Axcelis Technologies Inc (ACLS) 2020 Q4 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 Fourth Quarter and Full Year 2020. My name is Jerome, and I will be your coordinator for today. (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, Mary Puma, President and CEO of Axcelis Technologies. Please proceed, ma'am.

Thank you, Jerome. With me today is Kevin Brewer, Executive Vice President and CFO; and Doug Lawson, Executive Vice President of Corporate Marketing and Strategy. We are all participating in this call remotely, so I would like to apologize in advance for any technical difficulties. If you have not seen a copy of our press release issued last night, 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.

Good morning, and thank you for joining us. As a result of the strength of the overall electronics market and the growth of the Purion product family in 2020, Axcelis delivered its highest annual revenue in the last 15 years. To achieve this, our employees managed through many difficult logistical challenges brought on by the geopolitical environment and the continuing pandemic.

I'd like to thank our employees for delivering these results while continuing to serve our customers and adhering to safety protocols. This challenging environment has continued into 2021, but despite this, we are planning for another year of growth at Axcelis. The semiconductor industry is forecast to gain strength across all markets, and the Purion product family is poised for significant growth.

Our fourth quarter financial performance was in line with our updated increased guidance. Revenue for the fourth quarter was $122.2 million, with earnings per share of $0.43, gross margins of 43.4% and a year-end cash balance of $204.2 million. EPS was favorably impacted by a previously unrecognized tax benefit of $0.11 per diluted share. For the full year 2020, revenue was $47.6 million (sic) [$474.6 million] with an EPS of $1.46.

Our aftermarket business, or what we refer to as CS&I, once again contributed significantly to our revenue and gross margin. CS&I revenue was $58 million in Q4 and $181 million for the full year 2020. This strong performance was a result of high fab utilization, the growing Purion installed base and additional buying activity from one customer as a result of the current geopolitical situation.

The growing mature process technology market continues to be an area of strength for Axcelis, with 75% of Q4 shipments going to mature foundry/logic customers. The other 25% went to memory customers with NAND accounting for 15% and DRAM 10%. For the year, the mature process technology market accounted for 71% of shipments with memory accounting for 29%.

China continues to be a strong market for Axcelis. The geographic mix of our systems shipments in the fourth quarter was China, 56%; the U.S., 20%; Korea, 18%; and Taiwan, 6%. For the year, our geographic split was China, 54%; Korea, 28%; the U.S., 5%; Europe, 3%; Japan, 2%; and Taiwan, 8%.

We expect the memory market will improve in 2021. But as a result of the continued growth in the mature markets and the strength of Axcelis' product offerings in these segments, we expect that the mature markets will account for approximately 60% to 70% of our total shipments in 2021.

During the fourth quarter, the U.S. government placed Chinese foundry customer SMIC on the Entity List, meaning that licenses are required for all Axcelis U.S. shipments to SMIC. We have applied for licenses and are prepared to ship these tools against customer requirements in the first quarter.

As a result of the uncertainty related to these licenses, we are providing wider-than-usual guidance. For the first quarter, we expect revenue of between $118 million and $138 million, gross margins of approximately 40%, operating profit of between $11 million and $19 million and earnings per share of between $0.22 and $0.42.

Continued growth of Purion products is the key to achieving our long-term business models. We shipped the first Purion 200 revenue tool to a second customer for use in power device manufacturing. The power device market is a critical market for Axcelis and targeted Purion products for silicon carbide, including the Purion H200, will play a key role in increasing our customer base and revenues in this segment.

We currently have 6 Purion evaluation tools in the field focused on supporting growth towards our $650 million business model. During the first quarter, we expect to close one of these evaluations and ship an additional new one, resulting in a balance of 6 evaluation systems in the field as we head into the second quarter.

Before Kevin reviews the financials, I would like to summarize 4 key takeaways: First, the mature process technology market is very strong and growing, and Axcelis is the ion implant market leader in this segment. Second, memory is expected to recover in 2021 and will be additive to our strong mature process technology performance. Third, China will continue to be an important market for Axcelis, driven by many customers, both domestic and multinational. And fourth, the Purion product family is extremely well positioned to support future growth and our $650 million business model.

