Axcelis Technologies Inc (ACLS) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies call to discuss the company's results for the first quarter of 2018. My name is Tikia, and I will be your coordinator for today. (Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the presentation over to your host for today's call, Mary Puma, President and CEO of Axcelis Technologies. Please proceed, ma'am.

Thank you, Tikia. With me today is Kevin Brewer, Executive Vice President and CFO; and Doug Lawson, Executive Vice President of Corporate Marketing and 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.

During Q1, Axcelis made significant progress toward our goal of regaining market share leadership in ion implantation with the Purion platform. We announced the first shipment of a Purion H high current implanter to a new foundry/logic customer for development of their most advanced logic nodes. We also entered into a distribution and support agreement with SCREEN Semiconductor Solutions to bring the complete Purion product family to the Japanese market. These 2 opportunities have opened nearly 1/3 of the ion implant market to Axcelis. This represents more than $300 million in potential systems revenue previously unavailable to the company.

Purion has tool of record status at 7 of the top 10 CapEx spenders in the industry. Our advanced logic shipment and the SCREEN agreement have opened opportunities at the remaining 3 customers. This facilitates a continuing momentum shift in the ion implant market to Purion.

Revenue for the first quarter was our highest in over 10 years at $122.2 million. These results were above guidance and current consensus estimates. Our systems mix in the quarter was 37% mature foundry/logic, while memory comprised the remaining 63% of the systems shipments, with 36% of total shipments for DRAM and 27% for Flash.

Memory remains strong and is expected to represent more than 50% of the systems mix in the second quarter. The geographic mix of our systems shipments were Korea, 52%; China 20%; the U.S. and Europe, 7%; and the rest of world, 21%.

China continues to be an active geography. During the quarter, we announced our first orders for Purion from a new domestic Chinese memory manufacturer.

Turning to guidance for the second quarter, we are forecasting revenues of between $114 million and $118 million. We expect gross margins of approximately 38%, operating income of $15.5 million to $16.5 million, and EPS of $0.34 to $0.36 after a noncash tax expense of $0.10.

We continue to maintain our $450 million revenue model as our 2018 target. This will result in further market share growth coming from both established Purion customers and increasing demand from the new Purion penetrations made in 2017.

The industry remains in a strong sustained cycle that continues to be fueled by IoT in the mature foundry/logic market, data storage in the 3D NAND market and data analytics in the DRAM and advanced logic segment. The strong semiconductor market in 2017 provided a great backdrop for increasing Purion market share. This is continuing in 2018.

During Q1, we increased the Purion footprint with shipments to 3 new customer fabs. Two of these sites represent new Purion customers, one of which is our first Purion shipment to an advanced logic fab. The other location is a first in-fab Purion placement by an existing Purion customer. This brings total new Purion penetrations since the beginning of 2016 to 35.

Let me take a moment to discuss our 4 key 2018 objectives in more detail. The first 2 will drive 2018 revenue. Number one, growing our footprint within our existing customer base with a focus on large memory customers. And number two, establishing Purion in the nascent domestic Chinese memory market.

Our efforts on these two objectives are going well. New fab and customer penetrations in 2017 are now generating follow-on orders. We continue to work closely with existing customers on new recipe opportunities on their advanced process flows. For example, in Q1, we shipped a Purion H evaluation unit to a large memory manufacturer to prove performance advantages that will expand our footprint and increase our percentage of implant spend with this customer.

In terms of China, we have multiple new Purion customer shipments planned in 2018, and we announced our first orders for Purion from a domestic Chinese memory manufacturer. In addition to the emerging memory market, our business in the mature foundry/logic segment in China remained strong.

The third and fourth 2018 objectives are focused on our longer-term, $550 million target business model. And ultimately, regaining ion implant market share leadership. Number three, penetrating the advanced foundry/logic market segment with Purion; and number four, reentering the Japanese market.

These two markets represent approximately 1/3 of the ion implant market that has not been accessible to Axcelis. In the first quarter, we have made significant progress toward achieving these two objectives. In Q1, we shipped a Purion H evaluation unit to a leading-edge foundry/logic customer for their most advanced logic development efforts. Purion H was selected for this project, based on architectural advantages over the competition. These advantages will allow the customer to solve some very difficult process issues, while achieving significantly higher productivity and lower cost of ownership compared to the competition.

