Axcelis Technologies Inc (ACLS) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies third quarter 2012 conference call. My name is Jeff and I'll be your coordinator 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).

As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Amy Rasimas, Director of Investor Relations of Axcelis Technologies. And you have the floor ma'am.

Thank you. This is Amy Rasimas, Director of Investor Relations. Welcome to our conference call to discuss our third quarter results. With me today is Mary Puma, Chairman and CEO, Jay Zager, Executive Vice President and CFO, and Doug Lawson, Senior Vice President 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 Safe Harbor provision. These forward-looking statements are based on management's current expectations and are subject to the risk 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 obligations to update these forward-looking statements. I'd now like to turn the call over to Mary Puma.

Thank you, Amy. The third quarter proved to be more challenging then we had originally anticipated. Like others in the industry, difficult market conditions weighed on our financial results. This was driven by continued caution on the part of many customers.

Planned systems orders were delayed and [SAP] utilization which was all ready soft trended slightly lower in several geographies. Our revenues, which attract within our forecast all quarter, were negatively impacted by a decline in spared shipments in the last week of the quarter. Customers, managing to their reduced budgets, abruptly delayed receipt of parts that were ordered and scheduled for delivery that week. Consequently, our financial results came in at the low end of guidance.

Jay will be providing more color on the quarter and our forecast in a moment. At Axcelis, we know that successfully leveraging the industry cycle requires a downturn strategy that combines strong financial management with the effective product positioning designed to capitalize on the inevitable upturn. Therefore, in addition to carefully managing our expenses and cash, we are closely working with key customers on joint development projects related to advance node.

This work is being conducted both in our demo facility and with tool evaluations in our customer's fab. The results will provide our customers with the data they need to lock in Axcelis tool selections for future technology and capacity buys. So let's discuss our strategy for success relating to growth.

During the last 12 months, we have made major investments in the placement of three critical evaluation tools that will drive penetrations of our flagship products. Two high current Optima HDX evaluation tools have been placed in leading edge foundries. Advance nodes in foundries are expected to lead the industry into the next upturn. The third evaluation placement is the shipment of our first Purion M medium current ion implanter during the quarter.

The Purion M is the industries newest and most advanced medium current implanter. Providing significant technical and productivity advantages critical to leading edge nodes in both memory and foundry logic applications. The Purion M evaluation, which has been placed into a leading edge flash fab is going very well. Initial results from the field demonstrate that the productivity and energy savings advantages we believe that Purion M has over our competition are real.

We are eagerly awaiting additional feedback on the performance of the system that we will receive throughout the evaluation period. We also expect to place additional Purion M evaluation tools at other customer fabs in the coming months, including foundry logic and other memory sites. We continue to be optimistic that the Purion M's performance will result in incremental business in 2013 and allow us to gain market share in the medium current segment over the next several years.

Turning to the Optima HDx foundry evaluations, we are also excited that they are proceeding well on advanced nodes expected to lead the next round of capacity buys as the industry pulls out of this downturn. Field data shows that we are delivering to our customers significant cost of ownership advantages with our superior extended Eterna ELS3 source lifetime for Carbon and Germanium, as well as our cost effective damage engineering solutions. These evaluation tools have already been qualified on a number of customer recipes and we are in the process of qualification for additional implant steps as our customers transition to smaller node sizes.

During the quarter, we also received a technology award from an Optima HDx memory customer. We worked with this customer in an R&D environment to develop leading edge high current applications on the Optima HDx that we expect to be put into production in the future. We are proud of this recognition as it demonstrates that our technology is innovative and extendible. As with the Purion M, we believe that the significant competitive advantages that we deliver to our customers will drive higher revenues for the Optima HDx in 2013.

Turning to our other products. Our fleet of Optima XEx's continues to provide customers with the most productive, lowest cost of ownership of any high energy system on the market, and in Dry Strip, we enjoyed strong customer pull for our Integra RS and ES Dry Strip tool. During the third quarter, we announced the high volume follow on order for our Integra RS system from a major chip maker.

We also announced that we won a $30 million GSS contract with a leading chip manufacturer. Under the contract, Axcelis will support a full fleet of our equipment and manage a range of programs at US fab to enhance systems, productivity and capital efficiency, including all aspects of tool maintenance, spare parts, and consumable management and reporting. This order demonstrates the strength of our after market business even during soft industry conditions.

