Axcelis Technologies Inc (ACLS) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies second-quarter 2013 conference call. My name is Shelane and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate 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, Ms. Amy Rasimas, Director of Investor Relations of Axcelis Technologies. Please proceed.

Thank you, Shelane. This is Amy Rasimas, Director of Investor Relations. Welcome to our conference call to discuss our second-quarter results. With me today is Mary Puma, Chairman and CEO; Kevin Brewer, Executive Vice President of Global Operations and Interim CFO; and Doug Lawson, Senior Vice President of Strategic Initiatives. Jay Zager, Executive Vice President of Finance, was planning to be with us today but could not due to a death in his immediate family.

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, profit and other results are forward-looking statements under the SEC Safe Harbor provisions. These forward-looking statements are based on management's current expectations and are subject to the risks inherent in our business. These risks are described in detail in our Form 10-K annual report and other SEC filings which we urge you to review. Our actual results may differ materially from our current expectations. We do not assume any obligation to update these forward-looking statements.

I would now like to turn the call over to Mary Puma.

Thank you, Amy. Axcelis had many positive events take place in Q2 relative to financial results, product penetrations and customer satisfaction.

First, our second-quarter financial results came in at the midpoint of our guidance. Revenues were $47.5 million, gross margin 35.2%, net loss was $4 million or $0.04 per share and cash came in at $34.7 million.

Second, we negotiated a transaction to strengthen our cash position. As we announced on July 9, we closed on a three-year, $15 million term loan from Northern Bank & Trust. This loan is secured by a mortgage on Axcelis's headquarters facility in Beverly. The total of the net proceeds plus our Q2 cash is over $48 million. This loan provides funds to accelerate growth in our leading edge Purion platform.

Third, it was a watershed quarter for our new medium-current system, the Purion M. We now have three evaluation units in the field at leading chip makers. During the quarter, we shipped two Purion M evaluations to two different customers, one for advanced memory development and the other to a foundry for leading-edge logic. These two systems are installed and under qualification.

The third evaluation system, which has been in production in Asia for one year, is proceeding very well. This system is being evaluated on flash, DRAM and logic process flows as well as advanced R&D development wafers and is expected to close in the third quarter.

Fourth, we made significant progress with Optima HDx high current penetrations at top foundry logic customers as we successfully closed our two outstanding evaluations. Customers acknowledge the significant cost and ownership advantages provided by the extended lifetime of our Eterna ELS 3 source for carbon and germanium and our cost-effective damage engineering solution.

Finally, Axcelis was selected to receive the Texas Instruments 2012 Supplier Excellence Award, one of 12 suppliers out of 12,000, based on outstanding performance in the areas of product quality and service support. I want to thank key TI personnel for presenting the award at an Axcelis all-employee meeting in June. It was a very proud moment for Axcelis employees to receive this award and this vote of confidence from such an important customer.

I would now like to take a few moments to comment on where we are in the cycle. I've spent quite a bit of time recently with key customers in Asia, Europe and North America and met many others at Semicon West. These meetings confirm that an industry recovery is underway.

Most customers appear to be proceeding with their scheduled 2013 investment plans, and in some cases even accelerating the timing of planned shipments. This appears to be a broad-based recovery. Memory spending for both DRAM and flash is leading the way for improvement in 2013. We have already seen the start of this business and expect a significant increase in memory buying as we move through the end of 2013 and into 2014. It is important to note that Axcelis expects to capture its fair share of this memory spending across our product portfolio, particularly in high energy and in high current with our damage engineering capabilities.

We are also seeing growth in foundry logic investments in mobile products and in smaller note-size buildouts, although we anticipate that this spending will be somewhat muted in 2013 and pick up in 2014. This gives us adequate time to benefit from our recent penetrations into this segment of the market with Purion M and Optima HDx for carbon and germanium applications.

Overall, we anticipate that CapEx spending will continue to increase throughout 2013 and be robust through 2014. Next year should be a good year for semiconductor equipment purchases and for Axcelis.

Contributing to this broad-based recovery is an uptick at chip manufacturers outside of the top five CapEx spenders. These companies, focused on many types of devices like analog chips and in MEMS, are investing in both new and used Axcelis tools. Axcelis is well-suited to meet these customers' needs as we maintain strong relationships with them not only through our sales organization, but also through our GSS organization which supports our large installed base.

