Axcelis Technologies, Inc. (ACLS) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies Fourth Quarter and Full Year 2012 Conference Call. My name is Tahisha, 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, Ms. Amy Rasimas, Director of Investor Relations of Axcelis Technologies. Please proceed.

Thank you, Tahisha. This is Amy Rasimas, Director of Investor Relations. Welcome to our conference call to discuss our fourth quarter and full year 2012 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. Fourth quarter results were impacted by continued challenging global economic and industry conditions. Revenues, which came in around the midpoint of guidance, reflected ongoing weak system sales and low GSS revenues. As we expected, GSS revenues were negatively impacted by low fab utilization rates and customers holding back on year-end spending for consumables, spare parts and upgrades. Our Q4 results include the impact of the Lam Research transaction and a noncash inventory reserve adjustment. Excluding these 2 items, our financial results were generally in line with our guidance. Jay will review our Q4 results including details of these items in a moment. Despite an operating loss, we were able to generate cash from operations during the quarter. Additionally, the Lam deal yielded $8.7 million of cash. Both factors contributed to a better-than-expected year-end cash balance of $45 million. I'd now like to discuss the strategic value and structural details of the Lam agreement. On December 4, 2012, Axcelis and Lam announced that the 2 companies had entered into a strategic collaboration agreement focused on the interrelationship between each company's core technologies. Additionally, Axcelis agreed to sell its dry strip intellectual property to Lam as part of a planned strategic realignment that will allow us to focus our resources on the ion implantation market. These 2 actions are extremely important to Axcelis' huge strategic direction so I'll spend a few minutes on each. First, let's review the dry strip transaction. Axcelis agreed to sell its dry strip intellectual property, including the advanced nonoxidizing process technology associated with the Integra product line and some additional assets to Lam for $10.7 million. In addition to the intellectual property, several key technologies transferred to Lam to ensure smooth product transition for our customers. Axcelis will exit the 300-millimeter dry strip systems business by September of this year. This allows our customers a reasonable period to buy required short-term capacity and begin evaluation of Lam's products. We will also continue to sell legacy 200-millimeter systems for a period of 3 years. Axcelis has retained the aftermarket service for our large dry strip install base and will continue to support these customers indefinitely. We have resized and reorganized our global dry strip team to facilitate the customer transition to Lam to support the 200-millimeter legacy business for the next 3 years and to provide ongoing service for our install base. This transaction has benefited Axcelis in several ways while providing a clear transition path for our customers and protecting their install base investments in our dry strip products. In terms of benefits, first, it facilitated our exit from the low-margin dry strip systems business so that we can focus on the higher-margin and strategically more important ion implantation market. Second, it allowed us to retain the higher-margin service and spares business associated with our large dry strip installed base. And third, it improved our financials by adding cash to our balance sheet, reducing our inventory, lowering our OpEx and eliminating a low-margin product. Now I'd like to discuss the strategic collaboration agreement between Axcelis and Lam that will allow both companies to provide customers with optimized technology and product solution. Moore's Law continues to challenge technology with shrinking device structures increasing the interaction of formerly independent process steps, such as etch and implant, and creating new opportunities at these intersections. 450-millimeter production will also likely become a reality by the end of the decade, bringing additional manufacturing challenges. The result is more reliant on equipment suppliers to develop difficult advanced process technologies such as those needed to support new 3D FinFET transistor structures, 3D NAND devices and advanced packaging processes, blurring the line between the front-end fab and back-end packaging. Since no single equipment supplier can support all process steps, we will likely see increased levels of collaboration among the equipment community. Axcelis and Lam recognize this and have entered into a strategic collaboration agreement focused on the interrelationship between ion implantation, etch-deposition and advanced dry strip and wet clean processes. Our intent is to work together in our labs and jointly with customers to explore and exploit the opportunity created at these process intersection. We believe that together, we can enable new processing capabilities and more precise process control, leading to higher yields, better device reliability and more profitable device manufacturing. For example, ion implantation is being used to modify the physical characteristics of the materials used to fabricate semiconductor devices. We expect material modification techniques will increase the implant TAM over time and that our collaboration with Lam will provide us the opportunity to capture a larger share of this market. A collaboration steering committee