Axcelis Technologies Inc (ACLS) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies third quarter 2011 conference call. My name is Jennifer, and I will 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 the 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.

Thank you. This is Mary Puma, Chairman and CEO of Axcelis Technologies. Welcome to our conference call to discuss third 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 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' financial performance in Q3 was solid given the deteriorating industry environment that we encountered in the latter part of the quarter. We are pleased that the business is well positioned to manage through these slower market conditions. We are using this time as an opportunity to continue to develop new technologies, improve our existing products, and penetrate new accounts, as evidenced by the fact that we recently shipped two Optima high current systems to new customers. We expect further penetrations at new fabs in the near term for our Integra products and all of our Optima systems, high current, medium current, and high energy. We will also continue to upgrade our systems in the field with differentiating capabilities, like damage engineering technology and our new extended life source. I will talk a bit more about these opportunities, as well as some new enhancements in a moment.

In the past year, we've spent a lot of time discussing the revolution in the hand-held market and how Axcelis' technology, like Damage Engineering and Carbon and Germanium source life are enabling our customers to deliver high performance and low power consumption devices to the smartphone and emerging tablet markets.

Customers continue to be under intense pressure to deliver higher performance chips that extend battery life even further. Now we are witnessing the second phase of this mobile computing era, which involves directly connecting our smartphones, tablets, and PCs seamlessly to the cloud. In order for this approach to be successful, consumers are demanding that the cloud feels like it's in their pockets and on their desktops. The performance requirements of this diverse yet inter-connected ecosystem are driving our foundry customers through SOC, communication chips and image sensors, logic customers through high-performance CPUs for PCs and servers, and memory customers, through increased density and lower cost to push the limits of performance like never before. Our customers are depending on Axcelis to innovate and deliver enabling solutions that address emerging device fabrication challenges. These challenges will continue to be focused on device performance and yield concurrent with minimizing cost of ownership.

As a result of changing market dynamics, we expect that as the industry exits its current downturn, the foundry business will experience intense investment as DRAM has over the past few years. Just as we positioned ourselves to take advantage of this large wave of DRAM capacity buying, we have positioned our Optima and Integra product lines through multiple recent penetrations to leverage our strengths and grow our revenues as foundries invest.

We also expect significant growth in the CMOS image sensing market. We believe that our products are well-positioned for this segment as well. For example, we are seeing customers manufacturing these types of chips designing in an increasing number of high energy steps. This has solidified the importance and growth of high-energy implantation and opened a clear path into the Japanese market.

I will now step through the continued advances we are making in our implant and drive strip products. These advances will position us to capitalize on these changing dynamics when the market turns back up. We continue to see a very positive response from the industry on the Optima HDX. Chip makers are selecting the Optima HDX because its unique spot beam technology and short beam line deliver a set of process-related and productivity advantages that best address emerging device-related and manufacturing challenges across all customer segments. The Optima HDX's spot beam architecture and its high dose rates have allowed customers to achieve many benefits and advantages in the areas of damage engineering, beam current, and auto tune performance.

Most recently, we demonstrated remarkable cost of ownership advantages for advanced logic and memory high current implant applications from an innovative new ion source, the Eterna ELS3. This new technology 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.

As with damage engineering, the Eterna ELS3 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. We will continue to leverage this technology across our implant platform to further strengthen our market position.

Our ongoing investments in R&D provide additional competitive differentiation through innovation. Our most recent example of this is the launch of our next-generation high current system, the Optima HDXT. This new system provides all the benefits of the Optima HDX, plus the addition of an energy filter for energy contamination free ultra low energy performance. By delivering pure energy beams less than or equal to 2k EV, the Optima HDXT enables the manufacture of devices of less than 20 nanometer. This energy filter is also easily field upgradable on our install base of Optima HDXs.

The Optima HDXT includes the Eterna ELS3 source. It can be shipped with our damage engineering technology, or it can upgraded in the field after installation. Customers have confirmed that Axcelis' cold implant solution is the best available on the market today, enabling improved device performance and yield, while providing the lowest cost of ownership. We expect to continue to penetrate advanced logic customers with the Optima HDXT. We have already shipped one to a leading logic fab, and are poised to secure additional placements.

