Axcelis Technologies Inc (ACLS) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies second-quarter 2014 conference call. My name is Sarah, and I will be your operator for today. (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, Sarah. This is Mary Puma, Chairman and CEO of Axcelis Technologies. With me today is Kevin Brewer, Executive Vice President and CFO; and Doug Lawson, Executive Vice President of Corporate Marketing & Strategy.

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 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.

Axcelis reported second-quarter results in line with our July 7 preannouncement. As we explained several weeks ago at the time we preannounced, Axcelis has been challenged by an industry slowdown. In particular, a substantial pause in memory spending, combined with several system pushouts late in the quarter by customers in the MEMs, image sensor and power semiconductor markets, had an adverse impact on our financial results.

During the second quarter, we continued to execute on our Purion strategy. As forecasted, we shipped our first Purion H to a leading customer in Asia and closed the third Purion M evaluation at a foundry customer. We continued to experience a high level of customer activity on the Purion H, our high current system, at our Advanced Technology Center in Beverly.

Before I discuss additional details regarding third-quarter guidance and Purion products, I'd like to ask Doug to provide thoughts on the current industry environment, future market trends, and the likely impact this will have on Axcelis' business going forward. Doug?

Thank you, Mary. We see a strong memory build for both DRAM and Flash on the horizon. Customers have fab space available now or fabs under construction with planned availability in the near future. Our customers' technical and purchasing teams are actively engaged with us in preparation for this capacity build. They are discussing technical requirements, capacity requirements, and expected timing. Based on these discussions, we expect the full Purion family to participate in this upcoming build including our new high-current implanter, the Purion H.

Commodity economics related to memory pricing and demand will likely drive the exact timing of this next capacity build. Based on our discussions to date, we expect capacity additions to begin in late Q4 and continue through the first half of 2015.

Customers in the MEMs, image sensor, and power device markets continue to be active with Axcelis, looking at Purion implanters, legacy products, and used tools. These customers are benefiting from growth in the mobile, wearables, automotive, and Internet of Things markets.

As they add capacity, they are typically looking for improved productivity solutions since they are not usually adding additional fab space. This is a very dynamic market segment and one in which Axcelis actively participates. Unfortunately, the nature of this business makes it more difficult to forecast the exact timing of equipment shipments.

The leading-edge foundry customers continue to wrestle with the difficulties related to FinFET development. Foundries are planning on ramping capacity for 14- and 16-nanometer process flows sometime during 2015. However, due to the difficulty involved in FinFET development, the exact timing of this foundry ramp is less predictable.

As FinFET process flows mature, we expect the precision capabilities provided by the Purion platform will become an invaluable tool for improving FinFET device yields. FinFET manufacturing represents a significant growth opportunity for Axcelis and for the Purion platform.

Now I'll turn it back to Mary.

Thank you, Doug. Turning to our third-quarter guidance, we are expecting revenues to be relatively flat with Q2, between $38 million and $43 million. This will translate into operating results ranging from an operating loss of $6 million to $3 million and a loss per share ranging from $0.06 to $0.03 per share inclusive of restructuring of approximately $2 million. Gross margins will be in the mid-30% range.

The orders that pushed out late in Q2 resulting in lower than expected revenue and earnings are anticipated to close during the second half of 2014. As we highlighted in the preannouncement release, we have taken our quarterly expenses down from $20 million to $21 million to a range of $17 million to $18 million. We accomplished this in Q3 by implementing a mix of furloughs, forced vacation, and a reduction in our workforce. This reduction in force will allow us to maintain this low level of expense in Q4 and into 2015 even as we anticipate the business in these quarters will improve.

We restructured by completing a comprehensive review of the business to ensure that we can continue to support Purion product growth. These lower expense levels will also allow us to protect profitability and cash as we increase sales of Purion Hs and Purion Ms and broaden our customer base beyond memory.

Our expectation is that cash in Q3 will be in the low $30 million range. While we have taken swift actions to cut our costs and protect our cash, our success is dependent on driving systems growth. As painful as this industry pause has been, it has provided additional time for the Purion H and the Purion M to gain a stronger foothold at customers.