Our GSS business is showing positive trends that also foreshadow this upturn. Utilization at many fabs is improving, quotes for upgrades are rising and we are experiencing an increase in our average daily spare parts order rate, all good signs and a necessary element for our GSS business to return to healthy levels.

Overall, we are bullish about our prospects as we enter this upturn. So I would like to take a moment to provide some insight into the significant changes that we have made at Axcelis since the peak of the last industry cycle. These improvements drive our optimism and will allow us to show peak-to-peak growth in all key financial and market metrics. These changes also position the Company to perform significantly better during the next downturn, achieving our goal of through-cycle profitability.

I have categorized the areas of significant change into four segments -- products, financials, customer operations and alliances -- and I will discuss each individually.

Let's start with our products. Our product portfolio, which is primarily based on the Purion platform and several associated key Axcelis technologies, is in the best competitive position it has been since the early 2000s. This is the result of several strategic decisions made over the last two years. The first was to focus the Company's engineering, marketing and sales resources on our implant product line. The second was to focus our development efforts on 300-millimeter implant products capable of meeting the stringent technical requirements of sub-10-nanometer process flows and 3-D structures. The third was to develop the Purion platform based on the highly-successful Optima XEx endstation, allowing us to achieve the benefits of a common platform in a shorter time frame.

To support these strategic decisions we made several operational changes to ensure proper engineering focus on the development of the Purion platform. This included assigning EVP built-ins responsibility for delivering the new Purion platform and multiple new products based on this platform in an accelerated time frame while significantly reducing R&D spending. An ad hoc technology committee of our Board oversees this activity.

These decisions resulted in a faster and less-costly development cycle of the Purion platform that will result in a significantly quicker return on investment. Initial evaluations by customers across all segments are proceeding well and all indications are that the Purion platform will take significant market share at 300 millimeter. This market share gain will carry over to 450 millimeter, since the Purion platform has been designed to be scalable to 450 millimeter at a much lower cost than that of a full new design.

Moving to financials, our financial condition is healthy and stronger than it had been in recent years. Following the peak of the last cycle, we realized that we needed much stronger control of our cost structure, and I hired Jay Zager as CFO to bring this discipline into Axcelis. Jay worked with the management team to bring our costs under control and implement critical systems to maintain this focus. In June, Jay announced his retirement and Kevin Brewer will serve as an interim CFO in addition to continuing in his role as EVP of Global Operations. Kevin has over 30 years of experience with global high-technology firms and for the last decade has been leading Axcelis's worldwide manufacturing and supply chain operations. Kevin has been working very closely with Jay in all aspects of streamlining the business and implementing financial and cost controls. The transition from Jay to Kevin is going very smoothly.

Here are several highlights resulting from management's focus over the last two-plus years on reducing cost and shoring up cash. Our quarterly breakeven revenue has been reduced from $86 million to approximately $60 million. Quarterly combined R&D and SG&A spending has been reduced from $29 million to less than $21 million. Inventory has been reduced from $123 million to $96 million and cash has been managed successfully, including extracting cash from key assets such as $10 million from the sale of the dry-strip IP and $15 million from the mortgage of the building.

Now let's turn to customer operations. The third major change for the Company came in the decision to create a more aggressive and process-driven sales organization. I hired EVP John Aldeborgh to build a customer operations organization that will take full advantage of Purion platform-based products. John brings years of experience marketing and selling ion implant products at a competitor. He has implemented an aggressive, structured sales process and moved quickly to upgrade talent in a number of customer-facing senior management positions. This focus is not only on systems growth to regain implant leadership, but also on increasing GSS revenues.

Let's finish with alliances. We made a strategic decision to emphasize partnerships and collaborations as a way to improve our product development process and bring better process solutions to customers. Our Purion platform has been developed in joint development programs with key customers. This partnership approach has ensured that the Purion platform will meet our customers' production requirements today and process requirements in the sub-10-nanometer future.

Our collaboration with Lam Research enables us to work closely on methods of utilizing ion implant in new process-enabling ways that could increase the TAM for implant and will provide customers with more robust process capability.

We also plan to increase our participation in partnerships and collaborations with customers and other industry suppliers to continue to make Axcelis more efficient and our products more effective.

Turning to more recent product highlights, we are very excited about the inroads our products are making. The pull for the Purion M is related to its advanced angle control system, innovative beamline design, broad energy range and best-in-class beam current. It also boast the industry's highest source lifetime, longest intervals between beamline maintenance and a significant reduction in power consumption, supporting our customers' green initiatives. All these factors translate into the lowest cost of ownership, which is becoming more critical as customers work hard to control their cost per wafer.