Now I'd like to turn it over to Kevin to discuss our financials and some operational details. Kevin?

Thank you, Mary, and good morning. Axcelis delivered exceptional fourth quarter and full year 2020 financial performance thanks to the continued outstanding work of our employees and supply chain partners. Strong execution across the board and significant leverage in our business model delivered 140% increase in operating profit on revenue growth of 38%.

During this ongoing pandemic, the health and well-being of employees remains a top priority. We are doing our best to create a safe work environment for everyone at Axcelis. Pandemic-related protocols that were implemented during 2020 remain in place for 2021. Our pandemic response team will continue to closely monitor these actions and update as required.

We remain focused on our target business model and expect 2021 to be another growth year for Axcelis. We will continue to invest in products, evaluation tools, and infrastructure needed to support our $650 million target model.

Turning to fourth quarter and full year financial results. Q4 revenue finished at $122.2 million and above our updated guidance compared to $110.4 million in Q3. Q4 system sales were $64.3 million compared to $70.2 million in Q3. Q4 CS&I revenue finished at $58 million compared to $40.2 million in Q3.

The unusually high CS&I revenue in Q4 was driven by fab utilization, a growing Purion installed base and significant buying in the quarter by one of our customers. We expect Q1 CS&I revenue of approximately $42 million and recommend modeling at this quarterly level for 2021.

Full year 2020 revenue was $474.6 million compared to $343 million in 2019, an increase of 38%. Systems revenue was $293.6 million compared to $202.6 million in 2019, an increase of 45%. CS&I revenue was $181 million compared to $140.4 million in 2019, an increase of 29%.

Q4 sales to our top 10 customers accounted for 81.5% of our total sales compared to 76% in Q3. Three customers were at 10% or above in Q4, the same as Q3. For the full year, 74% of revenue came from our top 10 customers, with 2 at 10% or above. Q4 system bookings were $131.5 million compared to $26.4 million in Q3, for Q4 book-to-bill ratio of 1.98 versus 0.37 in Q3. Backlog in Q4, including deferred revenue, finished at $93.2 million compared to $45.1 million in Q3.

Q4 combined SG&A and R&D spending was $38.9 million or 31.8% of revenue compared to $34.3 million or 31% in Q3. Q4 combined SG&A and R&D spending was higher than forecast primarily driven by variable compensation expense. SG&A in the quarter was $22.6 million with R&D at $15.3 million. In Q1, we expect SG&A and R&D spending to be approximately $36 million and run at this level through the remainder of 2021.

Q4 gross margin was 43.4% and above our updated guidance. Q4 gross margin was driven by higher-than-forecast CS&I revenue and continued cost out activity. Full year gross margin was 41.8% compared to 42% in 2019. We are guiding Q1 gross margin of approximately 40%, driven by a less favorable mix of products and the closure of an evaluation system.

Gross margins will fluctuate quarter-to-quarter based on product and customer mix, the number of evaluation tools flows and the percent of revenue contribution for our entire accretive CS&I business. We have made solid progress on gross margin improvement with cross-sell initiatives, new Purion product extensions and growth in our CS&I business. Our target model reflects additional gross margin improvement, some incremental volume, higher sales of Purion product extensions, the continued savings from lean manufacturing and value engineering.

Operating profit in Q4 finished at $14.1 million compared to $13.9 million in Q3. Full year operating profit was $58 million, an increase of 140% compared to $24.2 million in 2019. We are guiding Q1 operating profit of between $11 million and $19 million. Q4 net income was $14.7 million or $0.43 per share compared to $10.8 million or $0.32 per share in Q3. Net income and EPS were favorably impacted by a previously unrecognized tax benefit of $0.11 per diluted share. Full year net income was $50 million or $1.46 per share compared to $17 million or $0.50 per share in 2019, resulting in a greater than 190% year-over-year increase.