Next I'd like to briefly discuss the second element of success during a downturn. Prudent financial management. Jay will add more detail in his commentary. From a financial perspective we believe that we are doing all the right things. We have taken a number of actions during 2012 to reduce our operating expenses and improve our margins. We have reduced headcount by 13%, focused our R&D spending on critical programs, and significantly improved our warranty and installation costs.

We continue to closely monitor our expenses and search for additional ways to lower them further. For example, in the third quarter, as we saw industry conditions become more challenging, we asked our employees to take one week of unpaid time. The team has also managed cash very well. One way we have done this is to lower our inventory levels.

For example, we have tightened up material purchases while still insuring that we are able to respond to customer requirements through systems and after market parts. Our efforts have paid off in the form of cash generation in the third quarter. We believe that our actions will maintain a stable and strong cash balance.

While we have made some difficult decisions on spending, we continue to invest in programs that will allow us to be successful and competitive in the future. I am confident that our flagship products and GSS operation, combined with our leveraged business model, will yield solid financial results as industry trends improve. I'm now going to turn the call over to Jay who will discuss our Q3 financial results and our guidance for Q4.

Thank you, Mary, and good afternoon everyone. As with many companies in our industry, Axcelis experienced a continuation of the downturn in the third quarter. Revenues were $44.6 million, slightly below the bottom end of our guidance and about 25% lower than the second quarter.

Gross margin, operating losses and cash all came in at the low end of our guidance. System sales in the quarter were $12.7 million, while sales for our aftermarket business, which we call GSS, were $31.9 million. While the sequential decline in GSS was relatively small at 3.1%, the sequential decline in system sales was significant, at 51.3%, reflecting a marked slow down in the buying patterns of our key customers.

Consistent with the lower systems revenues, system shipments also showed a marked decline to $8.4 million, compared with $26.8 million in the second quarter. Within these shipment totals, ion implant shipments were $2.8 million, or about one third of the total, while shipments for our cleaning and curing systems which reflect primarily our Dry Strip business were $5.6 million or about two thirds of the total.

For the first three quarters, ion implant shipments were almost 75% of our total shipments. In the quarter, about 90% of our shipments were to memory customers, and about 10% of our shipments were to logic and foundry customers. Through the first three quarters, about 70% of our shipments have been to memory customers. Sales to our top ten customers accounted for approximately 70% of our total sales. With three customers exceeding 10% but no one customer exceeding 20%.

Systems bookings for the quarter were $13.2 million, down about 28% sequentially. Our book to bill ratio was 1.56, compared with 0.68 in the second quarter. And we exited the quarter with a systems backlog, including deferred revenue, of $19.5 million, an improvement of $3.1 million or 19% from our Q2 ending backlog. GSS revenues were $31.9 million, a sequential decline of 3.1%.

While fab utilization rates remained relatively flat through most of the quarter, as Mary mentioned, we saw a decline in utilization rates in some geographies during the last week of the quarter. Our gross margin in Q3 was 32.2%, at the low end of our guidance, and a 6.3 point decline from Q2. During the quarter, we recognized both of the lower margin tools that had been in customer sights for several months. 2.6 points of margin deterioration was attributable to the recognition of those two tools.

Also, due to a lower than anticipated build schedule in the quarter as a result of the weakened industry environment, we experienced a significant increase in manufacturing variances resulting in a $1.1 million unfavorable impact or an additional 2.6 points of margin. Partially offsetting these unfavorable items, we continued to see improvements in our warranty and installation costs in the quarter, reflecting strong performance of our tools in the field.

Q3 operating expenses, excluding restructuring charges, were $21.6 million, compared with $23.2 million in Q2. Within these expense levels, R&D expenses were $9.9 million, compared with $10.5 million in Q2, and SG&A expenses were $11.8 million compared with $12.7 million in Q2. These reductions reflect the restructuring actions that we have taken throughout the year.

Compared with our guidance, our operating expenses were lower than expected, reflecting a decision taken midway through the quarter to implement a one-week furlough for all employees in September. We estimate that this action resulted in a reduction of Q3 operating expenses of approximately $700,000. Ending head count on September 30 was 911 people, including 897 employees and 14 temporary staff. Total head count declined by 32 people in the quarter and is down by 136 people, or about 13% since the start of the year.

We reported an operating loss, excluding restructuring, of $7.3 million consistent with our guidance. In the third quarter, the Company recognized $578,000 in restructuring charges, all related to employee severance costs. For the first nine months of the year, restructuring charges were approximately $3.6 million.