As a result, as our evaluations come to a successful close and these customers add medium-current capacity, likely in 2014, Axcelis will win its fair share of their medium current business. This will provide a significant boost in our market share in this segment.

In addition, the Purion XE continues to be the leading single-wafer high-energy system in the market. It is the benchmark for high energy productivity with the purest, most precise dopant placement required for today's most challenging high-energy applications in the memory and image sensor market segments. As industry conditions improve, high energy is one of the first tools and the fab for which customer seek to increase their capacity. Quotes for and shipments of Axcelis high-energy systems are up. Slot requirements for the Purion XE are increasing. Interest in high energy is a key element of our confidence in delivering a stronger second half.

The Purion platform is living up to its name, providing leading device manufacturers with the purity, precision and productivity required to meet customers' applications needs for emerging technologies. The performance of our Purion platform systems, both the Purion M and Purion XE, has been excellent and we are continuously enhancing system competitiveness based on customer input.

The benefits of Purion platform commonality are coming into focus. The Purion M and Purion XE share a common endstation in software control. Over the course of the industry upturn, we will begin to capture internal efficiencies in cost and time to market by building endstations that can be used to manufacture any Purion product. Customers also realize efficiencies in operator training and parts requirements.

We are looking forward to having the Purion serve as the platform for additional Axcelis products, including our 450-millimeter offering that will be available to meet our customers' high-volume manufacturing requirements.

With that, I will turn it over to Kevin to discuss Q2 results.

Thank you, Mary, and good afternoon, everyone. Before I share the details of the quarter, I would like to take a minute to thank everyone who took the time to meet with Doug, Jay and myself at Semicon West. It was a great opportunity to meet many of you in person over a busy four-day schedule and discuss some of the positive changes that are occurring in our business. Your feedback is important to ensure that Axcelis's strategic and financial goals are well aligned with those of investors.

As we discussed in our meetings, we have made solid progress with lowering our quarterly breakeven and strengthening our balance sheet. Tight cash management and a recent closing of a $15 million mortgage leaves us well positioned to ramp the business and make strategic investments in our Purion product. Purion is our newest platform and incorporates a high degree of hardware and software commonality throughout the design. This commonality will fuel future gross margin improvements through increased supply chain leverage and earlier adoption of our lean manufacturing principles. Inventory turns will also increase as a result of shorter manufacturing and supplier lead times.

Our improving financial performance and liquidity, along with a much stronger product portfolio, puts us in a solid position to capitalize on improving market conditions. On a personal note, I can tell you that I am very excited about the Interim CFO role. I believe my deep understanding of the business and industry combined with my close working relationship with Jay enables me to build upon our positive momentum.

Now I will discuss our Q2 operating results. Across the board, we finished within our guidance. Q2 revenues were $47.5 million, up 17% from Q1 and at the midpoint of our guidance, reflecting a recovering market. System sales were $16.6 million, up 31% from Q1. And our GSS aftermarket business finished at $30.9 million, up 10% sequentially.

During the quarter, approximately 20% of our shipments were to memory customers, primarily DRAM, while about 80% of our sales were at the foundry logic customers. We expect a percentage of memory shipments to increase as the memory market improves.

Sales to our top 10 customers accounted for about 74% of our total sales with three customers above 10%. Q2 system bookings of $16.5 million more than doubled over the prior quarter, and our book-to-bill ratio increased to 0.97, up from 0.64 in Q1. We ended Q2 with a system backlog including deferred revenue of $22.5 million, an increase of 65% of the prior quarter.

Moving onto gross margins, we finished Q2 at 35.2%, up 3.4 percentage points over Q1 and within our guidance. In the quarter, we realized improved factory utilization and a strong performance from our GSS business. Inventory for the quarter finished lower at $96.4 million compared to $98.7 million in the prior quarter. This reflects our continued focus on improving our inventory management and cash-to-cash cycle. We ended Q2 with a cash balance of $34.7 million, consistent with our guidance.

Q2 combined R&D and SG&A spending of $20.5 million came in slightly favorable to our guidance of $21 million, reflecting some favorable timing of R&D expenses. Looking at the details of these expenses, R&D for the quarter was $8.5 million and SG&A finished at $12 million. Net loss for the quarter improved to $4 million or $0.04 per share and at the midpoint of our guidance. This compares to a Q1 loss of $9 million or $0.08 per share.