In addition, we announced a multi-pronged partnership with SCREEN Semiconductor Solutions, formerly known as Dainippon Screen, that we expect will accelerate our first Purion shipment into Japan.

SCREEN is the sixth-largest capital equipment supplier in the world. The company is based in Kyoto, Japan, with over 3,000 employees worldwide. SCREEN brings to Axcelis a strong sales and service organization with deep ties to the Japanese customer base. Purion systems are well suited for key Japanese products such as memory devices, image sensors and silicon carbide power devices. As part of the partnership, Axcelis will establish a demo and applications lab, featuring a Purion H high current system at SCREENS process technology center in Hikone, Japan. Additionally, the 2 companies have agreed to work together on advanced technology development in multiple areas.

Now I'd like to turn it over to Kevin to discuss our financials.

Thank you, Mary. Axcelis delivered solid first quarter financial results, beating both company and analyst consensus estimates.

Revenue, operating profit and cash all finished our highest levels in over 10 years. Strength in the overall semiconductor market continues to provide Axcelis with an opportunity to firmly establish Purion across a broader customer base.

In the quarter, we shipped 2 new Purion H evaluation units. One to our first advanced logic customer, and the second to an existing memory customer for work on additional recipes for advanced memory devices.

Gross margin in the quarter was above our guidance, driven by lower system costs. Higher volume and numerous margin improvement initiatives should continue to improve our Purion product cost.

In Q1, we also continue to tightly control our spending, but we will invest in areas that enable us to achieve our revenue growth objectives.

In the first quarter, we opened the door to $300 million in potential new revenue for Axcelis in advanced logic in the Japanese market. Over the next couple of years, we will allocate additional capital and resources to setting up our applications lab, located at SCREEN's process technology center and step up our R&D efforts to support advanced logic. Q1 opened significant opportunities for Axcelis and we plan to take full advantage of them.

Now I'll review the first quarter 2018 financial results. Q1 revenue finished at $122.2 million compared to $116.4 million in Q4. Q1 system sales were $85.5 million compared to $75.8 million in Q4.

Q1 CS&I revenue finished at $36.7 million compared to $40.6 million in Q4. Q1 sales for our top 10 customers accounted for approximately 87% of our total sales compared to 64% in Q4, but 2 of these customers at 10% or above.

Q1 system bookings were $90.3 million compared to $103.8 million in Q4, with a Q1 book-to-bill ratio of 1.02 versus 1.35 in Q4.

Backlog in Q1, including deferred revenue, finished at $89.4 million compared to $87.3 million in Q4. Q1 combined SG&A and R&D spending was 23.4% of revenue compared to 22.3% in Q4.

SG&A in the quarter was $16.4 million, with R&D at $12.2 million. In Q2, we expect SG&A and R&D spending to be approximately 25% of revenues and in line with our target business model.

Q1 gross margin was 38.6% compared to 31.5% in Q4. Our Q4 gross margin was negatively impacted by an excess inventory reserve adjustment. In Q2, we expect gross margins to be approximately 38%, impacted by a higher mix of Purion H. We have detailed multiyear gross margin improvement roadmaps in place. Higher volume, value engineering, supply chain rationalization and lean manufacturing will all continue to play a critical role in driving the lower Purion product cost.

Operating profit in Q1 was $18.5 million compared to $10.8 million in Q4, which includes a charge for excess inventory.

Q1 net income was $13.9 million or $0.41 per share compared to $91.7 million or $2.68 per share in Q4. Our Q4 net income was impacted by a tax benefit of $81.6 million through -- principally through the release of tax valuation allowance-related impacts. We are guiding Q2 earnings per share of $0.34 to $0.36 after an expected noncash tax expense of $0.10.

Q1 inventory ended at $135 million compared to $120.5 million in Q4. Q1 inventory turns excluding evaluation tools finished at 2.4 compared to 2.7 in Q4.

Q1 accounts payable were $43.4 million compared to $32.6 million in Q4 due to the timing of material receipts. Q1 receivables were $75.6 million compared to $75.3 million in Q4.