Adoption of the Optima HD high current product family continues. During the quarter, as I just mentioned, we announced a major design win at one of the world leading foundries for an Optima HD-XT to be used in high-volume production for 28-nanometer logic applications. This customer specifically cited compelling advantages in the areas of low-energy applications and high-productivity, as keys to their selection. As a result of this adoption, we expect to fully participate in the next wave of 28 and 32-nanometer foundry capacity spending.

We also announced the sale of an Optima HDX to another new customer for advanced CMOS image sensor manufacturing. In this case, the system's enabling spot beam technology, combined with its proprietary wafer temperature control was selected to deliver solutions for our customers' lowest energy applications and highest dose requirements, with the versatility and extendibility to provide solutions beyond the 22-nanometer technology node.

And, in addition to the penetrations mentioned above, we received another follow-on order last week for the Optima HDX from a major memory chip maker expanding our presence in their high-volume manufacturing line.

We have moved into a new era in the competitive landscape for high current implant. Single-wafer architectures alone no longer provide a competitive advantage. Today, customers will differentiate high current product offerings based on beam line architecture. New penetrations are a function of the process advantages that Axcelis spot beam technology offers customers. We alone have been evolving and refining our spot beam technology for over 30 years to meet customers' increasingly changing and challenging needs. This is why Axcelis will continue to win in high current.

The Optima MD-XT is an exciting entrant to the medium current market, a segment in which Axcelis does not have significant market share, but we believe that this tool will change that. The Optima MD-XT delivers unmatched levels of productivity and energy purity across the broadest range of medium current implant applications. It provides chip makers with the flexible medium current implanter that significantly reduces operating costs, particularly at advanced nodes where uniform lower energy mid-dose implants become more critical in the fabrication of high-performance low-power devices.

We are very excited about this innovative new technology and the potential it offers our customers to more quickly meet the needs of emerging market trends. Upcoming placements at both foundry and memory fab will provide Axcelis with the footprint that will drive market share gains in the medium current segment in 2012.

The Optima XEX has quickly become the leading single-wafer high energy implanter on the market today. With the highest throughput, reliability and broadest energy range, it is the industry's clear, high energy implanter of choice. And as I mentioned earlier, it is a strong contender for multiple implant steps in foundry, flash, and DRAM, as well as the growing number of high-energy CMOS image sensor applications. The successful introduction of this tool allows us to continue to ship multiple tools to existing customers and will accelerate penetrations into new markets like Japan. Along with continuing sales of our multiwafer high-energy tools, the Optima XEX has secured our leading market share in the high energy implant segment.

The Integra ES advance dry strip tool is the only product on the market capable of delivering enhanced device performance benefits with production proven non oxidizing processes, along with an innovative modular cluster design that provides chip makers with outstanding manufacturing flexibility and speed. This product continues to provide customers with the best solution for difficult resist removal steps. These steps have process challenges that include a combination of substrate loss, surface oxidation and inadequate resist removal, which if not effectively addressed, can lead to compromised device performance and reduced yield. The more difficult resist removal steps now account for nearly 30% of all strip processes.

We recently announced that a major foundry has selected the Integra ES 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. The Integra momentum continues. We expect a multiple tool order in Q4 from an existing customer, which will complete a strong year for the Integra, a year that we believe will see our dry strip market share more than double.

Before I turn it over to Jay, I would like to comment on Axcelis' view and plans regarding the transition to 450 millimeter. As we discussed last quarter, the acceleration of Moore's law is also driving a rapid increase in capital intensity that will ultimately result in leading-edge semi-conductor manufacturers moving to 450-millimeter wafers within the next five to seven years. Axcelis is committed to bringing a 450-millimeter offering to market and is actively working both externally and internally to ensure that we have the right products at the right time. We are engaged with all members of the semi-tech ISMI-450 program that has become part of the global 450 consortium.

