Axcelis Technologies, Inc. (ACLS) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies Second Quarter 2012 Conference Call. My name is Tony, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Amy Rasimas, Director of Investor Relations of Axcelis Technologies. Please proceed, ma'am.

Thank you, Tony. 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; Jay Zager, Executive Vice President and CFO; and Doug Lawson, Senior Vice President of Strategic Initiatives. If you have not seen a copy of our press release issued earlier today, it is available on our website. Playback service will also be available on our website as described in our press release. Please note that comments made today about our expectations for future revenues, profits and other results are forward-looking statements under the SEC'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. I'd now like to turn the call over to Mary Puma.

Thank you, Amy. Axcelis managed well through what turned out to be a more difficult quarter than anticipated. Like others in the industry, our second quarter started off with much promise, showing signs of an industry recovery. Very late in the quarter, as global economic conditions stalled, we, along with our peers, found ourselves facing much more challenging industry condition. Cautious customers slowed their build plans and held back on placing planned orders -- actions that impacted both our equipment and aftermarket business. Despite this, we were able to deliver break-even profitability with a slight miss in revenue guidance. As many of our peers have reported, Q3 is shaping up to be a difficult quarter, although meetings at SEMICON West and several recent trips to Asia and Europe confirm that the longer-term outlook for the industry is positive. Our goal is to leverage future market strength. And as such, we remained focused on positioning our products for top line growth. At the same time, we recognize the need to continue to reduce our quarterly break-even revenue level and fortify our cash position. Jay will get into more detail on this in a few minutes. Our plan in 2012 is to continue to extend the reach of the Optima HDx beyond memory and into logic and foundry. The natural extension will be a key driver of improved market share in the future. Evaluations for the Optima HDx at logic and foundry customers are proceeding. We continue to demonstrate competitive advantages with our cost-effective damage engineering solution and our superior extended Eterna ELS3 source lifetime for carbon and germanium. In fact, in the field the ELS3 source exceeded its spec, clocking in over 500 hours of uninterrupted carbon implants. This resulted in more than a 100% advantage over the competition. Together, the ELS3, with Linde SPECTRA Solifex gas delivery system, provides chipmakers increased system availability, higher overall productivity and lower cost of consumables -- all translating to a compelling cost of ownership advantage. We are also very pleased about shipping our new medium current system to a large customer in Asia for evaluation, where it will be used to manufacture next-generation 2x nanometer Flash devices. For those of you who saw our press release earlier this week, you noticed that we have rebranded this system as the Purion M. The Purion M is the first tool in our next-generation Purion implant platform and further advances the best Axcelis technology. The Purion M provides significant advantages over our competition, particularly with improvements in yield, for applications like HALO implants, and increase productivity for implants that utilize the system's 335 keV extended energy range. We believe that the Purion M will allow us to become a significant player in the medium current segment, an area in which we have had a relatively small presence and market share. We are working on additional Purion M evaluations, which will be addressed in future announcements. The Optima XEx continues to ship to the worldwide chipmakers as they add capacity to their fab. Its excellent reliability, broadest energy range and superior productivity make it the leading system for high energy implantation. And in dry strip, we are building on the momentum our Integra platform had in 2011. Our 2 evaluations are proceeding well, further demonstrating the superior performance of the Integra ES for advanced strip applications. Customers are confident in Axcelis' ability to deliver strong technology solutions that provide superior process performance and the lowest cost of ownership. Our customers continue to strongly support and work with us to extend our reach as they develop solutions for advanced technology challenges. I'm now going to turn the call over to Jay, who will discuss our financial results for Q2, our restructuring actions and our guidance for Q3.

