Axcelis Technologies Inc (ACLS) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies second-quarter 2011 conference call. My name is Ed and I will be your Operator for today. At this time, all participants are in a 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, Ed. This is Mary Puma, Chairman and CEO of Axcelis Technologies. Welcome to our conference call to discuss second-quarter results. With me today is Jay Zager, Axcelis EVP and CFO, and Doug Lawson, SVP of Strategic Initiatives. 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 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.

Axcelis delivered a very strong second quarter. Revenues were $93.4 million and earnings were $0.04 per share, both above the top end of our guidance. Our gross margins were up several points, driven by product mix and progress against our gross margin improvement roadmaps. These results indicate that we are executing against our plan and demonstrate the leverage we have in our business model. I'm going to leave the financial details for Jay, who will talk more about what is behind these numbers and also about our thoughts on the remainder of 2011.

But first, I'd like to spend a few minutes on what we're seeing in terms of market dynamics. We are particularly pleased with our Q2 results given the more difficult industry environment we are experiencing compared with the first quarter. As we discussed during our last call and in various investor meetings since then, like our peers, we believe that we are in a mid-cycle correction, or pause as we have called it. In this weaker than anticipated environment, we have continued to see customer order and ship dates move around and result in a net pushout of expected revenues. This is what has created issues around visibility.

From an Axcelis perspective, our strategy through this period of uncertainty is to focus on being ready to meet customer requirements on a moment's notice. This is translated into maintaining inventory to allow us to quickly ship systems and to hold our spending at levels that support our customers' requirements. Our ability to quickly respond to our customers' needs in this current environment is critical to our business and to theirs. Just last year we first discussed the revolution in the handheld market and how damage engineering and cold implant technology were critical to enabling our customers to deliver high-performance and low-power consumption devices to the smartphone and emerging tablet markets.

Today, smartphones and tablets are firmly entrenched in our everyday lives. Intense competition in these markets has led to an acceleration of Moore's Law to achieve even higher performance and longer battery life.

Our foundry and flash customers depend on Axcelis to deliver advanced process capability in implant and dry strip to successfully compete in this market. Now we are witnessing the second phase of this next wave of computing. Companies like Amazon, Apple and Google are bringing the cloud to the masses. Cloud computing is no longer primarily focused on business. Services like iClass, Google+ and the Amazon Cloud Drive, as well as social networking sites like Facebook and LinkedIn are directly connecting our smartphones and tablets to the cloud. In order for this approach to succeed with the mass consumer market, the cloud must feel like local storage, like it's in your pocket. The communication server and storage performance requirements of the cloud are driving our foundry, logic and DRAM customers to push the limits of performance like never before.

This acceleration of Moore's Law is driving a rapid increase in capital intensity that will ultimately result in the leading-edge semiconductor manufacturers moving to 450-millimeter wafers within the next 5 to 7 years. In the interim, Axcelis' customers will depend on us to innovate and deliver higher productivity, lower cost of ownership and improved flexibility to help control this rise in capital intensity. In addition to the acceleration of Moore's Law and the associated rise in capital intensity, this next wave of computing is erasing long-defined market boundaries for our customers. New operating systems, new system architectures and new communications protocols are blurring the lines between logic and foundry and making it difficult to forecast Flash or DRAM, SOC or NPU. This certainly makes it difficult for our customers to plan ahead for their CapEx purchases which brings me full circle. Axcelis must be ready to meet our customer requirements on a moment's notice.

With that as a backdrop, let me drill down into some specific product advancements that highlight how Axcelis is addressing these customer issues and how they are driving 2011 market share gains. Customers continue to recognize that the Optima HDx's unique spot beam technology and short beam line differentiate us from the competition by delivering a set of process-related and throughput advantages that best address emerging device-related and manufacturing challenges across all customer segments.