We are also having discussions directly with the leading chip manufacturers who will forge ahead first with the 450-millimeter transition. We have put a development team in place and are actively working to leverage the existing advantages of our 300-millimeter system, like our spot beam technology, as we develop our 450-millimeter offering. Axcelis views this transition as a tremendous opportunity to grow our business and regain leadership in implant and secure our position in dry strip. We will provide additional information on the progress of our programs as we move forward. With that, I would like to turn it over to Jay for more details on our Q3 financial results and Q4 outlook.

Thank you, Mary, and good afternoon, everyone. Axcelis today reported solid financial results in what was a much more difficult industry environment than previously anticipated. During the quarter, we saw customers becoming increasingly cautious about their spending plans. On the system side, we experienced delays of order and ship dates. And in our service business, we saw a decline in the consumable segment at the end of the quarter driven by a drop in fab utilization rates. As a result, consolidated sales for the quarter were $72.5 million, which was below the low range of our guidance, and 22.4% lower than our Q2 results. On a year-over-year basis, revenues declined 3.5%.

Although we reported an operating loss of slightly under $200,000, due to foreign exchange gains in the quarter of almost $1.8 million, we were able to report net income of $1.2 million, or $0.01 per diluted share, which was in the mid range of our guidance.

System sales in the quarter were $35.1 million, while sales for our aftermarket business, which we call GSS, were $37.3 million, and system shipments were $33 million. Within these totals, high-end implant shipments were $17.8 million, or about 54% of the total, and shipments for our cleaning and curing systems, which reflect primarily our dry strip business, were $15.2 million, or about 46% of the total. Through the first three-quarters of the year, over 35% of our shipments have been for dry strip products, higher than our historic rates. As a result, we expect that when final 2011 market share data become available, we will more than doubled our share of this product segment.

In the third quarter, slightly more than half of our sales were from memory customers, primarily flash, with foundry and logic customers each accounting for slightly more than 20% of the total. Sales to our top 10 customers accounted for approximately 75% of total sales. Three of our customers exceeded 10% of total sales for the quarter, with no customer above 20%. This trend has been consistent throughout the year.

Systems bookings for the quarter were $14.8 million, down from $48.4 million in Q2. Our book-to-bill ratio was 0.45. This decline is indicative of the worsening environment we experienced in the quarter. We believe that bookings will be substantially higher this quarter. And we ended the quarter with a systems backlog, including deferred revenue of $22.9 million. GSS revenues were $37.3 million in the quarter, 6% lower than Q2. Our GSS business is relatively strong for most of the quarter, but we did experience a decline in our consumables business during the last few weeks, with fab utilization rates declining in virtually all the geographies.

Our gross margin in Q3 was 37.1%, a sequential improvement of about 50 basis points and substantially higher than our guidance. This improvement was due primarily to a higher mix of GSS business in the quarter with strong upgrade activity, continued execution of our cost improvement programs, and the push-out of two very low gross margin systems that we had expected this quarter.

Q3 operating expenses were $27.1 million, compared with $27.9 million in Q2, and $28.7 million in Q1. As we saw the unfavorable impact of reduced customer demand in the quarter, we took a proactive approach towards more aggressively managing our discretionary spending. Within this total, R&D expenses were $11.4 million, compared with $11.8 million in Q2. And SG&A expenses were $15.7 million, compared with $16.1 million in Q2.

Ending headcount on September 30 was 1,045 people, including 1,015 employees and 30 temporary staff. During the quarter, we reduced employee headcount by 24 people and temporary staff by 27 people. The vast majority of these reductions were in manufacturing operations. As a result of these factors, we reported an operating loss of $189,000.

Other income, net of other expenses, was $1.6 million. This included a $1.8 million foreign exchange gain primarily as a result of the strengthening of the dollar relative to the euro in the quarter. We accrued $230,000 in taxes this quarter. And net income was $1.2 million. And with 108 million shares outstanding, we reported earnings of $0.01 per diluted share.