Thank you, Mary, and good afternoon, everyone. As Mary indicated, Q2 started out to be a solid quarter for Axcelis, but business held off toward the end of the quarter with a significant slowdown occurring in the last 2 weeks of June. As a result, revenue for the quarter came in at $59.1 million, slightly below the low end of our guidance. And due to the timing of shipments, our cash balance of $33.9 million was also lower than we had expected. Despite the lower revenues, we were able to generate break-even earnings, significantly better than our guidance. Q2 consolidated sales of $59.1 million reflect a sequential improvement of 7.5%. System sales in the quarter were $26.2 million, while sales for our aftermarket business, which we call GSS, were $32.9 million. Both system sales and GSS sales had modest growth over Q1. And system shipments were $26.8 million, a 43% sequential improvements. Within these shipment totals, ion implant shipments were $24.9 million, or about 93% of the total. And shipments for our cleaning and curing systems, which reflect primarily our dry strip business, were $1.9 million, or about 7% of the total. For the first 6 months of the year, implant shipments were about 81% of total shipments, more in line with our historic ratios. In the quarter, about 2/3 of our shipments were to memory customers, and about 1/3 of our shipments were to logic and foundry customers. This was the same profile that we saw in the first quarter. Sales to our top 10 customers accounted for approximately 90% of our total sales, with 3 customers exceeding 10%. Systems bookings for the quarter were $18.3 million, down about 22% sequentially. Our book-to-bill ratio was 0.68, compared with 1.26 in the first quarter. And we exited the quarter with a systems backlog, including deferred revenue, of $16.3 million, down about 1/3 from our Q1 ending backlog. GSS revenues were $32.9 million, a sequential improvement of about 2.5%. Fab utilization rates improved during the first 2 months of the quarter and then remained essentially flat in June. Our gross margin in Q2 was 38.5%, a 1.2 point improvement over Q1 and substantially higher than our guidance. We did not recognize either of the 2 low-margin tools that have been in customer sites for several months. Customer budgetary constraints on the first tool prevented us from recognizing revenue in Q2. Delayed acceptance of product enhancements on the second tool also pushed related revenue from the quarter. We have since received acceptance on that tool. The deferral of these tools out of Q2 had a significant favorable impact on our margins. Additionally in the quarter, we saw much lower-than-expected warranty and installation costs. And finally, we had lower-than-anticipated Q2 build volumes that had the effect of delaying some of the anticipated unfavorable manufacturing variances from Q2 to Q3. Q2 operating expenses, excluding restructuring charges, were $23.2 million, compared with $26.0 million in Q1. These reductions reflect the impact of the restructuring actions we took in February. Within these expense levels, R&D expenses were $10.5 million, compared with $11.7 million in Q1, and SG&A expenses were $12.7 million, compared with $14.4 million in Q1. Ending headcount on June 30 was 943 people, including 929 employees and 14 temporary staff. Total headcount is down 104 people, or about 10% since the start of the year. As a result of these factors, we reported a modest operating loss of $408,000 in Q2, a significant improvement when compared with the $5.5 million operating loss in Q1. Higher revenues, improved gross margins and lower operating expenses all contributed to these improvements. The company recorded $153,000 of restructuring charges in the quarter and slightly over $3 million in restructuring charges for the first 6 months of the year. Other income net of other expenses was $560,000, primarily as a result of foreign exchange gains. And we accrued $469,000 in taxes in the quarter. Including restructuring charges, our net loss for the quarter was $471,000, which translates into break-even EPS. Looking at our balance sheet, we ended Q2 with a cash balance of $33.9 million, slightly below our guidance. During the quarter, our cash declined by $3.4 million. This decline was due primarily to the unanticipated delay in a customer order and payments. Accounts receivable were $35.0 million, an increase of $4.5 million from Q1. This increase was due to both higher shipment levels and the timing of these shipments. Our DSO increased from 50 days to 53 days. Q2 inventories were $126.6 million, a sequential decrease of $2.1 million. And we ended the quarter with an accounts payable balance of $17.6 million, essentially unchanged from the prior quarter. Now I'd like to provide some insights into our view of the last half of the year. Q3 market conditions appear to be more challenging right now than we had previously anticipated. As a result, we are currently projecting Q3 revenues to be between $45 million and $60 million. Within this overall total, we expect to see a modest decline in our systems business and a modest increase in our GSS business. We expect that Q3 gross margins will show a sequential decline to a range of 31% to 36%. At the high-end of our revenue guidance, we would expect to see lower gross margins. At the low end of our revenue guidance, we would expect to see higher gross margins. In the quarter, we expect to recognize the sale of both of the low-margin tools I mentioned earlier. We also expect to record an unusually high manufacturing variance in the quarter. Gross margins should recover to the mid- to high-30% range in Q4. Q3 operating expenses should be flat to slightly higher in the quarter. We recognized the need to continue to reduce our operating spending levels and to lower our break-even revenue level. Accordingly, we have taken additional restructuring actions, which will result in approximately $500,000 of restructuring expense in Q3. As a result, we expect to report a Q3 operating loss of approximately $5 million to $8 million and a Q3 earnings loss of approximately $0.06 to $0.08 per share. Our cash balance should increase in the quarter to a range of $35 million to $37 million. The primary driver for the increase in our cash balance will be lower inventory levels. With the anticipated recovery of our gross margins in Q4 and the benefit of our Q3 restructuring actions, which will lower our Q4 operating expenses to $21 million to $22 million, we believe that our break-even revenue level in Q4 will be under $60 million. Accordingly, we should be close to break-even profitability in the fourth quarter. In addition, we are focusing our efforts to strengthen our balance sheet, particularly with regard to our cash. We have lowered our operating expense levels and are driving toward higher gross margins. These actions will help to improve our cash balance. Additionally, we have initiated several actions to reduce our inventory and expect that it should be below $120 million by the end of the year. Also, we have taken actions to move cash from our international locations to the U.S, where our cash demands are greatest. As a result of these actions, we remain confident that we are adequately funded to meet our business needs. In addition, we have no outstanding debt and our $30 million line of credit remains available to fund the business upturn. We will continue to explore other opportunities to add cash to our balance sheet, including a reexamination of a potential sale leaseback for our Beverly facility. Last quarter, I indicated that we needed to achieve revenues of approximately $70-plus-million and gross margins in the mid-to-high 30% range to return to profitability. With the actions we have taken, we are driving to return to profitability and generate cash at revenue levels below $60 million. We believe that as a result, we are well-positioned to withstand any lingering softness in the industry and will generate significant revenues, operating profits and cash as our business improves. With that, I'd like to turn the call back to Mary.