As customer spending returns later in the year, Axcelis will be better positioned to sell not only the Purion XE but also the Purion H and Purion M, allowing customers to experience the full power of Purion. Purion will continue to gain footprint, as it is the implant platform of the future optimized for low-energy requirements of advanced logic devices, high-energy requirements of advanced memory devices, and the uniform angle and dose control requirements of FinFET devices.

We recently shipped our first Purion H high-current implanter and expect to ship several additional systems to multiple customers during the second half of 2014. This is a major milestone for Axcelis, as high current represents the largest segment of the implant market at approximately 55%. It is also the segment that will benefit most from the increasing material modification implants being implemented in advanced 3-D process flows.

The Purion H's magnetically scanned spot-beam architecture brings new capabilities in the low-dose, low-energy application region, critical for advanced FinFET devices. Additionally, it allows customers to return to the preferred spot-beam architecture with all of its uniformity benefits.

The Purion H represents a significant advancement in implant technology that, when combined with the common Purion platform, delivers precision, purity, and productivity unavailable in other implant platforms. Purion H joins the rest of the Purion product family which includes the Purion XE high-energy implanter and the Purion M medium-current implanter.

The Purion XE was the first product in the Purion family. It opened the door for the Purion H and Purion M in the memory and image sensor segments. The market-share-leading Purion XE is based on a linear accelerator, or LINAC beam line, that provides customers with the highest level of productivity and lowest level of metal contamination in the industry.

The Purion M is currently qualified as three different customers representing both the memory and foundry segments. These customers recognize that the Purion M's angular energy filter and broad energy range was designed to meet stringent emerging device requirements while ensuring superior levels of system productivity. Furthermore, electricity consumption and resulting cost of ownership are significantly reduced by the Purion M's single-magnet design.

Production implanters have essentially remained technologically stagnant over the last decade. As we know, competition spawns innovation, and Axcelis, by introducing the Purion product family, has ushered in a new era of innovation.

We currently have one customer using all three Purion products, with a second to follow later this year. These customers are actively looking to develop new manufacturing strategies for their implant operations that will drive process excellence and the lowest cost of ownership.

With that, I'll turn it over to Kevin to provide more details on second-quarter results.

Thank you, Mary. Q2 revenue finished within our revised guidance announced on July 7. While the Q2 revenue level is extremely disappointing, we remain encouraged by the continued penetration of the Purion platform.

In the quarter, we shipped our first Purion H high-current tool and recognized revenue on our third Purion M evaluation tool. Shipment of the new Purion H is significant, as high current now represents 55% of the total available implant market.

We have also taken steps to lower both our operating and cash breakeven levels after a careful review of strategic investments required to meet Purion penetration requirements. With these changes, our new operating breakeven moves from $60 million per quarter to under $50 million, and our cash breakeven lowers to under $42 million per quarter.

Looking at the details of our second-quarter results, revenue finished at $41.2 million and within our revised guidance. System sales made up $10.9 million compared to $32.5 million in Q1. GSS revenue finished at $30.3 million compared to $28.4 million in Q1. Q2 sales to our top 10 customers accounted for about 67% of our total sales compared to 81% in Q1, with two of these customers at 10% or above.

In the quarter, all of our tools shipped to foundry logic customers compared to 13% in Q1. The significant shift in Q2 orders highlights the magnitude of the memory pause, which accounted for 87% of our shipments in Q1.

Q2 system bookings were $9.2 million compared to $27.6 million in Q1, and our book-to-bill ratio increased to 0.95 compared to 0.87 in the prior quarter. Q2 gross margin was 35.2% and within our guidance of mid-30s. Q2 inventory ended at $106.7 million compared to $95.5 million in Q1. System order pushouts that occurred late in the quarter drove the increase in inventory.

Combined SG&A and R&D spending was $20.4 million and within guidance of $20 million to $21 million. SG&A for the quarter was $11.5 million, with R&D at $8.9 million. Q2 operating loss was $6.1 million compared to an operating profit of $0.3 million in Q1. Net loss of $6.9 million, or $0.06 per share, was in line with our revised guidance of minus $0.05 to $0.07 per share.