Q1 cash finished at $148.5 million compared to $140.9 million in Q4. We expect Q2 cash to finish at approximately $154 million.

Q1 was a great quarter for Axcelis. We delivered quarter-over-quarter improvement in revenue, gross margin, operating profit and cash. In 2018, we are focused on driving higher revenues through share gain, improving gross margins through cost-out initiatives and solid cash generation required for investments expected to drive future growth. Thank you.

Now I'd turn the call back to Mary for closing comments.

Thank you, Kevin. Our customers are choosing Axcelis' Purion platform because they realize the value or innovation benefit they gain from having competition between 2 strong implant suppliers. We have all watched this play out as Axcelis has grown implant market share from approximately 5% to 27% over the last few years.

In Q1, we put additional pieces in place that we need to complete our march toward market share leadership. Our agreement with SCREEN and our shipment to a leading-edge foundry/logic customer have given us access to $300 million of implant opportunity, meaning that the entire $1 billion implant Tam is now available to Axcelis.

Furthermore, our SCREEN agreement not only provides Axcelis an entree to the Japanese market, it also gives us access to a world-class Japanese facility in which we will outfit a demo and training center. This will allow us to better serve the needs of all of our Asian customers. The agreement also builds upon our desire provide our customers with solutions to better meet their emerging manufacturing challenges through our technical collaboration. We are confident about 2018 and the continuous growth and profitability that we believe we can deliver over the next couple of years at the $550 million revenue model. We are also excited about identifying new technologies, products and businesses that will allow us to continue a trajectory of profitable growth that our shareholders have come to expect from Axcelis.

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

(Operator Instructions) Your first question comes from Edwin Mok of Needham & Company.

First, actually just a housekeeping, just to clarify. I think last quarter you guys talked about you have a step-up in tax expenses here, but [not] for cash taxes to remain really low. I think this quarter, you just reported your GAAP number. You're not going to back out from (inaudible). I just wanted to clarify that's the case, and how -- tax rate is going to stay at this 20% range going forward?

Yes, so we are reporting GAAP numbers, Edwin, and this quarter, our tax rate was 20.4%. So we feel that we'll be in the 20% to 21% range going forward. And the impact -- you're right, we're paying taxes now, but it's noncash because we have this big deferred tax asset on the balance sheet now. So it will be a while before we use that up. So it is impacting the P&L because it shows an expense, but then we don't pay the expense, so we don't pay the cash.

Okay, great. And then kind of moving on to business, we've heard from some companies kind of talking about, maybe within the memory space, there's some shifting kind of equipment spending or shift in capital expansion from NAND to DRAM. Just wondering if you guys are seeing that? And as that progress through the year, how does that affect your business?

So Edwin, we really haven't seen any major shift between DRAM and NAND. It's very common for things -- for shipments to move around quarter-to-quarter. But we really haven't seen any changes in the market, as I just mentioned. And we think overall demand remains strong both for memory and also the mature process technology market. And what we're doing is just we continue to monitor the timing of these customer investments very closely. But customers are continuing to tell us that they feel confident about this being a sustained cycle and as that those investments are going to take place.

Okay, Good. All right. Can I ask you a question about that agreement with SCREEN? You mentioned that you're placing our Purion H product on that customer's site. I was wondering, it seems like the opportunities that you're going after like -- or the end customer there, the chip-makers they are -- memory, (inaudible) silicon carbide. Seems like there's a high-energy type of application more than high current. Just curious why you're placing a high current too there? And then, would that agreement -- does that -- does those product come with slightly low gross margin because I guess you have to give up some margin to SCREEN as a distributor?

Yes. So on the first quarter, Edwin, we made a decision to put Purion H in the lab in Japan. It's the largest TAM, it's used for a lot more implant applications than the high-energy implanter. And so the image sensor and NAND markets definitely do use high energy, we can do the work for their applications back here in Beverly pretty easily. So what we'll be doing in the lab there is have a Purion H full implanter, but we will have Purion XE front-end that will allow us to do full training with the Purion XE, which is a little bit wider, a bigger system just based on the size of the tool. Relative to the financial question, our -- we haven't released exact terms of the agreement. But it's a representative agreement, so we'll be paying them a commission, so it shouldn't impact the gross margins.