For example, we have talked about the benefits that the Optima HDx's spot beam architecture and its high dose rate have allowed customers to achieve. Currently, greater than 25% of the installed base of Optima HDxs have been upgraded to include damage engineering capability. In addition to the damage engineering and auto tune advantages we've been talking about, we recently also introduced revolutionary new ion source for high current implant that provides remarkable cost of ownership advantages for advanced logic and memory applications. Axcelis has a rich history of technology leadership in ion source design. This new source is the result of significant research and development in cooperation with our customers for a challenge with the new device designs that require the use of novel species and ultra-precise implants to power mobile electronics. The result is the Eterna ELS3, which extends source life by an unprecedented 500% improvement for carbon and a 300% improvement for germanium applications. Carbon and germanium implants have become critical to device performance in the shallow junctions associated with sub-28 nanometer nodes.

The Eterna ELS3 allows for higher implanter to uptime and significant manufacturing cost advantages for the very critical implant steps. The new source is already in production at several of the world's top memory and logic chip makers and is making a significant contribution to their manufacturing goals. The Eterna ELS3 is available as an option on new tools, as well as a sealed upgrade to installed systems. In fact, upgrades have already been ordered or installed for more than 30% of the existing install base of Optima HDxs. We expect to leverage this technology across our implant platform, further strengthening our market position.

Some of these architectural advantages is driving the adoption of the Optima HDx at new customers. Last week, we announced a major design win that one of the world's leading foundries. The system will be used in high-volume production at the chipmaker's new flagship manufacturing facility for 28 nanometer logic applications. Our customer specifically cited the product's compelling advantages in the areas of low energy applications and high productivity as keys to their decision in tool selection. We're very excited about this new high current customer and the potential it holds to increase our market share even further as they expand their capacity. At SEMICON West a few weeks ago, we launched our newest medium current product, the Optima MDxt. This product offers Axcelis an opportunity to significantly expand our offering in medium current implants, a segment in which we currently do not have significant share. The Optima MDxts innovative proprietary design brings unmatched levels of productivity and energy purity across the broadest range of medium current implant applications, providing for optimized manufacturing flexibility and capital efficiency. It provides chipmakers with a flexible medium current implanter that significantly reduces operating costs.

From a device perspective, customers continue to push Moore's Law to more advanced device nodes with extremely shallow transistor junctions. At these advanced nodes, uniform ultra-low energy mid dose implants become critical in delivering high-performance, low-power devices. The combination of its manufacturing capability, including high throughput and flexibility due to its broad energy range and reduced power consumption from its single magnet beam line design, make the Optima MDxt a powerful new addition to Axcelis' Optima family of ion implantation systems. With the introduction of the Optima MDxt, Axcelis is now well-positioned to take advantage of new growth opportunities in the second largest implant segment. We're very excited about this innovative new technology and the potential it offers our customers to more quickly meet the needs of emerging market trends. We are currently working with several large customers on the timing of initial shipments and as a result of penetrations in 2011, we expect to begin realizing market share gains in the medium current segment beginning next year. The Integra ES advanced plasma strip tool addresses difficult resist removal steps that now account for nearly 30% of all steps.

Improper resist removal can result in 2 significant defect types -- substrate loss resulting in device performance issues such as high leakage and low yield and inadequate resist removal creating contamination, also resulting in low device yield. Customers using the standard bulk strip tools offered by our competitors will often add additional process steps, such as wet cleans, to their process flows to reduce the risk of these defects. The addition of these extra steps is costly in terms of throughput time, capital expenditure and processing risk. The Integra ES eliminates the need for this improvised solution. It is the only product on the market capable of delivering enhanced device performance benefits with production-proven, non-oxidizing processes along with an innovative marginal cluster design that provides chipmakers with outstanding manufacturing flexibility and speed.

We recently announced that a major foundry has selected the Integra ES to support their most advanced high-volume device manufacturing facilities. It was selected for this project because of its significant performance advantages for non-oxidizing dry strip processes over ultra-shallow junctions and sensitive exposed high-K and metal gate materials for 2X nanometer processes. We expect that as the rapid adoption of the tool continues and customers order multiple units to fill out their fabs, our market share will more than double in 2011.

