regard to Q2, exactly for the reason we talked about. We expect to see some inventory buildup and the reason is because we just don't have the clarity we would like to see on specific tool sales. And so faced with the alternative of not building a tool and possibly missing a sale, or building a tool a little bit too early we made a conscious decision that we will make sure the tools are available to meet customer requirements. So there will be a buildup in Q2 due to the lack of clarity that's existed, frankly for the last couple of weeks, around specific tool forecasts for the quarter. At this point we remain confident that for the full year we will be generating cash. I say that with the uncertainty of the second half environment, but from everything we can say today, our expectation at this point, is that we will generate cash in the second half of the year and then for the full year in total.

Thank you. That's helpful. And regarding the push outs can you provide us more details like what customers? Basically are they foundry customers, more memory centric customers and have they given you more idea -- is it related to handsets pushouts or tablets?

We are not going to comment on specific customer names as I mentioned earlier. It is multiple customers and they are coming from several different customer segments. We had one of these customers in visiting the factory earlier in the week and while they talked about the fact that there were some tools moving around and some pushouts that was the first part of the sentence. The second part of the sentence was, "but you need to be ready because this could turn on again at a moment's notice." That is really what Jay is talking about in terms of the fact that while the tools aren't going to go this quarter they could go any time, and in fact it is possible they could go this quarter, but based on the customers' determination at a specific point in time. That is really about all of the color I think I can give you around that.

Okay, thanks, Mary. Just looking at where you are seeing more product [tractions] for which customers, can you give us more idea on that?

We haven't put out any press releases in the quarter because we had talked about how we are not going to announce every order that we get. Obviously we have got systems in our backlog, so we are getting orders. We have a number of new penetrations that are in the pipeline right now that we are very excited about really across all of our Optima product lines and our Integra product lines as well. And so we think that hopefully over the coming months, hopefully even within this quarter we will be putting out some press releases that will, again, make announcements on these pretty exciting penetrations.

Okay, thanks.

Monica, I think Jay mentioned in the script that our business this quarter was split evenly a third, a third, a third between foundry, memory and logic if that gives you a little bit more breakdown.

Sure, thanks. Just a couple of questions more for me. Can you provide some update on the adjacent market opportunities you have talked about in the past, either in solar or LED.

I'm sorry. Could you repeat the question?

Adjacent market opportunities, either in solar or LED.

So again, the adjacent markets as most people see them are the solar market and the LED market, and we do continue to believe that solar represents an opportunity for diversification for implant technology and that opportunity continues to be, as the solar customer migrates away from the phosphorus doping on P-type silicon and moves towards boron doping on N-type silicon. Customers are currently investigating that, evaluating that and as they move we expect that we will be a player in that market. For the time being we continue to focus our efforts on the semiconductor market and gaining share especially in the high current area.

Okay. Thanks. Just a house keeping question. How should we think about the tax rate going forward for like remaining 2011 and if you can provide some idea for 2012 also that would be very helpful.

You know that we have NOLs in the US, so probably the easiest and best way to talk think about our tax provision this year and going forward is if you take a look at our provision in Q1 as a percent of our pretax income, it was slightly under 7%. That is probably a reasonable indicator at least for 2011 as to where our normal tax rate would be. Obviously at the end of the year we go through a much more comprehensive review and take a look at potential FIN 48 tax adjustments. But in general that is a reasonable way to look at our business today.

Thank you so much. That is all for me. Thanks.

(Operator Instructions). Our next question will come from the line of Edwin Mok with Needham. Please proceed.

Hi. Thanks for taking my question. I guess I have a question to ask regarding the pushout regarding your outlook for the current quarter. You mentioned that this past quarter you have around one third memory and one third foundry and one third logic. Do you see that mix changing dramatically in the third quarter?

No. Actually, no. I'm looking at the bookings that we have at least what is in the pipeline right now and it still is a pretty evenly spread out mix across the three segments.

So would that imply that the pushout was -- call it even around the different segments? It is not concentrated on one particular type of end customer?

Yes, it was definitely not concentrated in one customer and it was across multiple segments.

I see. And then question regarding I guess different type of products. Do you see like a difference between strip and implant in terms of customer ordering pattern for the coming quarter?

No, I think it is pretty much the same. In fact, we've had both the implanters and the Dry Strip tools impacted by some of the shifting around from a customer perspective. I mean as Jay mentioned, we had a higher than anticipated percentage of Dry Strip tools actually in Q1. So, do you want to add more?

Interestingly if we look at our Q1 results we came in essentially on our guidance, but having said that, we probably were a little bit where we expected to be in implant because some tools actually got delayed from Q1 to Q2. Conversely, it just turned out that we had more Dry Strip tools than we expected and some were actual accelerations of Q2 sales. So each customer and each requirement is different, and it just so happened in Q1 that the mix was a little bit different than we would normally see.

And Edwin, this is Doug. We are also continuing to see an enhanced interest in the Integra platform because of these difficult to remove strip layers. I think there has been a pickup in activity in terms of people looking at the platform for that, so that has been very encouraging from the strip side.

Great. Actually that leads to my next question. You guys are doing relatively well on the strip side, actually coming back quite a bit. I'm just curious, in terms of how you look at that piece of business. I know you guys talk about implant for quite a bit, but in terms of the strip business. How do you guys see that and what will be the main driver for, at least in your mind, that leads you to believe that you can be successful in strip?

It is clearly accretive to our bottom line. It is an area where, as Mary mentioned, we are going to see significant market share gain in the year. We ended the year at 6% and with 40% of our business coming from Dry Strip in Q1, obviously we believe we gained quite a bit of share just in the first quarter. So, it is an important part of our overall business model and it allows us to build and leverage our operating expenses to help us deliver solid profitability.

And I think, Edwin from a technical perspective at this point the Integra ES product is definitely showing significant advantage over the competition in the bulk strip market, and so we would expect that customers -- I think I have mentioned in the past that close to 30% of the strip layers now on these advanced technologies that are requiring more advanced strip processes and the ES really attacks that. So we think we will see that and that will pull some additional RS type business with it because of the common platform.

Great. Very helpful. Actually, I have a few more questions but I will (inaudible) So thanks for taking my questions and congratulations on the good results.

Thanks, Edwin.

Thanks.

This concludes the Q&A portion of the call. I will now turn the call back over to Mary Puma who would like to make a few closing remarks.

Thank you. I would like to reiterate that we remain positive about our prospects. We anticipate continued success with market share gains and improvements in our financial model. Our share gain in the implant market in 2011 will be driven by our momentum in high current, by our strength in high energy, and by our renewed focus in medium current. We also expect to more than double our market share in Dry Strip in 2011 as a result of penetrations we've made with our Integra system.

We look forward to sharing our progress with you in the coming months through press releases and attendance at a number of investment conferences. Jay will be presenting at the Taglich Brothers Conference in New York City on May 3, and Jay and I will be at the Credit Suisse Conference in Boston on May 2, as well as the Craig-Hallum Conference on June 1 in Minneapolis. We look forward to seeing many of you at these events. We appreciate you taking time today to learn more about Axcelis. Thank you.

Thank you for your participation in today's call. This concludes your presentation. You may now disconnect. Good day, everyone.