has been formed and initial meetings held. We look forward to capturing the value that will be created for our businesses and our customers as a result of this partnership. Now let me shift back to our current business. As we said during our last call, we know that successfully leveraging the industry cycle requires a downturn strategy that combines strong financial management with effective product positioning designed to capitalize on the inevitable upturn. As a result, we have focused very hard on prudently managing our expenses and cash through this trough. We took a number of actions during 2012 to reduce our operating expenses. We reduced headcount by more than 15%, focused our R&D spending on critical programs, asked our employees to take 3 weeks of unpaid shutdown and significantly lowered our warranty and installation costs. We essentially took our breakeven revenues down to around $60 million per quarter. We have taken a hard look at 2013 and determined that additional actions were acquired to mitigate current industry conditions. Input from customers leads us to believe that we will not see any noticeable uptick in revenues in the first half of 2013. Indications are that during this time frame, spending for both systems and service will continue to be constrained by lackluster chip growth. We do believe that there will be some level of recovery in 2013 led by foundry investment and the accelerating shift to mobile products. Several foundries have announced plans for varying degrees of investment with the slope of their ramps in some cases dependent on the speed and timing of chip demand. Memory CapEx in 2013 is a bit harder to gauge. We are not optimistic about DRAM investments in 2013, but we do expect flash spending to resume later in the year to replenish low chip inventories. Timing for this investment is also subject to change based on economic conditions and industry demand. As a result of our view on 2013, we executed another reduction in force in January of about 6% and communicated to our employees that we would take unpaid time off this year. In addition, we continue to look for ways to reduce our operating expenses. Despite these difficult actions, we are making investments that will allow us to be successful and competitive and expand our reach in the logic foundry and flash segment. In addition to investments in product programs, in particular those associated with our Purion platform, we are also making investments in people in order to have the strongest team possible to drive our success. A few weeks ago, John Aldeborgh joined Axcelis to lead our customer-facing operations, including sales and GSS. John is a 30-plus year veteran of the semiconductor equipment industry, including several years at Varian as their VP of Sales and Marketing. His knowledge of our industry and products and his relationships with customers will provide our field operations an added boost. In terms of product penetrations, we continue to make progress with key customers, seeking solutions to emerging technology challenges. We are working closely with them on joint development projects related to technology development at advanced node. We spoke last quarter about 3 critical evaluation tools in the field that will extend the reach of our flagship products into logic foundry and flash. We have 1 Purion M medium current ion implanter under evaluation for both memory and logic applications, and 2 high current Optima HDx evaluation tools in leading-edge foundries for logic. The Purion M evaluation we have at the flash fab in Asia is proceeding smoothly. This customer's evaluating the Purion M not only for flash recipes but for logic recipes as well. The field data we have received demonstrates the productivity and energy savings advantages the Purion M has over our competition. We expect to leverage these advantages into revenue opportunities when both foundry and flash investments pick up later this year. We also expect to ship 2 additional Purion M evaluation tools in the near future, one to a foundry logic customer and another to a second memory customer. Both of these customers currently have plans to invest to meet the required demand for logic and flash products, respectively. We are confident in our ability to win with the Purion M and secure future business at these accounts later this year. Our 2 Optima HDx evaluations at logic foundry customers will close this quarter. Field data shows that we are delivering significant cost of ownership advantages to our customers with our superior extended Eterna ELS3 source lifetime for carbon and germanium, as well as our cost-effective damage engineering solution. Customers continue to work with these evaluation systems beyond the original joint development project parameters to explore the benefits of emerging implant applications at smaller node sizes. This increased scope should result in higher revenues for the Optima HDx this year. During 2013 as capacity requirements increased in the flash segment, Axcelis expects to see a greater demand for high-energy systems. As the leading single wafer high-energy tool on the market, the Optima XE should capture the lion's share of this business. We believe that having a laser focus only on implant will be a positive for Axcelis moving forward. We are optimistic that even in the face of first half industry headwinds, Axcelis revenues will increase in 2013 as customers buy our flagship products to meet their technology and capacity requirements. I'm now going to turn the call over to Jay to discuss our Q4 and full year financial results and Q1 guidance.