Several weeks ago at SEMICON West, we met with many of our customers. Most meetings included a brief discussion on the current industry pause which was reflected in our my earlier comments. But, the majority of each conversation was very positive as we talked about what a difference a year or 2 has made for Axcelis. The discussions were focused around our enhanced Optima and Integra product portfolio and the increasing strength of our business.

Customers across all segments, DRAM, flash, logic and foundry confirmed that they are seeing our tools bring to their fabs the productivity and process advantages that I just highlighted. And there was a great deal of discussion around new design-in opportunities, as well as additional enhancements that we have to offer. The excitement was there, the momentum was positive, the opportunity for Axcelis is real. With that, I'd like to turn it over to Jay to give more color on our second quarter results and to provide third quarter guidance.

Thank you, Mary, and good afternoon, everyone. We were extremely pleased with our Q2 performance as we showed improvements over Q1 in what was a far more difficult industry environment. Consolidated sales for the quarter were $93.4 million, higher than the upper range of our guidance and essentially unchanged from Q1. On a year-over-year basis, revenue grew by slightly more than 60%. Operating profits were $6.2 million or 6.7% of revenue; our strongest performance since the fourth quarter of 2006. Net income for the quarter was $4.2 million, our best performance since the second quarter of 2007.

Earnings per share were $0.04, which was $0.02 higher than our guidance and $0.02 better than our Q1 results. Systems sales in the quarter were $53.7 million, while sales for our aftermarket business, which we call GSS, were $39.7 million and systems shipments were $54 million. Within these totals, ion implant shipments were $39.9 million, or about 74% of the total, and shipments for our cleaning and curing systems, which reflect primarily our dry strip business, were $14.1 million, or about 26% of the total. The split between implant systems and cleaning and curing systems was in line with our historic ratios. If you recall in Q1, we saw an unusually high amount of cleaning and curing systems shipments.

With respect to customer segments, about half of our shipments were for memory, primarily flash, with about 30% for foundries and about 20% for logic. Sales to our top 10 customers accounted for approximately 77% of total sales in Q2. 3 of our customers exceeded 10% of total sales for the quarter with no customer above 20%. These trends were identical to what we saw in Q1.

Systems bookings in the quarter were $48.4 million compared with $34.3 million in Q1. Our book-to-bill ratio was 0.90 up from 0.67 in Q1, and generally on par with overall industry ratios. We ended the quarter with a systems backlog, including deferred revenue, of $42.4 million.

GSS revenues of $39.7 million reflect solid sequential growth and we are essentially at our historic GSS run rate of $40 million per quarter. Our aftermarket business comes from selling spares, upgrades and services.

Our gross margin in Q2 was 36.6%, a 320 basis point improvement over Q1. This significant sequential improvement was due to favorable product mix, lower product costs as a result of our gross margin improvement programs, and lower installation costs.

Q2 operating expenses were $27.9 million compared with $28.7 million in Q1. The sequential decrease was due primarily to lower state employment taxes, the majority of which were incurred in Q1, and the absence of executive severance costs which we had incurred in Q1. Within this total, R&D expenses were $11.8 million, unchanged from Q1, and SG&A expenses were $16.1 million compared with $16.9 million in Q1. Ending headcount on June 30 was 1,096 people, including 1,039 employees and 57 temporary staff. During the quarter, our employee headcount remained essentially unchanged, while we reduced our temporary staff by 33 people. This reduction was primarily in our manufacturing operations. We plan to hold our employee headcount essentially flat this quarter, but we will continue to flex our temporary staff as business conditions change. As a result of these factors, our Q2 operating profits were $6.2 million, or 6.7% of sales.