Looking at our balance sheet, we ended the quarter with a cash balance of $44.4 million, which was higher than we had originally projected. We generated $6.6 million of cash in the quarter. We believe that our cash balance places us in a strong position to weather current market conditions.

Accounts receivable were $39.9 million, a decrease of almost $18 million from Q2. This decrease was due entirely to the lower shipment levels in the quarter, and because of the timing of these shipments, our DSO improved from 56 days to 49 days.

Our inventory at the end of the quarter was $121.9 million, a decrease of $2.4 million. This was a lower level than we had expected, as our operations team did an outstanding job in the quarter with respect to material purchases and inventory management. We remain comfortable that at this inventory level, we will be able to respond quickly to customer shipment requests. And as we lowered material purchases in the quarter, we saw a significant reduction in our accounts payable, ending the quarter with an AP balance of $17.7 million, compared with $30.9 million at the end of Q2.

Now I would like to provide some insights into the current quarter and provide brief comments on calendar year 2012. We are currently projecting Q4 revenues to be between $60 million and $70 million. As was the case last quarter, there are several situations where the timing of tool shipments could change as customer buying patterns have become more erratic during the past few months. Within this overall revenue forecast, we expect to see declines in both our systems is business and our GSS business. We expect that Q4 gross margins will show a sequential decline of approximately two points. This decline will result from the inclusion of the two low-margin tools that were deferred from Q3 and from projected changes in the product mix.

As we stated last quarter, we expect that for the foreseeable future, gross margin should remain in the mid to high 30% range. Operating expenses should be at or slightly below Q3 levels. We are projecting modest engineering hiring in the quarter to support product development activities. The spending increases from these additional hires will be offset by further cost reduction actions, including a requirement for our employees to reduce their year-end vacation accrual balances. So as a result of the lower revenue forecast and the projected gross margin decline, we expect to report a small earnings loss in the quarter between $0.01 and $0.05 per share. Due to this operating loss, we are also expecting to use cash in the quarter and project that our year-end cash balance will be between $37 million and $40 million.

Although we continue to be excited about our customer penetrations in 2011 and the positive impact they will have in 2012 and beyond, we have limited insight as to when the current low-end capital spending will begin to show signs of recovery. While we believe our financial position remains solid, we recognize the importance of continuing to strengthen our balance sheet in this challenging environment. Accordingly, we have decided to move forward on a sale-leaseback of our facility here in Beverly. Our 417,000-square-foot facility is home to our manufacturing operations, our advanced technology center, and our corporate offices.

Based upon discussions with several real-estate consultants, we believe that we should be able to raise at least $50 million in net proceeds from the sale of our facility with an associated 15-year lease-back arrangement. We expect to complete this transaction sometime in the first quarter of 2012. This additional cash will further secure our balance sheet. After this transaction is completed, we should have between $90 million and $100 million in the bank, as well as the ability to draw on our $30 million line of credit. This financial flexibility will allow us to continue to make the investments required to execute our strategy of gaining market share, increasing our top line performance, and improving our profitability. And now I would like to open the meeting to questions. Operator?

(Operator Instructions). Your first question comes from the line of Patrick Ho. Please proceed.

Thank you very much. Mary and Jake, can you just give your initial thoughts on the DRAM industry? And what your thoughts are on or about 2012, given your pretty decent exposure to the overall memory market. Given that the DRAM market has been weak this year, what do you look for in terms of both capacity buys as well as potential gains that you've made over the years that will translate in these new technology nodes?

Well, during the quarter, as we explained, we saw customers becoming increasingly cautious about their spending plans, which is what resulted in the delays in order and ship dates, as well as the reduction in our consumables, in our GSS market. And the majority of this really came from a reduction in foundry spending, but there also was very weak DRAM spending.

We believe that -- we certainly don't know exactly what will happen next year, so obviously, impossible to tell when the business will pick up. But we do believe the DRAM, from what we understand from our customers, will remain weak moving into 2012. But we have hopes that DRAM will continue to improve throughout the rest of the year and actually exit the year at a much more positive run rate.

