Axcelis Technologies, Inc. (ACLS) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies First Quarter 2013 Conference Call. My name is Cathy 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.

Thank you, Cathy. This is Amy Rasimas, Director of Investor Relations. Welcome to our conference call to discuss our first quarter 2013 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. First quarter results came in generally as expected. Revenues were at the low end of guidance, impacted by ongoing industry weakness. Systems and GSS sales remained soft as fab utilization was low, and customers continued to be cautious in making CapEx investments. Despite these tempered results, our cash balance at the end of the quarter was significantly above guidance due to strong expense and cash management. Earlier this week, we introduced the Purion XE, the second tool in our expanding family of benchmark ion-implant products. Each member of the Purion family shares the powerful 500 wafer per hour single wafer end station, shared software, industry-leading source technology and an innovative and productive ultra-pure beam line. Single wafer LINAC technology is the industry benchmark for high-energy productivity and lowest cost of ownership, while providing the purest, most-precise dopant placement required for today's most challenging high-energy applications in the memory and image sensor market segments. Axcelis is the market leader in high energy, and the Purion XE assures that we will maintain that position. The introduction of the Purion XE also provides advantages associated with a common platform, including a common end station and shared software controls with the Purion M, our newest medium-current offering. From a customer perspective, the common elements of the Purion platform were designed to drive manufacturing flexibility and lower the total cost of fab operations. Common platform architecture and systems options enable either process transfer between system, simplified maintenance and improved reliability. From an Axcelis perspective, a common platform drives benefits from reduced inventory requirement and margin enhancement opportunity. We will recognize these financial improvement as volume associated with the sale of products based on the Purion platform increases. In addition to the Purion XE, we anticipate that the Purion M will be a major component of Purion product sales. The Purion M has continued to perform very well at our first evaluation site in Asia, where it is undergoing qualification for flash DRAM and logic process flows, as well as being used for R&D. With the industry's most advanced angle control system and an innovative beam line design, the Purion M provides leading device manufacturers with the purity, precision and productivity required to meet customers' needs for emerging technologies, such as FinFET devices. In addition, the Purion M's broad energy range and best-in-class beam current enable it to be utilized in market segments traditionally covered using high current or high-energy implanters. Coupled with the industry's highest source lifetime, longest intervals between beam line maintenance and a significant reduction in power consumption, the Purion M continues to demonstrate industry-leading lowest cost of ownership. Based on these capabilities, we anticipate that this first evaluation will successfully close as planned later this year, and that we will see follow-on orders when additional medium current capacity is required. Our efforts to further penetrate the market with the Purion M has come to fruition in the past few weeks. We announced that the Purion M was selected by a second customer in Asia for leading-edge memory development. Additionally, a third customer, a leading foundry, has selected the Purion M for advanced logic development at its newest fab. All 3 customers have worked extensively over a number of months with our Purion M system in our advanced technology center in Beverly, Massachusetts. This paves the way for an easier transition to qualification and production upon installation in their fab. Our goal continues to be swift, effective evaluations that allow for qualification in time to meet capacity buys associated with specific customer project timing and an industry upturn. We are executing against the same philosophy with our Optima HDx evaluations at logic and foundry customers. Our field data confirms that we are delivering significant cost of ownership advantages with our superior extended Eterna ELS3 source lifetime for carbon and germanium, as well as our cost-effective damage engineering solution. As capacity buying picks up, we expect that sales of the Optima HDx will increase across multiple customer segments, including systems for damage engineering applications for memory manufacturing. Another major lever for future growth, our strategic collaboration agreement with Lam Research, continues to gain definition and momentum. During the quarter, we held initial technology meetings and identified several joint development opportunities focused on the intersection of implant, etch and deposition. With the industry moving aggressively to sub 20-nanometer nodes with complex 3D device structures, we are finding that etch and deposition processes can be enabled or significantly enhanced with the use of implant. These are nontraditional implant applications compared to the traditional source strain electrical implants. This quarter, we initiated engineering projects with Lam to jointly develop these process-enabled implants, that when combined with the performance capabilities of our Purion platform, will provide significant value to our customers and substantial growth opportunity for Axcelis. Our exit from the dry strip systems business is proceeding smoothly, with customers placing the final few capacity related orders for Integra systems. Our IP and process know-how has been transferred to Lam, and customers are evaluating this new capability on the Lam dry strip tools for future technology nodes. I recently returned from a trip to Asia during which I met with key customers to ensure that Axcelis is meeting their needs and to better understand their current investment plans. I believe that an industry recovery is underway. While we continue to expect foundry investment to strengthen throughout the year based on the accelerating shift to mobile products and smaller node size build outs, we are finally seeing some signs of life from other segments of the market. Memory customers are selectively adding systems to accommodate DRAM capacity requirements at leading-edge nodes. Flash customers also expect spending to resume later in the year due to increased chip demand. These customers have discussed their plans with us so that we have adequate time to respond to their upcoming capacity needs. It is important to note that the uptick in memory spending is a very positive development for Axcelis given the strong acceptance of our high current and high-energy products in the memory segment. There are other positive signs. We have seen an increase in several leading indicators from customers focused on the automotive segment that are encouraging and could signal a broader industry uptick. Our core activity for systems and upgrades from these customers is up, fab utilization at related fabs is also beginning to improve, which is reflected in steadily increasing spare parts order rates. Additionally, we are seeing a stronger request for high-energy systems, which is a segment that typically experiences capacity buying early in an upturn. While we remain cautiously optimistic, as Jay will discuss, these signs of life are translating into an improved outlook for the second quarter. We are very focused on winning with our products at key accounts. During my Asian trip, we spent significant time reviewing Axcelis' customer account team strategies focused on the successful introduction of our Purion platform products. In addition, we have implemented a number of changes in our customer operations management team that upgrade talent. We have brought in several senior managers with significant implant experience to improve processes and strengthen growth initiative. We have also reallocated resources to support customer accounts that are critical to revenue growth. These initiatives will ensure that we continue to seed the market and capture capacity buys for our Optima HDx and product space on the Purion platform. The final thing I'd like to mention before I turn the call over to Jay is how very proud and honored I am that Axcelis has received the Texas Instruments 2012 Supplier Excellence Award. Recipients are an elite group of suppliers chosen from a large worldwide supplier base for their exemplary performance. Axcelis received the award for its outstanding performance in the areas of product quality and service support. I believe that this award reflects the ongoing investments that Axcelis has made in new technology and customer support. It is also a testament that TI, along with many other customers, continues to have confidence in Axcelis as a leading semiconductor equipment supplier. With that, I'll turn the call over to Jay to discuss Q1 results and provide Q2 guidance.