We are guiding Q1 earnings per share of between $0.22 and $0.42. Our Q1 guidance reflects our current assessment of the potential impact on our business from the coronavirus and the export control situation with a specific customer in China, which we will continue to closely monitor.

Q4 cash finished at $204.2 million compared to $212.7 million in Q3. We announced a $100 million share repurchase program for 2021. Q4 receivables were $86.9 million compared to $45.2 million in Q3. Q4 inventory ended at $161 million compared to $159.7 million in Q3. Q4 inventory turns, excluding the valuation tools, finished at 2.0 compared to 1.8 in Q3. Q4 accounts payable were $24 million compared to $24.3 million in Q3.

We finished 2020 with strong momentum and are excited about the prospects of recovery in the memory and automotive markets. We'll continue to make the necessary investments in our products and the infrastructure needed for our $650 million target model. Our customers continue to have high expectations for our Purion products, which we intend to achieve.

Thank you, and I'll now turn the call back to Mary for closing comments.

Thank you, Kevin. We are pleased with our fourth quarter financial performance as well as our exceptional overall performance in 2020 and are looking forward to another year of growth in 2021. Axcelis has a competitive Purion product line, a broad and diverse customer base, a strong balance sheet and a dedicated team of employees. These are the strengths that will continue to drive our growth toward our $650 million model and ultimately to a market leadership position in ion implantation.

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

(Operator Instructions) Your first question comes from the line of Patrick Ho with Stifel.

Congrats on the really nice finish to the year and the outlook for '21. Mary, maybe first off, in terms of the market environment, you're talking about a memory recovery in '21. Compared to 3 months ago, do you see the magnitude of that memory recovery being "greater" than it was 3 months ago? And I guess, how does that potentially impact us, from their standpoint, the wafer [sort of] build out as well as how many tools you may be shipping to the memory market in '21?

Okay. So Patrick, we've been saying now for quite a while that we expect a recovery in memory in 2021. I think if you take a little bit back, if you remember, in Q3, we actually shipped no systems to the memory -- to any memory customers. In Q4, that had increased to 25%. And we're actually saying that we expect memory to account for 30% to 40% of our systems revenue in 2021. And that's in comparison and up from 29%, which is where we ended for full year 2020. So we are starting to see some signs of the memory recovery, and we expect it to continue throughout the remainder of the year.

Doug, I don't know if you have anything you want to add to that.

Sure. Thanks, Mary. Patrick, the recovery that we're seeing this past quarter, it was split 15% and 10% for DRAM and NAND. And we expect -- we're seeing activity on both fronts, both NAND and DRAM. And so as we've been saying about this particular memory recovery, we see it as more of a longer-term, couple of years kind of recovery versus what we saw back in '17 and '18, where it was very steep.

There'll ultimately be more area under the curve in terms of growth as a result. And we're poised to do well there with our position. The percentages of memory versus mature in our projections are primarily due to the fact that the mature markets are just so active right now. And that's become a much bigger piece of our business compared to what it was back in the '17, '18 time frame.

Great. That's helpful. And maybe as my follow-up question for Kevin, in terms of your working capital management, AR obviously was a little bit up, which may highlight some of the linearity, but you're also building some inventory. Have you run into any supply constraints on your end as you're preparing for a higher level of shipments this year? Any supply constraints or issues on that front in procuring parts?

Yes. Thanks, Patrick. It's a good question. So I would say the supply chain constraints are what they've been for most of 2020 with the pandemic. Things were tight. We've continued to drive inventory probably a little ahead of where we need to be so that we're not waiting for long-lead material.

And as things kind of tightened up in different spots in 2020, we were able to move things around a little bit. We do have, in some cases, multiple suppliers. So it's about the same now. I think the pandemic-related issues are improving. But as you point out, the industry is ramping. So there's additional pressure coming from -- for a different reason now. But all in all, I would say it's about what we had to deal with last year, so I don't expect any issues with keeping up what we need to do this year ramping.