Q2 cash and cash equivalents were $35.6 million. Our cash remains adequate to fund important strategic initiatives like continued Purion platform development and product penetrations. We have a line of credit in place to support a ramp if business ramps up, and we continue to explore financing initiatives that will strengthen our balance sheet, including a possible sale-leaseback on our Beverly facility.

Q2 receivables were $32.1 million compared to $38.1 million in Q1, and this was due to the timing of shipments and order pushouts. Q2 accounts payable were $17.4 million compared to $17.9 million in Q1.

In light of the current industry environment, we decided to take further cost-cutting actions. After careful review and consideration, we took steps to lower our quarterly SG&A and R&D expenses through headcount and salary reductions and lowered our discretionary spending. As a result of our recent restructuring activity, we now expect quarterly SG&A and R&D spending to be in a range of $17 million to $18 million per quarter.

Thank you. And now I'd like to turn the call back to Mary.

Thank you, Kevin. I'd like to conclude by addressing the comments in our preannouncement press release relative to hiring Blackstone Advisory Partners to assist Axcelis with optimizing and accelerating the market penetration of the full Purion platform.

We have worked with Blackstone in the past to assess approaches to various strategic issues, including our 450-millimeter strategy. Blackstone will be assisting us now as we evaluate financing and strategic initiatives that will strengthen our long-term position in the semiconductor equipment industry. This is a critical time for the industry as the industry matures, cycles are less predictable, and customers and equipment suppliers consolidate. And it's a critical time for Axcelis, as the role and performance requirements of ion implant change dramatically, particularly affecting the performance of other toolsets like Etch and enabling new applications like materials modification.

Customers are realizing that these new implant applications require the most innovative technology that Axcelis offers through our Purion platform. When the upturn resumes, led by memory spending, we will have all three Purion products positioned to ramp. We expect that Purion topline growth, combined with the streamlined expense structure, will result in a highly leveraged business-to-business model that should deliver handsome returns for our shareholders.

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

(Operator Instructions) Edwin Mok, Needham & Company.

So first question is I noticed that your GSS revenue increased sequentially. Any kind of color you can provide that on why it increased sequentially? Any help you have for us on the third quarter and as to how we think about GSS revenue?

Edwin, this is Kevin. On GSS, we have a core base business which is a used parts consumable business. And then the thing that flexes little bit is the used tools as well as the upgrade business. So I think in the quarter what we saw was a little bit higher revenue on used tools.

I see, okay. That's helpful. Then is that -- should we expect similar level in the coming quarter, or is it returning back to the March quarter level?

I don't want to break that out right now, but I will tell you used tool business is something we've been continuing to focus on and a scenario we want to grow in our GSS business.

Okay, that's fair. And then Doug, you mentioned about expectation for memory spending to resume starting for the fourth quarter. Anyway you can give us little breakdown where it comes from? Is it DRAM, was it 3G NAND, or incremental NAND spending? Any kind of color on that?

Sure. At this point, it seems like the DRAM spending seems to be in front of the NAND at this point. And so we're expecting DRAM to begin towards the end of Q4. And it seems like the flash is going to be something that's in the first half of 2015.

I see. Okay, great. Helpful there. And then the -- I think you guys the talked about Purion M being qualified at three customer right now. And all this is some of the memory customer. I was wondering should we expect revenue to start to come in for the Purion M in the fourth quarter as this spending picked up on memory? Or is it more like 2015? I think some of those products I think qualify for it a little bit, but we haven't seen product revenue. I was wondering if you could give some color around what are you expecting for the Purion M product.

So depending on the exact timing of when that memory capacity spend starts, we expect all three Purion products to participate in this upcoming spend. So that would include the high-energy tool, the medium-current tool, as well as the new Purion H high-current tool.

Okay. So that leads me to my next question, right. So you just shipped the first evaluable Purion H, right, and I guess you expect -- you mentioned that you expect at least one more to a second customer, maybe more. But how long does it take for the customer to actually turn around and get that to qualify to the point where when they place these orders, the orders will come to you on the Purion H?

I'm just wondering can -- any kind of color about turnaround time for the qualification for the tool. And what would give you confidence that you could turn it around fast enough? If the spending starts to pick up in 4Q, do you have enough time to do that?