I guess the one thing I want to clarify is, while we certainly do have -- you called it exposure. We certainly have DRAM customers. That's not the only type of customer that we have. And we have a very broad customer base. And so even if DRAM spending does not pick up until a little bit later than the scenario I laid out, we feel that we are still on very solid footing, financially, to be able to weather this downturn in the market. We'll continue to control our expenses and make additional market share gains in some of the other segments of the market.

Patrick this is Doug. The other thing that I think is important to just touch on from Mary's comments is in the foundry space. Right now in a downturn is the most opportune time for an equipment company to make penetrations. It is when the engineering staff say our customers are free to do the evaluations and do the work to qualify new tools and new processes. So as they come out of the downturn, those processes can be turned on and capacity buys made. So I think within our comments today, the penetrations we discussed in the foundry markets may be more important to us than what happens with the foundry market next year.

The DRAM.

I mean the DRAM market.

Great, that's helpful. Just moving to the dry strip market for a second. Historically, the Asian players in dry strip have been very competitive in terms of pricing. With some of the projected share gains you guys have generated, are you seeing additional pricing pressures in strip coming from Asia, given that they're trying to defend their turf? Is that not as big an impact for you guys, especially over the last 12 to 18 months?

I think that pricing has always been competitive in dry strip, given the nature of the tool set. I don't necessarily believe we've seen anything increase recently from a pricing standpoint. One of the areas where we are particularly strong is in what I talked about, some of the more difficult strip processes. And that's where we have our Optima ES penetrations, and that's where that product is focused. Because of the additional capabilities that that tool has, we are able to get a bit of a higher price for the ES versus tools that are more focused on the bulk strip market.

Great.

I think that covers it.

Final question for Jay, in terms of the gross margins on a going forward basis. I know longer term you guys have set that 40% plus type of gross margin target. Maybe if you could give a little bit of color in terms of, do you believe most of the structural changes have been done, and it's just more now waiting for both volume, as well as some of the new product traction? Or do you believe there's still more structural things you can do internally that will boost it longer term?

I think simplistically the answer is both. Clearly we will benefit as our volumes increase. And if 2012 is a rebound year for the industry and for us, that will clearly help us. But the improvements that we're talking about internally are continuous. You just never reach the point where you finish and say, we're done. We've made tremendous progress on some of our manufacturing processes.

Frankly, I still think we have some opportunity and some work to do with our install costs and some of our warranty costs, which are still modeling a little built higher than we'd like to see. But we're making continuous progress, Patrick. And I'm pretty pleased with where we are right now. 37% is a long cry from the low 30s and the low 20s that we were a year or two ago. So directionally, we're moving very positively, but the volumes will help us.

Great. Thank you very much.

Ma'am, you have no questions at this time. (Operator Instructions).Your next question comes from the line of Weston Twigg from Pacific Crest Securities. Please proceed.

Hi, this is Monica for Wes. Thanks for taking my question. Jay, maybe could you talk about, like you talked about sales and lease back of facilities. We were wondering if you could talk about how much would that be increasing your expenses because of lease-back.

It's interesting. It's a little bit complicated, and we still don't have the exact numbers, but we anticipate that for a 15-year lease of our building, we would expect to see an incremental annual cost of somewhere between $4 million and $4.5 million a year. Now that will be offset from a P&L standpoint by two factors. We currently are expensing about $2.5 million a year right now on depreciation of the current facility.

And then secondly, the property is on the books for a market value of about $35 million. So we would anticipate that we would have a one-time gain, which we would then amortize over the life of the lease. And that would also contribute about $1 million, $1.2 million each year. So the net impact would be a P&L impact of somewhere between $0.5 million and $1 million a year.

Thank you. Very helpful. And if you can also maybe, Mary, you can talk about -- you talked about the CMOS (inaudible) market and your traction in the market. So could you give us an idea how do you think that market could be for Axcelis? And also could you tell if you buffer the current weakness in the semi cap market?

I'll turn it over to Doug.