Thank you, Mary, and good afternoon, everyone. Although fiscal year 2012 remained challenging due to the industry downturn, Axcelis effectively used this time to make several important improvements to our financial models and processes. We continue to significantly reduce our operating expenses, lowering our quarterly break-even revenue to approximately $60 million. We also improved our cash managements, particularly with respect to our inventory and material procurement processes. We've reported a Q4 operating loss of $14.1 million and a Q4 net loss of $14.8 million or $0.14 per share. These results include 2 unusual nonrecurring items. The agreement with Lam Research resulted in a net gain of $7.9 million and had a favorable cash impact of $8.7 million. The gain reflects the $8.7 million cash payment we received from Lam, partially offset by some associated product material costs of $800,000. We also incurred $500,000 of restructuring costs as a result of this transaction. Additionally in the quarter, we completed a comprehensive review of our worldwide inventory levels and recorded a $13.4 million noncash increase to our inventory reserves. This analysis reflected both historic and projected inventory requirements supporting both our systems business and our aftermarket business for all our products, components and parts. With this change, we believe that our current inventory reserve levels are appropriate to support our business going forward. Q4 revenues were $44.6 million at the midpoint of our guidance and essentially unchanged from the third quarter. System sales in the quarter were $17.4 million, while sales for our aftermarket business were $27.2 million. As expected, we saw a modest sequential increase in our systems business, offset by a modest sequential decrease in our GSS business. System shipments were $17.6 million at the quarter, more than twice the Q3 shipments. Within these shipment totals, ion implant shipments were $9.6 million, or about 54% of the total, while shipments for our cleaning and curing systems, which reflect primarily our dry strip business, were $8.0 million or about 46% of the total. For the full year, total shipments were $71.5 million of which approximately 2/3 of our shipments were for ion implant products and 1/3 were for dry strip products. In the fourth quarter, approximately 20% of our sales were to memory customers, primarily flash, while about 80% of our sales were to logic and foundry customers. For the full year, memory sales were about 60% of the total, and logic foundry sales were about 40% of the total. Sales to our top 10 customers accounted for about 70% of our total sales with 2 customers above 10%, but below 15% of total sales. For the full year, our top 10 customers were also at about 70% of our total sales with only 1 customer above 10%. Systems bookings for the quarter were $17.3 million, up 30% sequentially. Our book-to-bill ratio was about 1.0, and we ended the year with a systems backlog, including deferred revenue of $18.5 million, down about $900,000 from Q3. GSS revenues were $27.2 million, a sequential decline of about 15%. As we expected, we saw a decline in fab utilization rates throughout the quarter. Excluding the $13.4 million inventory reserve adjustments, gross margins were 31.1% in Q4 compared with 32.2% in Q3. The sequential decline was due primarily to lower GSS revenues and higher manufacturing variances due to the low Q4 build activity. On a positive note, the company continues to see improvements in warranty and installation costs, which were about 50% lower in Q4 versus Q3. Q4 operating expenses, excluding restructuring charges and the Lam transaction, were $21.9 million, compared with $21.6 million in Q3. Within these expense levels, R&D expenses were $8.4 million compared with $9.9 million in Q3 and SG&A expenses were $13.5 million compared with $11.8 million in Q3. During the quarter, we recognized $2.1 million in onetime marketing expenses associated with our evaluation programs. These expenses were not included in our Q4 operating expense guidance. The Q4 levels also reflect 2 weeks of unpaid time off for our employees, while the Q3 levels reflected 1 week of unpaid time off. Year-end headcount was 887 people, a decline of 24 people in the quarter. For the full year, headcount was down 160 people or about 15%. Including the impact of the $13.4 million inventory reserve adjustments, the $7.9 million gain on the sale of assets to Lam and $600,000 of restructuring charges, we reported a Q4 operating loss of $14.1 million. Restructuring charges in the quarter were $600,000, driven primarily by the headcount reductions associated with the Lam transaction. Other expenses net of other income were approximately $500,000, and we accrued $217,000 of taxes in the quarter. Our net loss from the quarter, including both the Lam transaction and the inventory reserve adjustment, was $14.8 million or $0.14 per share. Looking at our balance sheet, we ended the year with a cash balance of $45.1 million, including the $8.7 million we received from Lam. Excluding this transaction, our year-end cash balance would have been $36.4 million compared with $35.3 million at the end of Q3. These results were better than our guidance. We have made significant progress this year in improving our cash managements, particularly with regard to our material purchases for both our systems and our aftermarket business. As a result, we have been able to generate cash from operations for the past 2 quarters, despite reporting operating losses. Accounts receivable were $24.8 million, essentially unchanged from Q3 and our DSO remained at 50 days. Our inventory at the end of the year was $100.2 million, a sequential decrease of $23 million. This decrease was the result of both improved inventory management in the quarter and the $13.4 million increase in our reserves. And we ended the year with an accounts payable balance of $10.2 million, down about $1.5 million from our Q3 balances. The sequential decline was due primarily to the lower material purchases. Now I'd like to provide some insight into the current quarter and briefly comment on the remainder of the year. Industry conditions continue to remain challenging. Accordingly, we are projecting Q1 revenues to be essentially flat with Q4 in the $40 million to $50 million range. Both our systems and our aftermarket revenues should be at or about Q4 levels. We expect to see a 3- to 5-point sequential improvements in gross margins over our adjusted Q4 results due to favorable product mix, the timing of systems acceptances and lower manufacturing variances. Q1 operating expenses should be at or slightly lower than Q4. About 2 weeks ago, we implemented a reduction in force, affecting approximately 50 people, primarily in our manufacturing operations. We expect to incur $1.1 million of restructuring charges in Q1. As a result of these factors, we expect to report a Q1 operating loss of approximately $5 million to $7 million and an earnings loss of approximately $0.05 to $0.07 per share. We are projecting that our cash balance will decline this quarter and that we expect to end Q1 with a cash balance in the mid-$30 million range. This reduction is due to our projected operating loss, our restructuring expenses and the timing of R&D investments in our new Purion platform. As the industry recovers and our quarterly revenues return to the $60-plus million level, we will return to profitability and expect to generate significant cash from operations, and our $30 million line of credit remains available. We are optimistic that the industry will recover in the second half of the year. We will continue to carefully manage our expenses and our cash, and we remain well-positioned to capitalize on an industry upturn. With that, I'd like to turn the call back to Mary.