We continue to manage our business towards a targeted breakeven level of $60 million of quarterly revenue and have worked hard to lower our expenses without compromising strategic R&D investments. Our improved financials and strengthened team along with the competitive Purion platform positions us well as the industry recovers.

Finally, I would like to take us opportunity to thank Jay for all of his hard work at Axcelis. His efforts along with the work of the management team have strengthened our balance sheet and fiscal discipline, both of which will carry Axcelis forward into the future.

Thank you, and now I would like to turn the call back to Mary.

Thank you, Kevin. The Axcelis management team and I are energized by our prospects for the future. This is a new Axcelis, a better Axcelis. We look forward to capitalizing on the improvements we have made that will facilitate growing our market share and profitability during the industry upturn. We are moving out of a restructuring and positioning for the future phase and into a growing-the-business phase. Our implant portfolio, led by our Purion platform products and our Optima HDx, is very competitive and provides our customers with unique benefits that meet their emerging device challenges.

Consistent with this, we expect to see continuing improvement in market conditions in Q3 and are currently projecting Q3 revenues to be up another 10%-plus, resulting in revenues in the $50 million to $55 million range. We expect that the sequential increase will come primarily from system sales. Q3 gross margins are projected to be flat in the mid-30% range. Q3 combined R&D and SG&A expenses should also be flat to Q2, staying in the $20 million to $21 million range, reflecting continued strong management of our expenses.

As a result of these factors, we expect to continue to reduce our losses and report a modest Q3 operating loss of approximately $1 million to $4 million and an earning loss of approximately $0.02 to $0.04 per share. We are projecting that our cash balance will be in the high $40 million range in Q3. Without the mortgage proceeds, our cash balance would remain essentially flat to Q2. We will be continuing our tight controls on expenses and cash usage.

As I discussed earlier, Axcelis has made numerous strategic and operational changes that through the next cycle will drive improved performance in revenue growth, in market share and in profitability. And in fact, we expect to see these initiatives result in profitability in Q4. We are excited about the future and the significant value that we believe we can create for our shareholders.

With that, I would like to open it up for questions.

(Operator instructions) Christian Schwab.

Mary, thank you for all of that detail. A few quick questions for you -- when you look at peak-to-peak revenue cycles, are you willing to give a range or another way of saying what your aggregate market share will be in the TAM, in the next peak cycle, say 2014, 2015 time frame, versus a couple years ago?

Well, Christian, I think you have seen our business model, which you can find in our investor presentation on our website. We have tried to model where we think we will go through the cycle. We expect that in this upcoming cycle we can have revenues higher than where we were at the peak of the last cycle, which I think, as you recall, in Q1 and Q2 of 2011 were about $93 million. And that's really a function of the strength that we see in the product portfolio. It will be a combination of increasing market shares for the Optima HDx. It will be having or gaining very healthy market shares from the Purion M, which is a product that we did not have in the last cycle, and then also maintaining our leadership with the Purion XE, our high-energy system.

We also expect that our GSS revenues will get back to more historical healthy kinds of levels, and perhaps with some of the initiatives that we are driving right now, or John Aldeborgh and his team are driving, we can even surpass the peaks that we saw in the last cycle.

So I'm not going to give you an actual number. Obviously, we need to see what the timing is on some of these investments and understand really the intensity of the next upturn. But, again, I think we can definitely have much more significant market share and at least meet if not beat the revenues that we had in the last cycle, the peak of the last cycle.

Great. And then you talked about improvements in the GSS business as well as greater commonality on the products, does that give you greater conviction that maybe in the next peak cycle gross margins can get as high as 40%, or should we think that it stays in the high 30s?

I'll let Kevin answer that.

We've talked about this. At least this year, we are saying we are going to stay in the mid-30s. Certainly as the commonality from the Purion product gets out there and we gain traction with that platform, the systems gross margins will start to improve a little bit.

In terms of can we hit the 40%, we certainly know gross margins will improve from commonality. I think the timing on that is going to have a lot to do with the volumes and when this actually occurs. So I guess the answer to your question is yes. The commonality will help gross margins. When we get to 40% is going to be more determined by the timing of the recovery.

Great. And you guys talked -- my last question -- you talked about increased quota activity in the high-energy side. Did you expect to start shipping, or would you expect to be shipping any high-energy boxes, i.e., implanters in Q4 of this year, or do you think that's more of a 2014 event?