Monica, this is Doug. The application within the CMOS image sensing market that has tremendous opportunity is high energy implant. There's also high current, because it's usually done in a foundry. So there's high current implant that goes along with it. So as you know, the image sensing market is growing quite a bit. And so a lot of this is done in the foundry market and would be captured within the foundry spending market share numbers.

And the other thing about that, we alluded to the fact that we think that there's a big opportunity in Japan. As you know, since 2009, we have been working to penetrate the Japanese market directly. And we believe that in 2012, we actually have a very significant opportunity to ship a number of different types of our tools into the Japanese market for this specific application. So for us, all of that would be upside.

Okay. Thank you. Helpful. Jay, you did talk about why the payables actually reduced in the quarter about $13 million, $14 million. Can you talk about the reduction in the payables.

I'm sorry, I couldn't understand the question. Which?

Account payables reduced in the quarter.

The reduction in payables?

Yes, please.

Basically, what we've done a very good job at this quarter is, as the industry has turned down a little bit, we took a hard look at our material purchases and brought them down. That was one of the reasons why we were able to reduce our inventory a little bit in the quarter. So the reduction in payables is really a factor of just lowering our material purchases. And obviously, as we go into Q4, we'll look very carefully at material requirements and volume requirements to support our Q4 shipments. So at this point, it's a little bit premature to determine whether that number is going to move up or down, but it's obviously something that we're carefully managing.

Okay. Just maybe the last one for us. Did you see any cancellations in the quarter?

We don't see cancellations, per say. What we see is, and we've been seeing this for the last several quarters, customer buying patterns being very erratic, where they agree that they'll purchase something and move it back a quarter or two. Or they'll agree to take multiple products, and they'll spread them out over a period of time. So we're seeing much more of that than specific cancellations of orders. I think basically, our customers are doing what we're doing. They're taking a wait and see look at how their activities are. And we're at the end of the food chain, so we're just beg impacted by their changes.

Okay. Perfect. Thank you so much. That's all for us.

Your next question comes from the line of Christian Schwab from Craig-Hallum Capital Group. Please proceed.

Thank you for taking my question. Just one quick question. As we look to 2012, as far as the industry, what percentage of revenue is going to be driven by capacity purchases by your customers versus technology driven? Is there any subsegments of your business that if people migrate to a 2x node, they're going to have to spend X amount of dollars regardless of what the capacity of the industry is? Is there anyway to quantify the differences between what potentially could be shipped in 2012 versus 2011 based on capacity versus technology node?

Yes, Christian, I think probably the -- it would be a really long answer probably, a long discussion more than an answer. I think the best thing to do is to look at some of the industry analysts' data in terms of the nodes as they're coming on-line and the volume expectations, and look at that trend to be able to calculate where the spending is, and then --

No, I understand. We understand that type of work. We just have other smaller companies who are being told by large customers that they are going to be spending significant amounts on next-generation technology nodes. And they will be very well positioned for that and may see a recovery in the first half of 2012, regardless of capacity spending.

I guess what I was trying to ask softly, but I will ask bluntly is, could you see a recovery in the first half of the year driven by what customers are talking to you about regarding technology driven spending, or do you really need capacity?

Well, I think, as I talked about on a previous question, this downturn is a great opportunity for penetrations as the customers start to look at the new nodes. And the damage engineering and cold and the Integra advanced strip processes are quite critical for customers in the 2x nodes. In addition to some of the other technology on our high current product, then we also talked about the advanced image sensing devices requiring more and higher energy implants. And so all of those are directly related to that technology buy that leads to the capacity buy later in the year.

That makes sense. Lastly, I just want to make sure I heard the number correctly. You expect $50 million net proceeds from the sale-leaseback, is that correct?

Yes.

Awesome. No other questions. Thanks, guys.

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

I'd just like to thank everyone for taking the time to join us. We will be attending the 2011 technology, media, and telecom conference in New York this Thursday, October 27th. And we look forward to seeing some of you there and speaking with the rest of you to address any follow-up questions. Thank you.