Yes so, a couple of comments on that. First, as we expect, there'll probably be a couple of more evaluation customers on the Purion H in 2014. And we expect that some of those customers could take multiple Purion Hs during this fiscal year as well.

In terms of your turnaround question, remember the Purion is all built on a common platform. And so the Purion platform, which is the wafer handling and all the software, this is qualified in high-volume production on both the Purion XE and Purion M. So the qualification time for a customer and the learning curve for the customer is much lower for the Purion H since it's the third member of the family.

Let me add to that. The other thing to remember, and we've talked about this before, is that we worked in very close conjunction with several customers to develop the Purion H. And so some of these first customers who are taking the evaluation tools are very familiar with the tool and have actually run a significant number of wafers at our Advanced Technology Center here in Beverly.

So in some cases there is actually qualification that's being done by shipping wafers here and then sending them back to their fabs. And that's in preparation for the installation of the tool and then a quick turnaround from a qualification standpoint.

I see. So it's Purion H that you shipped is actually in store and up and running at customer site then, right? Am I correct on that?

Well, we shipped it at the end of June, so it's under installation right now and will be beginning the process qualification very shortly.

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

Patrick Ho, Stifel.

I apologize. I jumped on a little bit late, so maybe you may have said this in your prepared remarks. With regards to the Purion M, what are the potential impacts of gross margin as these initial systems flow through the P&L?

Basically I'm just trying to get from a modeling perspective how many basis points on the gross margin line as these systems flow through the initial systems that you guys have shipped have qualified. How does that impact the income statement?

Yes, so on the first shipments always being a first tool in the fab typically run at the lower gross margin. There's a little bit more work you have to put in to them, a little bit more customization. So in terms of a modeling, I would model Purion Ms at slightly down from where you're going to take them when we're into volume production.

And the other thing, too, Patrick, because we have commonality on the M and the H and the XE platform, really the leverage comes through supply chain when all these tools really start getting out there in a higher volume. I think that's where you'll see the biggest pickup at that point in time.

Great, that's helpful. Kevin, I know you talked about in the press release, the most recent cost-cutting initiatives that lower the breakeven levels following the June quarter. Are these sustainable? Or once you start getting back to that $60 million to $70 million quarterly run rate, especially as you mentioned memory CapEx spending going up, things turning around, does the breakeven then also rise? Are those costs coming back at some future point?

I think at those levels you just mentioned, that these new levels are where we can stay. The only wild card, Patrick, would be if we got hit with significantly more evals than we planned in there, there would be some incremental. But in terms of the development projects and where the money was being spent through head count, those cuts are what I would -- nothing is ever permanent, but I would consider those mostly permanent in terms of what we've done. (multiple speakers) I guess to answer your question is we should be able to cull that at these lower levels.

Okay, great. That sounds great. And final question from me, you know, given that traditionally or at least in recent years you've had the stronger exposure to the memory side of things given your product portfolio, as you start, I guess, penetrating and working closer to the foundries, what are some of the key applications that the foundries are looking for from your end in terms of both the M as well as the H products?

So the key application area in foundries is probably going to be in two areas. The first is all around the FinFET and the Fin definition. The angle control and uniformity control of all of the process steps around that are critical. I've actually heard several engineers at our customers basically refer to the FinFET as the integration engineer's nightmare. And the uniformity of all of the processes and how they add up is critical.

So the implant uniformity is going to be key. And that's a place where the Purion excels, with the spot-beam architecture and the tight-angle control and precision.

The second area that the foundries will be keying in on is the materials modification. And this will be, again, tying back to critical angle control, critical dose control, and the ability to vary both energy and dose across the wafer to increase the process windows for processes like Etch.

Great. Thank you very much.

(Operator Instructions) It looks like there are no further questions in queue, so I'll turn the call back over to Mary Puma, who will make a few closing remarks.

Well, we appreciate your taking the time to listen to our Q2 earnings call, and we look forward to speaking to and seeing many of you soon. So again, thank you very much.

This concludes today's presentation. Thanks for your participation. You can disconnect, and have a wonderful day.