Your next question comes from the line of Craig Ellis with B. Riley Securities.

Congratulations on a real strong 2020 and finish to the year, team. So I just want to start with a near-term question. Clear -- it's clear that the company believes that CS&I will move back towards that $42 million level. But within the memory and mature foundry business, can you just characterize some of the gives and takes for the first quarter and help us understand how DRAM versus NAND might be performing to start the year?

[Craig, there's activity...]

Okay. So -- oh, go ahead. Doug, you can take it if you like.

Okay. Sorry about that. So Craig, we're seeing activity on both fronts. And as you know, we're more dependent on wafer start additions. And so we are seeing activity from both sides. It was split relatively evenly in the fourth quarter. From a -- as we look at the first quarter, we're seeing activity in both fronts. So it looks good. From a mature standpoint, the mature markets are very active, have been throughout 2020 and continue, and we don't see that slowing down in 2021. So...

Yes. Craig, if you want...

That's helpful. And then maybe -- go ahead, Mary.

No, I was just going to give a little bit more color on the mature market. So last year, image sensor and the general mature foundry business was very strong and continues to be into 2021. Automotive showed weakness, but we do see it recovering. And that's going to be positive for the power device market, which is going to be positive for Axcelis. And then as Doug said, we're seeing activity on both sides of memory. So it's -- we're getting to the point where we see most of our markets and market segments beginning to hit on full cylinders.

That's great. And then longer term, the company commented on memory being 30% to 40% of systems. Can you just characterize the demand visibility that you have through calendar '21 in different parts of mature foundry and with DRAM and NAND specifically so we can get a sense of how far out order visibility extends now?

Yes. I mean I think we have very good visibility into the first half of the year, and things are starting to become more clear, moving into the second half of the year. But we are seeing changes in terms of customer timing, both pull-ins and some delays in some cases, not really because of the market, I think. What I would say, I would characterize it mostly as some slight delays in fab readiness. So we expect -- that's normal for us, though, I don't think we're seeing anything that's necessarily out of the ordinary at this point in time. So as I said, first half visibility good, second half starting to improve.

And I think customers do realize that, given the ongoing challenges with the pandemic and, in some cases, the geopolitical situation, they may need to lock in on their forecast and notify suppliers maybe a little bit sooner than they normally would just because they want to make sure they get in the queue for their systems given some of the lead times that are out there right now. Kevin just commented that things seem to be manageable at this point in time, but you add a ramp on top of a pandemic, and you can get some issues at some point moving forward. So customers are aware of that.

Absolutely. And then one final one before I hop back in the queue. It's a multi-parter and more in the political realm. The first part of it would be, can you provide us any color on the optics that you have into the license granting process? And then on the other side of that, I think it was within the last 2 days that a number of the very large U.S. chip companies were speaking to the new administration and really expressing the need for a lot more federal government help building out the U.S. chip supply industry. If something were to happen in that regard, what would it mean for Axcelis?

Well, we're monitoring all the geopolitical -- the situation and the issues, obviously, on an ongoing basis. And so we've got our legal counsel watching it carefully. We're working with outside trade attorneys. We're very involved with SEMI, our industry trade group, to make sure that our voice is heard as well as to better understand the situation. Obviously, investment in semiconductor fabs would be a positive thing. And in the U.S., we would love that. We think that, that would be a real upside for the U.S. government, the country and for Axcelis.

In terms of some of the other geopolitical issues, there's really not a lot to say about what's going on with the licenses. I think that's maybe what you were poking at a little bit, Craig. We've applied for the licenses. We are prepared to ship systems in parts against customer requirements as soon as we receive the licenses. And we just haven't heard anything back yet. As far as we understand, we don't believe that anything significant has changed based on the change in administration. But again, we're all basically just waiting.

Your next question comes from the line of Christian Schwab with Craig-Hallum.

This is Tyler on behalf of Christian. First question, I think you alluded to it but maybe a little more color, what's your expectation as far as the timing of the memory recovery through the year? Are you expecting kind of a step-up here in Q1 or just a gradual improvement this year? Any color on timing would be great.