Other expenses, net of other income, were $618,000 primarily as a result of foreign exchange losses. And we accrued $243,000 of taxes in the quarter. Including restructuring charges, our net loss for the quarter was $8.7 million or $0.08 per share, at the low end of our guidance.

Looking at our balance sheet, we ended Q3 with a cash balance of $35.3 million, consistent with our guidance. During the quarter and despite an operating loss, we were able to generate $1.4 million in cash, the majority of which came from operations. This was accomplished through stringent expense management and by extremely tight management of our material purchases. Accounts receivable were $25 million, a decrease of $10 million from Q2. This decrease was a direct result of lower sales volumes.

Our DSO improved from 53 days to 50 days. Q3 inventories were $123.3 million, a sequential decline of $3.4 million. And we ended the quarter with an accounts payable balance of $11.7 million, a reduction of about $6 million from Q2. This decline was primarily driven by reducing our material purchases.

Now I'd like to remind some insights into the current quarter and briefly comment on 2013. We expect market conditions to remain challenging in the fourth quarter. As a result, we are currently projecting Q4 revenues to be in the $40 million to $50 million range. Within this overall total, we expect that system sales will show a modest increase, while our GSS business will show a modest decline.

Our GSS projection is tied to fab utilization rates which declined in the last week of Q3 and are not currently projected to improve in Q4. We expect that Q4 gross margins will show a modest sequential improvement. Margins continue to be under pressure from two factors; continued unfavorable manufacturing variances and a lower GSS forecast.

As previously stated, we are continuing to drive down operating expenses and expect that in Q4, these expenses will be between $20 million and $21 million. We are planning two additional weeks of unpaid leave in the fourth quarter. Restructuring charges in Q4 should be less than $100,000. As a result of these factors, we expect to report a Q4 operating loss of approximately $5 million to $7 million, and an earnings loss of approximately $0.05 to $0.07 per share.

Last quarter, we indicated that we were driving to achieve break even profitability in Q4 at revenues of $60 million. While we have taken our expenses down as forecasted, we currently do not anticipate revenues at the $60 million level due to continued industry weakness. Our Q4 cash balance will remain flat to slightly down. The unfavorable impact of the operating loss should be offset by continued reductions in our inventory levels.

As previously indicated, we expect year-end inventory levels to be around $120 million. Also in the quarter, we revisited the potential for a sale lease back facility for our corporate headquarters. Challenging industry conditions and our financial performance make it difficult to secure an attractive arrangement at this time. Accordingly, we have put the sale lease back process on hold and will reconsider it at a later date.

Earlier this quarter, we announced that we had modified our $30 million line of credit agreement to align the covenants to our forecast reflecting industry conditions. As we have previously stated, we view this line of credit as a tool we could use to fund material purchases to support a significant upturn in our business. And with no outstanding debt, we remain confident that we are adequately funded to meet our business needs.

We are managing well in what continues to be a difficult industry environment. During the year, we have taken significant actions to lower our operating spending, reduce our inventories, and improve our cash position. While it is extremely difficult to project industry movements beyond the current quarter, we are entering into the 2013 planning cycle with a basic assumption that these challenging conditions will continue into the new year.

As a result, we plan to tightly manage our expenses, material purchases, and cash. We are well positioned to capitalize on an industry upturn and believe that with our lowered operating expense base, we should be able to leverage improved industry conditions and higher revenue into significantly stronger operating results. With that, I'd like to turn the call back to Mary.

Thank you, Jay. Visibility on the timing of market improvement remains uncertain. As a result, and as Jay discussed, we are keenly focused on managing expenses and cash carefully through this period and are committed to driving growth through evaluation penetration.

We have three very exciting evaluations underway in both medium current with our new Purion M system and in high current with logic and foundry customers. These evaluations will ultimately grow our market share in these large and important implant segments. Our customers are very supportive and are counting on us to help them meet their future manufacturing challenges.

We believe that we are on a course that will, when the industry turns up, lead to higher revenues, improved margins and profitability, cash generation, and ultimately, increase shareholder value. With that, I'd like to open it up for questions.

Thank you. (Operator Instructions). Our first question comes from the line of Christian Schwab with Craig-Hallum Capital Group. Please proceed.

Hey, guys. What do you think the ion implant TM for 2012 is going shake out to be?