Other expenses, net of other income, were $1.1 million compared with $400,000 in Q1. The sequential increase was due to higher foreign exchange losses. We accrued $844,000 in taxes this quarter. Net income was $4.2 million and with 109 million shares outstanding, we reported earnings of $0.04 per diluted share.

Looking at our balance sheet, we ended the quarter with a cash balance of $38.0 million, in line with our guidance. During the quarter, we used $7 million in cash to fund our operations. Accounts receivable were $58 million, an increase of $8 million from Q1. This increase was due entirely to the timing of shipments during the quarter. As a result, our DSO increased from 48 days in Q1 to 56 days in Q2. Our inventory at the end of the quarter was $124.3 million, an increase of $900,000 from Q1. This increase was less than we had expected as we were able to carefully monitor the material purchases during the quarter. Our current inventory levels will allow us to respond very quickly to customer requests for shipments on a moment's notice. As a result of lowering our material purchases, we saw a reduction in our accounts payable, ending the quarter with an AP balance of $30.9 million compared with $38.0 million at the end of Q1.

Now, I'd like to provide some insights into the current quarter and the balance of the year. We are currently projecting Q3 revenues to be between $78 million and $90 million. This is a broader range of revenue projections than we would normally give and reflects our uncertainty as to the timing of several major tool shipments. As with other companies in our industry, we are seeing the continuation of a slowdown in CapEx spending. Discussions with customers on new opportunities, however, continued to be robust and have actually intensified in the past 3 months. Within this overall revenue forecast, we expect this potential sequential revenue decline to come entirely from new systems sales, as we expect aftermarket sales to remain essentially flat with Q2.

In Q3, we expect to see a sequential decline in gross margins of approximately 2 points. The Q3 projections include revenue from 2 very low gross margin systems shipments. 1 of these systems is an evaluation tool and during the evaluation period, close customer collaboration resulted in substantially higher labor and material costs. The product enhancements arising from these customer discussions have resulted in future upgrade opportunities and additional revenues for Axcelis. The second system had similar circumstances with higher product costs due to new technologies introduced on the tool. In general, for the foreseeable future, we expect that gross margins will vary quarter-to-quarter based on product mix and the mix of product sales versus aftermarket sales but should remain in the mid- to high-30% range. From a broader perspective, our gross margin cost reduction initiatives are working and we are improving gross margins on every product that we build, particularly on our newer products.

An increase in our product mix toward our newer products will weigh on gross margins until we complete our cost out plans. Additionally, we're seeing more competitive pricing actions by our key competitors as we continue to make inroads in the marketplace. Despite these pressures, we remain committed to driving gross margins to the 40% plus range.

Q3 operating expenses should be at or about Q2 levels. As a result of these factors, earnings per share will be between breakeven and $0.02 in the quarter. We expect to generate cash in the quarter. At the lower end of the revenue range, our cash will show a marginal improvement. At the upper end of the revenue range, we would expect cash to return to 2010 year-end levels. Similarly, at the lower end of the revenue range, our inventory would show modest growth, while at the higher end of the range, we would expect inventories to remain at or about Q2 levels.

In summary, Q2 was a solid profitable quarter for us with strong gross margins and operating profits. And as we move into Q3, we are continuing to work closely with customers to demonstrate our product and technology advantages and we are encouraged by future opportunities for technology design-ins and capacity buys. We are positioned to win in the marketplace in both dry strip and in implants; across all three implant segments, high current, medium current and high energy. Despite the uncertainty in the current markets, we're optimistic about our prospects for the remainder of 2011 and we look forward to an industry rebound in future quarters. Now I'd like to open the meeting up for questions. Operator?

(Operator Instructions) Weston Twigg.

Just was wondering, on the outlook on Q3, do you think with your more concentrated customer base that you're little bit better or maybe even worse position than some of the other equipment companies? Or do you just see weakness as generally broad-based?