Thank you, Jay. 2013 is starting out with challenges, but also much promise. We continue to be committed to doing what it takes to manage through the trough of this cycle, both fiscally and operationally. Our strong product portfolio and the opportunities from our collaborative relationship with Lam give Axcelis momentum. We believe that with a laser focus on implant and a little help from the economy, 2013 will be a year that brings growth, profitability and shareholder gain. With that, I'd like to open it up for questions.

[Operator Instructions] Your first question comes from the line of Christian Schwab from Craig-Hallum Capital Group.

Great. Guys, can you kind of walk me through what you think the TAM for ion implant was in '12 and what you think your approximate market share was in high energy, high current and medium current?

Yes. We still don't totally understand or haven't quantified what the drop in the TAM was for Q4. But it's probably somewhere between $600 million and $700 million. Based on that and what we know from a bottom's up perspective of customers, we expect that our implant share was probably about flat with 2011. And at that point, our best estimate is that it was around 12%. We also feel that we held approximately the same amount of market share in each segment. So in medium current, it was less than 5%. In high current, it was between 5% and 10%. And then in high energy, it was over 50%. So we maintained our leadership in high energy and did not get the traction that we had hoped in 2012 in high current and medium current, mainly due to the industry downturn and the lack of capacity buying that existed at our customers.

How long do you think it takes, Mary, for the industry to kind of recover, excluding this year, back to what historically has been an average TAM of around $1 billion?