Okay, great. That's helpful. Lastly, just on the advanced logic win there. Congrats for make -- winning that eval position. Just curious, what kind of time frame for that? And is it possible to describe what node are we talking? Is it more like a 5-nanometer node or is it [kind of] for the current (inaudible) advanced node?

So we're not going to identify the node because it's obviously confidential in terms of the customer we're dealing with, and the development that they're using the Purion H for. Beyond that, typically a logic evaluation will last one year, and that is, in fact, the length of this evaluation agreement. As has happened in the past, I think, to be conservative, we should probably think of taking revenue in 2019. But I'm not going to rule out the fact that we could actually ship additional Purion Hs to that customer this year.

Your next question comes from Patrick Ho of Stifel.

Mary, maybe just to follow up on some of the comments you made regarding China, and particularly specifically the domestic market. Where are you getting the biggest interest right now, on the memory side or the mature technology logic side, given that, that region has both of those markets growing at a pretty rapid pace?

We're actually getting a lot of interest from both sides, both customer segments. There is interest from, I'll call the domestic, with some of the new domestic memory suppliers. And we talked about how we actually got our first orders from one of those customers in Q1. We also have a lot of interest from some of the more established, or I'll call them, maybe the global memory companies. So the memory side is actually quite strong. And then on the mature process technology side of the business, we have a lot of business in China. We've talked about that before, then we have an [excessive] installed base. And we're seeing those customers continue to show interest in Purion and place additional orders also.

Great, that's helpful. And maybe as a follow-up question in terms of your services business and also maybe also related to China somewhat. How do you look at that opportunity on the services front given that, that's an area where you guys have capitalized upon with your current installed base. But China also tends to be, I guess, a more -- a region where they tend to have more of those types of third-party vendors or local shops there. How do you plan to penetrate the services market and keep a lot of that in-house for yourself versus the vendors out there?

I actually don't think we've seen it -- the competition be any stronger in China than some of the other Asian markets that we've gone into. One of the things that's clear is that, especially at some of these new fabs where the operators are new, the management teams are actually looking towards or looking to Axcelis to provide support, both in terms of service and spare parts and consumables, because in some cases again, the operators are new and the locations are remote, and so in terms of being able to come online as quickly as possible, I would say we're actually getting probably our fair share or maybe even more of our fair share in these situations.

Right. Final question for me, and for Kevin in terms of gross margins. I think you talked about the progression to 40% gross margins has been pushed out somewhat. But as we look at 2018 as a whole, as you get some of these cost-out programs and some of the savings you talked about, would there be a potential trajectory to increasing gross margins as the year progresses?

Yes, Patrick, we still believe that 39%, which we put in our target model is achievable this year. And when I look at that, I'm thinking more along the lines of an average of 39%. So the answer to your question is, yes, as we move forward, I expect to continue to see these margins creep up. We've got all the usual things that impact us with mix in evals and stuff. But at these revenue levels, an eval recognized and has a lot less impact on margins versus on lower revenue. So, yes, I'm very comfortable with what we have in the model, 39% is where we can get to this year. And then beyond that, as you pointed out, if you look at our $550 million model, 40% plus is where we would expect to be.

Your next question comes from David Duley of Steelhead.

Just a couple questions on memory spending. I was just curious, have you seen an increase in overall DRAM spending? Many of the other large equipment guys have talked about DRAM spending being better than expected. And I was wondering what you had seen thus far?

Yes, I think, versus what we had anticipated coming into the year, we have seen DRAM spending increase. So I think that what we're seeing is pretty consistent with what others are telling you.

Okay. And I'm assuming that's kind of 2 sources of increase, a little bit more perhaps from China and then a little bit more from non-Chinese customers, the Korean guys who seem to be ramping up a fab or 2.

Again, I think we're seeing the same things that everybody else is seeing, so those regions would be among the areas where we would see some strong DRAM spending at this point.

Okay. And as far as the mix in Q2 between memory and foundry/logic, could you repeat that again? I think you mentioned it. And then perhaps, if you could provide some guidance what you think the mix would be for the second of the calendar year?