I don't think we necessarily have enough visibility. I mean I just alluded to the fact that there's visibility in Q1 that leads us to believe that there is a memory -- and we have visibility into the first half, I'm sorry, and -- which leads us to believe that a memory recovery will occur in 2021. But we don't -- I don't really -- we just don't have a view at this point in time, and we're not really going to forecast that in terms of putting numbers around it.

So as I mentioned before, we're seeing an improvement in the percentage of systems that we're shipping out to memory customers. And we do expect that as a percent over the course of the year to increase versus last year, so 30% to 40% versus 29%. But in terms of the timing, we're just going to continue to watch -- talk to our customers and watch the trends in the market.

Understood. That's very helpful. Second question then. I believe previously your comments were that, at some point in 2021, you expected to reach a run rate of your $550 million annual model. So I guess, given where Q1 is guided and expectations for an improving memory market and an improving automotive market, I'm wondering if it's reasonable to think that the full year '21 will kind of be close to or approach that $550 million annual target.

Yes, Tyler. It's Kevin. Yes. So obviously, it's in our line of sight right now with the guide we just gave. So you're right. We had we have kind of been saying, at some point, we hit the run rate in 2021 and then maybe the 2022 then. We're not providing full year guidance at this point, but as you point out, as I just said, it's in our line of sight at this point. And the $650 million model, as we continue to say, is a couple of years after the $550 million. But obviously, we're setting up well coming out of the gate in Q1.

Your next question from -- comes from the line of Tom Diffely with D.A. Davidson.

Mary, you said that you expect to close one of your eval tools during the quarter. And I'm wondering, what is your thought as far as the process of starting to ramp up production tools based off of the eval over the next few quarters?

I think the prospects are actually very good. I will actually say that, for this evaluation, we have already shipped some repeat orders to that customer prior to the evaluation closing. So we definitely have been selected as PTOR for the specific application. We've shipped some repeat tools, and we expect to ship some additional tools moving forward.

Great. And then, Kevin, when you look at the margin profile, how big an impact does both the closing of the eval tool have on the margin in the quarter? And then when you look at the top and the bottom of your guidance range, what is the impact of the margins there?

Yes. So I mean evals always have a negative effect, yes. Some evals have higher costs than others, so that certainly [moved] in a number evals. And I think what's going on in Q1 is we've got the evals out going out. We've also got a higher mix of high current tools going out, which is overall is good for the company because that that's a large market, and one of the areas we want to continue to grow in is high current.

But maybe I could help you a little bit more. If I look at the full year right now, Tom, I'm seeing full year gross margin in 2021 similar to what they were in 2020. And that includes a number of evals closing out. As Mary said, we've got one closing out and another one going out, which is 6. And I think as you can recall, typically, we would have 2 or 3. So we've been saying for the last couple of quarters there's a high number of evals and more going. So those are sitting on the margins.

And the other thing, we're going to see a lot of growth this year coming from systems versus CS&I, right? So as systems grow, [that's accretive to] CS&Is. That can pressure things a little bit. But the good news is, with all that in there, growth in systems, all these evals, I, at this point, expect the gross margins full year to finish similar to last year. And our target model was 42% to 43% on $550 million. So we're doing -- we're just off of that a tiny bit. And if you look at -- try to do the math and figure when we get there and think about cross-sell initiatives, maybe we could get there a little bit sooner than we thought.

Some of these initiatives still have to kick in. So like, from a gross margin point of view, I feel really good where we are right now and expect this year to continue to drive cost out and get the value [and to have] more Purion product extensions. And those are all things we need to get to our models. And then the $650 million model, margins are up to 44% to 45%, and that's a couple of years later. So we're -- again, we're in good shape, Tom.

Your next question comes from the line of Mark Miller with The Benchmark.

Congrats on your progress. Were there any shares repurchased last quarter?