Absolutely. We have been shipping, actually, high-energy throughout 2013 and I think it's safe to say that we expect to see a pickup in Q4.

Perfect. And that still runs at $4.5 million to $5 million on average?

That's correct, the Purion XE, yes.

Excellent, thank you, no other questions.

Edwin Mok, Needham and Company.

So actually, I just had a follow-up question to Christian -- Mary, in terms of high-energy, I think, if I go back to the last few nodes, we have seen some of the high-energy stuff got moved into more medium-current high process. But it sounds like you are a little more confident about high-energy. Do you expect high-energy as a percentage of your total in-time market grow as we see customer strength to advanced node?

The high-energy market is primarily memory, as you know, and image sensor. And the needs of high-energy have not changed. There is, as you mentioned, overlap between some medium-current and high-energy. In fact, that's the place where our Purion M medium-current has a significant advantage over the competing system. We can go at high throughputs to a much higher energy. So it allows our customers to buy a combination of Purion XE and Purion M and have much greater flexibility on their fab floor.

I see, okay, great, that's actually very helpful. And then just talk a little bit about the Purion M. You mentioned you have one large customer, which is closer to the end of that, I guess, development program that you have. Right? Are you expecting a number of Purion M orders and shipments to come after that program is completed, and that's what gives you the confidence of the implied strong growth about having to get through the fourth quarter of this year?

Yes. So the answer is, absolutely. I think as I mentioned in my script, the timing at this point is not clear. It's not clear if it will happen at the end of this year or into 2014. But we fully expect to get multiple tool orders from that customer. In addition to that, we have the two other evals out there at two different customers. And based on the closure or the timing of closure of those evaluations, we expect to get repeat orders for those in 2014 as well.

Is it possible for you to tell me what type of technology and what node? Are you targeting -- are those products being evaluating for -- the two Purion M that you mention?

There's actually three Purion Ms that are being in evaluation. The three are being evaluated at different sites for DRAM, for NAND and for advanced logic in a foundry. In all, cases they are being evaluated on the most advanced nodes that are in production as well as R&D for upcoming nodes. To date, the performance in the furthest-along eval has been extremely well. We are seeing the tool perform at production levels that the customers are very, very happy with.

Yes, maybe cost developments more specifically about the foundries. Right? So we have heard a lot of companies as well as some of your customers talk about transitioning into FIN/FET area. Right? How do you think that would impact or benefit your business?

Well, I think there's still quite a number of implants that are used in the FIN/FET structures. And in fact, the angle control that we have on the Purion M product line becomes very critical as you move into some of these advanced nodes for FIN/FET, as well as other 3-D structures and, in general, the shallower depths and the tighter geometries. So the Purion M has many benefits for those technologies, including a very broad energy range that allows us to do very low-energy implants, which is critical even in planar devices with very shallow junctions.

Okay, that's very helpful. Last question is just a financial question. I think you guys talked about $60 million or low $60 million as a breakeven target for you guys. Right? I guess two-part question to that. One is, what kind of gross margin do you need to get to, to get to that breakeven? And the second question is, do you guys have any kind of temporary cost-reduction effort like furloughs or maybe shutdowns that might come back if your business continues to improve?

So we are basically at that breakeven now at the $60 million of quarterly revenue. If you take our expenses at $20 million to #21 million a quarter, if you take mid-30% gross margins at $60 million of quarterly revenue, you are at that breakeven. So we are where we want to be with that model.

In terms of the furloughs, we have in this quarter another one-week furlough that will be included, but we plan in Q4 to not have to do any additional furloughs at this point.

We have always said that based on market conditions, and obviously we are constantly monitoring, if for some reason this upturn were to not materialize, and we have no evidence that that's the case, we will continue to take whatever actions are required to ensure that our costs online with where the industry conditions are.

Great, that's all I have, thank you.

Ms. Puma, you have no further questions at this time. (Operator instructions)

Okay, well I guess there are no further questions. So I would like to take us opportunity to thank Jay Zager for his many contributions to Axcelis and to wish him well. I'd also like to thank you for joining us today. Hopefully, we will see some of you at the Craig-Hallum Alpha Select Conference and the Rodman and Renshaw annual investment conference, both in September in both in New York. Thank you very much.

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 the following remarks.

This concludes the presentation, ladies and gentlemen. Thank you for your patience and you may now disconnect your lines. Thank you for joining us.