It's really hard to say, but we think it's going to be significantly less than the data quest projection that's out there right now, which I think is at about $1 billion. Again, it's hard to tell, but well below that.

Do you think you're losing share or do you think that just because you're disproportionately tied to memory, it looks that way?

No, we don't think we're losing market share. The orders that we haven't gotten are orders right now that customers have pushed out. It's not that we have lost them to the competition. I think, what we're seeing right now is very consistent with what others in the industry are seeing in terms of lowered systems business, and when things pick up we fully expect to get the business from customers that we currently have and to at least maintain our market share. And we believe that with the product penetrations and evaluations that we have placed in the field right now, we will actually have improved market share and a much stronger 2013.

Great. What do you think the quarterly shipping capacity with the workforce reduction is today?

This is Jay, Christian. I'm not sure that's a meaningful question because with our flex workforce, we can bring people in at a moment's notice. So with all the issues we're facing, ramping up for higher volumes is not a problem for us. And the plant can easily handle two, three, four, five times the capacity its experienced this year. And the good news for us is that many of the folks who we've laid off in the manufacturing area are folks who we would readily call back in when the upturn occurs, so we would be able to move relatively quickly to respond to an upturn.

Where it's challenging for us is not so much on the labor side, but it's managing the material purchases to make sure that we're not getting ahead of ourselves with material purchases, but also being able to react quickly when market demand increases. We will be able to respond fairly seamlessly to increases in volumes.

Fabulous. Great. Thank you. No other questions.

Our next question comes from the line of Patrick Ho with Stifel Nicolaus. Please proceed.

Thank you very much. I apologize, I missed the early parts of the call, so maybe you already addressed this. In terms of the shipments of the Purion M system, are you targeting multiple customer segments? What I mean by that, is logic, foundry and memory. Or are you primarily focused on one of those areas at the outset and then once you get traction on it expanding into the other segments?

No, we did mention that, Patrick. The Purion M initially went into a flash fab, a leading edge flash fab. However, in terms of customers we are working with right now, it is a mix of logic, foundry as well as additional memory customers. So, as we always have, we will report the shipment of those systems when they go out to the field.

Okay, great. Again, I apologize if you also mentioned this, but obviously there's always a lot of moving parts in terms of new products and the qualification. What's the timeline you're looking for in terms of the Purion M? In terms of are you looking at this as a six month type of qualification or is this going to be longer, say 12 months?

At this point, based on what we know and the customers we're working with, it's going to vary anywhere from six to 12 months. Based on the performance of the tool, what our expectation is that even if it's a 12-month evaluation, that once the tool is qualified for production across a broad number of implant steps that the customers, when they are going to buy will, in fact, buy additional Purion M units even prior to the evaluation officially closing out.

And Patrick, one of the points that Mary mentioned which you may not have caught, is the initial evaluation unit is doing very well. We were actually very pleased, we and the customer as well, very pleased by the performance of the tool, so that hopefully could result in a more accelerated buying cycle than a more delayed buying cycle.

Great, that's helpful. Jay, maybe just a question for you in terms of the business model. Obviously, we're in a difficult environment, not only yourself but a lot of the companies in the space are obviously trying to make their cost cuts, they're restructuring. Obviously, OpEx is probably, I don't want to say the easier way, but you can use a lot of variable expenses to help lower your cost structure. On the cost of goods lines, how do you see it for the Company right now and what types of moves can you make on that line to help the overall business model, as well as the break even level?

We're actually putting a lot of effort into that area. Apart from the activities underway to reduce the material costs and the labor content of our products, we entered fiscal year 2012 this year with about $30 million, Patrick, in manufacturing overhead spending, and that goes in obviously to the overhead rates we use, et cetera. We have brought that number down by about 15% this year.

And as we start to plan for next year, we plan to take out an additional 5%, 10%, 15% of reductions in our manufacturing overhead. So that's going to reduce our cost base as well, and as you indicated, it doesn't show up in the operating expenses, but it shows up in the costs of goods. On a similar basis, we've taken a hard look at our service overheads, and those numbers are much smaller. But we're also targeting some significant reductions in the service overheads as well so that the cost reduction activities are not limited to the OpEx, but also include all aspects of the cost of goods components.

Great, thank you very much.

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 would like to thank you for joining us today. We were planning to attend the Piper Jaffray conference in New York next week. However, we were informed earlier today that it has been postponed. We will post an update to our investor presentation on our website next week. Thank you.

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