Well, I expect that we'll see the market improve, as we said, sometime during the second half of the year. I would hope that 2014 would be something that would approximate something that we would call more normal, that would be in that range, Christian.

Yes. Christian, this is Doug. I think as we get into the second half of this year, we'll start to see the CapEx spending come back up. Implant has been relatively stable in the $1 billion range, a little bit higher during big upturns, a little bit lower during downturns. So I would expect that we'll start to see a return to those levels towards the end of this year and be pretty stable in the next.

Okay. In Lam's conference call, they were -- the CEO was pretty excited about the collaboration with the Axcelis team and made comments about working hard about developing opportunities and plans in the weeks and months ahead, but for competitive reasons really didn't want to talk about it to Wall Street analysts at the time. As you guys have begun working with Lam, do you think that the opportunities are about selling existing products in doing a more competitive offering in combination with Lam versus something maybe you did before and have a more competitive combination of the 2 process steps versus AMAT and Varian? Or do you think it's more about next-generation products or tweaking of your existing products to target some of the well-known complications at the 2x node in particular for system on chips for mobility and eventually 450?

Yes, Christian, this is Doug again. I think it will begin impacting current products for both companies. Mary talked about the relationship between the etch and the deposition and implant. We see lots of opportunity to explore process interactions there that current products that will work very well with. I think as the 2 companies work closely together, we'll find places where we can improve implant processes and probably implant equipment over time. And I think, as we move into the 450 world in the next few years that there will, again, be more opportunity not just because of 450, but just because of the continued migration down Moore's Law into smaller and smaller geometries. And we especially see lots of opportunity with the 3D structures especially with transistors in the past being heavily dependent on implant. Today, that's a little bit less the case in terms of the electrical characteristics. We see lots of opportunity and material modification that could actually grow the implant TAM.

Where do you guys think the easiest low-hanging fruit for market share gains is for doing deals in conjunction with Lam? Is it the high and medium current area where we should be monitoring you guys over the next year, 1.5 years regarding market share gains because of your collaboration with Lam or not?

Well, I think it's too early to really talk about that and I think we would probably say the same thing as the Lam CEO, that it's a little early to tip our hand competitively. What I will say is we have huge opportunity in medium current. We have low single-digit share and we have a new product in the Purion M that's doing very well in the evaluation. And we expect that, that product will gain us market share independently, as we look at what we can do with that product and our high-current products and our high-energy products in conjunction with the Lam relationship, there could be additional upside there. But it's still too early to tell what that is.

Yes, for right now, Christian, the thing to focus on are all the things that we've been talking about in terms of product penetrations with the medium current and the high current, and moving from the memory space, in particular with the high current into the foundry logic area, those are all the near-term opportunities we have. And we think that we'll see some of those come to fruition in 2013.

Yes, and in fact, let me just add a little bit to that. Kind of a combination of your 2 questions, Christian, in terms of market share and the cycle and so forth. The foundry space is definitely a very big growth area over this next couple of years, and the current evaluations we have going on in high current will lend a lot of opportunity to us for market share gains there. And so we think that, that's an area. So between the medium-current product being new and in evaluation, the foundry product -- the high-current products and foundries, both doing well at the very beginning of this next upturn, puts us in a very good position for market growth.

Great. And then my last question, what is a company like TEL is going to be doing? Does this -- does your collaboration with Lam preclude you from another strategic collaboration with TEL as they may be looking on the outside in regarding a combination of Lam's 40% range, upper 40% range and Edge [ph] and AMAT trying to be a player?

Yes. Christian, I don't know. I mean, it's really very difficult and it's really inappropriate for me to speculate on what TEL might do. We're just very focused on what we're going to be doing with Lam.

Ladies and gentlemen, I would now like to turn the conference back over to Ms. Mary Puma for closing remarks.

I'd like to thank you, all, for joining us today. We will attending the Stifel, Nicolaus conference in San Francisco on February 7; the UBS conference in Boston on February 27; and the Piper Jaffray conference in New York on March 12. And we hope to see many of you there. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.