Okay. So these numbers, by the way, we made a change to this right before we read the script. So these are the actual numbers, and I apologize if they're slightly different. The foundry/logic is 36% in terms of shipments and the memory is 64%, and the split would be 37% DRAM and 27% Flash.

Okay. And that's the same mix -- that was the mix you had in the March quarter? What do you expect the mix to be in Q2 and in the second half?

Well, we don't really forecast what the mix is going to be. We did say in the script that we expect our memory shipments to be over 50%. So it will still remain predominantly memory, although it may not be quite as strong as that 64% that we had in Q1.

Okay. And then, could you take a stab at -- if you could take a guess at what you think your first half's revenues of this year will look versus the second half? Is there going to be -- would you expect a decline in overall memory spending? Or is that going to be different for you guys?

Well, we -- the first of the year continues to be strong, and I think that's witnessed by our results from Q1 and also our guidance for Q2. And in 2018, we are focused on achieving our $450 million revenue target. At this point, we have limited visibility into the second half, but if you look at what's going on right now in the marketplace, there is a lot of fab construction underway, so we're confident that spending will occur and we just continue to monitor the timing of those customers and customer investments very closely. I think the other thing is that we're actually focusing beyond 2018. And we're pretty excited about the fact that we are getting all the pieces in place now for the $550 million target business model with the first shipment of the Purion H to a leading edge foundry/logic customer, and then also the distribution and support agreements and other elements of our collaboration with SCREEN. So I think we feel very confident about where we're going in 2018 and even moving forward over the next couple of years.

Final question for me is, as far as China goes and the domestic memory guys, do you think you're going to achieve a 40% share of those new customers as they come online given your market position?

Again, I'm not going to conjecture at what the market share is going to be. It's pretty hard to tell based on the fact that we don't exactly know what the spending is going to be. But we continue to say that we think we're going to get our fair share of that business. As I mentioned earlier, we have a position at both the domestic and global memory customers as well as the mature foundry/logic guys. So I think it's going to be a big year in China across a number of different customer segments.

(Operator Instructions) Our next question comes from Mark Miller of The Benchmark Company.

As memory scales up to a greater number of layers per device, do you see increased use of ion implants as we go to next-generation device with more layers?

The use of ion implant is a little bit more wafer-based than layer relative to the NAND process. Although, we do continue to work with customers and partners looking at ways that implant could be used in material modification applications to help with some of the difficult etch and patterning steps involved in that. But currently, it's really driven by the transistor definition on the NAND devices.

Okay. This noncash tax expense, does that -- sounds like that's going to extend through the rest of this year? What about 2019?

Well, it's going to be based on our earnings, right? But we have $81.6 million, I think, was the number that we put up on that deferred tax asset reserve. So there's a lot of profit that can be made before we chew through that. So basically any tax expense that we have going forward, Mark, will pull from that reserve, and when the reserve runs out, it runs out. But at a 20% tax rate on our expenses, it suggests that, even if we achieve greatness, there's a few years before that's gone.

And that was -- $81.6 million was there for the March quarter, is that correct?

We put that up at the end of the last year when we -- or yes, March quarter. Right.

Okay. I'm just wondering, maybe I missed it. Cash from operations?

I just gave the cash number. We went from $140 million up to $148 million. I think, most of that was from operations.

Typically it's a 1 for 1 kind of ratio.

So about $7 million to $8 million cash from operations.

Our next question comes from Christian Schwab of Craig-Hallum capital.

Did you make a comment of what you're seeing, Mary, on the nonleading edge side? And what your expectations are for 2018?

Well, I didn't -- what I said is that we really haven't seen a change in the marketplace that, overall, the demand remains strong, and that's both on the memory side of the business and the mature process technology side of the business. And there have been a few -- there's been some movement in and out, which is normal, I think, in any given quarter, but in general, we feel very confident about 2018 and the fact that we're going to hit our $450 million revenue model, and our customers are telling us they feel confident about the fact that the market's going to the remain strong and that we're in a sustained cycle.

You have no further questions at this time. 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.

So we hope to see you in the coming months at the B. Riley conference in Santa Monica and the Craig-Hallum conference in Minneapolis, both in May, and at the Stifel conference in Boston in June. Thank you for your support.

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