Weston, I don't think it's necessarily a function of the customer base that we have. I think it is a function of the fact that we're doing better because we're actually making progress in terms of penetration with the markets, with the products that we have, both in implant and in dry strip. We've talked all along throughout 2011 about the fact that we are gaining momentum from a revenue perspective, our sales year-to-date and we expect through all of 2011 we'll be up considerably over 2010. So, I think that's really what's driving the fact that the decline that we're potentially seeing in Q3 is somewhat better than many of our peers.

Okay. Good. And then on the cash aside, what is changing? But the cash burn was for working capital, but on lower revenue you're going to generate cash in Q3? Can you explain what's changing from quarter to quarter?

Yes. We're doing a pretty good job managing our cash. We would have generated cash in Q2, but because we curtailed our material purchases as result of tighter inventory controls, our payables actually went down a little bit. So that was a 1-time reduction in cash. As we look at Q3, we expect to generate cash at lower revenue levels and at higher revenue levels so I think our cash controls are working. And as we've said all along, we expect this year we would be cash positive and we're on track to deliver that.

Okay. And then finally, at which revenue level do you think you'll hit the 40% gross margin target?

First you have to tell me what our competition's going to do with pricing. There are obviously a lot of factors that are driving our gross margin results. The point we try to make very clear on the call is that the internal things that we're focusing on, reducing our costs, improving our product efficiencies, getting higher levels of commonality in our parts, reducing our installation costs, those are all tracking well and in fact, in many cases we're ahead of our internal projections.

The market's a different story. Pricing pressure continues to be much more intense than we would expect it and so it's really hard, particularly given the revenue projections in the future, to really determine exactly when we would approach or exceed 40%. But we are making substantial progress. Obviously, we'll have some more information as we go forward, but as I said in my comments, it's reasonable for us to be looking at gross margins in the 35%, 38% range over the next several quarters.

Okay. Perfect. Very helpful, thank you.

Brian Yurinich, Craig-Hallum Capital Group.

Actually this is Christian. With regard to the 40% gross margin target, is that a function predominantly then of the cost out initiative and assuming competitive pricing remains?

Yes, as I said, it's a function of many activities. The good news is we're getting great traction with our newer products. These newer products just don't have the margins that some of the older products do and as we make our enhancements, as we make adjustments, as we move forward, we're seeing substantial progress in every single product we build. But the mix is working a little bit against us.

The good news is I'm very pleased with the performance of our operations teams in terms of what they're doing on a product by product basis. We had talked before the introduction of the MDxt with a common front end really helps our commonality as well as giving us a much stronger product in the marketplace, so we're taking all the right steps. But right now, the math is working a little bit against us and therefore for planning purposes, we don't see ourselves getting to the 40% range over the next several quarters.

That makes sense. What is the target date for the cost out plan being done?

It really varies. A lot of it's a function of how quickly the industry recovers. From our standpoint, the faster the industry covers, the more new products we can get out to our customers, the more efficiently we can get some of these cost reductions in place. So as we've talked for a while now, these pushouts and the lack of clear definitive, in many cases, order schedules from some of our customers really makes it very difficult for us to be more precise around when we can achieve these objectives. I know you'd like clear information, but we just don't have good visibility to these forecasts right now.

Yes. You're not alone. On that inventory level, can you just remind us how much of that revenue is actually sitting at customer level to support guaranteed uptime?

I'm not sure I understand the question. Go ahead?

There's a certain percentage of that inventory that never leaves, I understood previously. I just couldn't remember what the amount was to guarantee uptime.

We have probably about $40 million or so of inventory associated with parts and consumables that sits in the field and in many cases, actually sits at customer sites.

Perfect. That was the number I was looking for. Good quarter in a difficult environment. Thank you.

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

Thank you, Ed. I like to thank everyone for taking time to join us today. We are in the process of scheduling non-deal roadshows and we will be attending the Piper Jaffray Semiconductor Summit in Boston on August 31. We look forward to seeing many of you at these events. Thank you for your continued support.

This concludes the presentation. Thank you for your participation at today's conference. You may now disconnect. Good day.