Thank you, Jay. We believe that we have a strong roadmap to drive top line growth, improve profitability and generate cash. Continuing on this path will drive customer penetrations and market share gains and result in enhanced shareholder value. With that, I'd like to open it up for questions.

[Operator Instructions] Your first question comes from the line of John Cangelosi [ph] of Exelis [ph].

I have a question. How much of your business do you do in Europe? Do you do any business in Europe?

In terms of our system sales, most of our system sales tend to be over in the Asia Pacific area. However, we have, over the years, had a very strong implant business end in Europe, and as a result, a good portion of our GSS aftermarket business still takes place in Europe.

If you take a look at Q2, though, about 20% of our bookings came out of Europe and about 30% of our shipments. So it's mixed, but it really varies quarter over quarter. So I think, basically, what you're asking us, are we exposed to what's going on right now in Europe? And based on the reaction and discussions we've had with our customers, our customers are much more influenced by the global economy and what's happening in the global economy in the semiconductor industry versus any of the immediate things that are happening on the continent.

Right. And I have another question. Do you see or foresee any more restructuring expenses coming in the last half of this year?

Well, we continue -- we've said this before -- we continue to review where we are, what market conditions are, where the company's financial performance lies. And we have always said that, should market continue -- conditions continue to deteriorate, that we will continue to look at our operating expenses and take actions. And in fact, that is what drove the additional restructuring that we took in, in Q3. So it's just simply a matter of monitoring and then making decisions about what the right thing to do is for the business.

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

Jay, who are the top 3 customers? And what percentages were they? Do you have that handy?

We don't list the specific customers. They were all above 10% and they are generally in the 10% to 20% range.

Great. And then, I guess my last question. Do you think the company's at a position to maybe seek strategic alternatives? We've kind of struggled for a number of years now not to get back to profitability and maybe the organization may be attractive to somebody else. I mean, your stock, I mean, you could -- your aftermarket revenues, if you will, call it $140 million to $150 million, are quite profitable, sustainable business that -- I mean, most companies don't trade well below product and support. Are we at that type of point yet? Or is that something we need to look at down the road depending on how the top line looks?

So Christian, we all know that consolidation is accelerating in the industry, and the Axcelis management team and our Board believes that it's critical that we gain additional scale as we move forward. As you know, our primary goal at this point in time is to drive the business to be the best that it can be. We're growing top line growth. We're improving gross margins. We're reducing our operating expenses. We're driving very hard for profitability and to generate cash. And we believe that taking all of those actions will allow us to be a very profitable company and a candidate potentially to gain the scale, to become part, potentially, of another company. So I think we just wait and watch and we continue to do what we're doing now. As I said, I think we've got a very strong roadmap to drive that top line growth and profitability. And we'll just keep marching down that path and see where it takes us.

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

I'd like to thank you all for joining us today, and we look forward to seeing many of you at the Craig-Hallum Alpha Select Conference in New York, which is scheduled for September 27. Thank you, again.

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