There were not, Mark. So the program that was in place last year was suspended in Q1. We would not put that back in place. And then the Board approved the new program for this year, $100 million. And as a reminder, the prior program was $50 million, and we had spent about $25 million of purchasing shares prior to putting that on hold.

You've indicated a recovery in the auto sector. I'm just wondering, is that starting to accelerate? Because there's been a lot of talk about chip shortages facing the auto manufacturers. And I'm just wondering if that's really starting to accelerate significantly.

Mark, can you repeat the question? I heard the chip shortages, but I wasn't sure what the front end was.

Well, there's been reports that auto manufacturers are facing chip shortages. I'm just wondering. You said there was recovery auto -- in the auto. Has that started to really accelerate as the quarter went on?

We started seeing it pick up in the last quarter. It's -- we see it in a few different areas. We see it in the power device area, which started to strengthen last quarter, and we see that continuing to grow throughout the year. The image sensor market is a big piece of the automotive world these days. And that's been strong. And it's hard for us to tell exactly what's going to automotive versus phones and other image sensor applications. And then the general foundry, which -- general mature foundry, which is what's really all in the press these days, where everybody is talking about $0.20 parts keeping lines down, that's -- that whole foundry -- mature foundry market has been strong. Utilizations in that segment have been very high. And so that's been a big piece of our business over the course of 2020 as people bought all the consumer electronics and PCs and so forth. And that will continue now that you start layering automotive on top of it.

Your next question comes from the line of Quinn Bolton with Needham & Company.

Congratulations on the nice results. I just wanted to ask, maybe I missed it, but did you say which of the 6 eval tools had been accepted for revenue recognition or will be accepted for rev rec in the March quarter?

No. We didn't say which one would be accepted in Q1, and we didn't talk yet about the new one that will be going out in the quarter either. So we'll give more color on that as we progress through the quarter and into next quarter.

So like, I think it was Tom's question that you've already received repeat orders for that eval tool that was closed?

We have. I guess the only additional color I'll give around it is it's for an image sensor application, and we'll just leave it at that.

The second question I had is from the CS&I strength in the fourth quarter. It looks like perhaps you're not subject to export controls for that part of the business, just wondering if that's the right read. And given the very strong level at $58 million, is there a risk that, that customer doesn't purchase for some time that CS&I revenue could actually come in below $42 million at some point as that customer digests inventory of spares?

Yes. I'm not worried about that. I think that the customer who did a lot of buying is also running at a very high utilization rate. And we have shipped a number of tools there. And I think they obviously -- they're probably putting more parts [than needed] on the shelf, but I think they're going to continue to buy anyway. And as the business grows around this -- we had strength across the board. [I spiked out at] one customer, but there's continued strength across the board. So I think the $42 million number that we put out there in the model too is the right number to be using. And I don't see any downside risk to that.

And just lastly, Kevin, for the $100 million share repurchase program, can you give us any sense? Is that going to be under 10b5-1? Or will you be sort of in the market on a consistent basis, so you're going to try to be opportunistic? Any sort of thoughts on how that $100 million buyback is executed this year?

Yes, Quinn. So we will use the 10b5-1, which is similar to what we did on the program last year that we were executing under. And beyond that, whether it be opportunistic or not, I mean it's -- it will be a Board-approved [grid] that we buy to. And I think the Board and management realize that we should be returning cash to shareholders through some type of program, which we've agreed is a share repurchase. So I'm not going to say how much we're going to spend because -- right? I mean we put it out there. We could spend it all or a good portion of it. I guess what I'll leave you is we realize that we need to be utilizing this program. So again, Quinn, I'm not going to...

No, I know you're limited in -- yes. I know you can't give us too much on timing or amounts, but thanks for the color you did provide. And that's it for me. I'll go back in the queue.

All right. We have no question at this time. (Operator Instructions)

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

I'd like to thank everyone for joining us today, and we hope to talk with you virtually at upcoming investor events. We will be participating in Susquehanna Financial Group's 10th Annual Technology Conference in March. We expect to conduct several virtual NDRs during the quarter as well. We thank you for your continued support, and please stay healthy.

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