Thank you, Mary, and good afternoon, everyone. Q1 revenues were $40.7 million at the low end of our guidance and about 9% below Q4 levels. In the quarter, the industry continued to experience low fab utilization rates, which negatively affected our system sales and aftermarket business. System sales in the quarter were $12.7 million, down 27% sequentially, while sales for the GSS aftermarket business were $28 million, up 3% sequentially. System shipments were $11.8 million in the quarter, down about 1/3 from the Q4 levels. Within these totals, high-end implant shipments were $8.4 million or about 71% of the total, while shipments for our cleaning and curing systems, which reflect primarily our dry strip business, were $3.4 million or about 29% of the total. Under our agreement with Lam Research, we will ship the last Integras later this year. During the quarter, approximately 30% of our sales were to memory customers, primarily DRAM, while about 70% of our sales were to logic and foundry customers. Sales to our top 10 customers accounted for about 60% of our total sales with only 1 customer above 10%. Systems bookings for the quarter were $7.6 million, down 56% sequentially. Our book-to-bill ratio was 0.64 compared with 0.98 in Q4, and we ended the quarter with a systems backlog, including deferred revenue of $13.6 million compared with $18.5 million at the end of the year. GSS revenues were $28 million, a $700,000 increase over Q4. This increase was primarily driven by upgrades, as our spares and service revenues showed a modest decline. Utilization rates were essentially flat to Q4, up slightly in Asia and down slightly in the U.S. and Europe. Our gross margin in Q1 was 31.8%. Included in this margin was a $2.1 million inventory reserve adjustment related to our Integra product line. This adjustment was not contemplated in our Q1 guidance and reflects our current forecast for Integra sales for the balance of the year. Excluding this adjustment, our gross margin would be 37%, a sequential improvement of about 6 points and above our guidance of 34% to 36%. This sequential improvement was due to favorable product mix, the timing of product acceptances and lower manufacturing variances. Warranty and installation costs continue to track below historic levels. Q1 operating expenses, excluding restructuring charges and the impact of a $400,000 milestone payment from Lam Research, were $21 million, a reduction of about $1 million from Q4. Within these expense levels, R&D expenses were $9.2 million compared with $8.4 million in Q4 and SG&A expenses were $11.8 million compared with $13.5 million in Q4. The increase in R&D expenses relates primarily to new product development associated with our Purion platform. The reduction in SG&A expenses is due to the fact that the Q4 results included $2.1 million of one-time marketing expenses associated with our evaluation programs. In addition, the Q1 spending levels reflect only 1 week of unpaid time off for our employees compared with 2 weeks of unpaid time off in Q4. Early in the quarter, we implemented a headcount reduction, affecting approximately 50 people, primarily in manufacturing operations. The sales and service functions also experienced some minor adjustments. Primarily as a result of these actions, total headcount at the end of Q1 was 824 people compared with 887 people at the end of the year. The Q1 operating loss, excluding restructuring charges, the Integra inventory write-off and the milestone payment from Lam, was $5.9 million, within our guidance of a $5 million to $7 million loss. In comparison, excluding one-time charges, our Q4 operating loss was $8.1 million. Restructuring charges in Q1 were $1.8 million, which was above our guidance of $1.1 million. In the quarter, we were able to accelerate restructuring actions that were contemplated for the second quarter. Other income, net of other expenses, was $800,000, primarily reflecting a $1 million foreign exchange gain. Our net loss in the quarter was $9 million or $0.08 per share. The Integra inventory write-off and the restructuring charges, net of the Lam payment, had an unfavorable $0.03 impact on our results. Looking at our balance sheet, we ended the quarter with a cash balance of $42.5 million, considerably above our guidance of a mid-$30 million balance and down about $2.5 million from our year-end balance. This favorability versus guidance was due primarily to accelerated timing of customer shipments, as well as aggressive expense and cash management. Our focus on strong working capital management will continue. Accounts receivable were $23.2 million compared with $24.8 million at the end of the year. Our DSO increased slightly in Q1 from 50 days to 51 days. Q1 inventory was $98.7 million compared with $100.2 million in Q4. This reduction was due to the previously mentioned Integra inventory write-off. And we ended the quarter with an accounts payable balance of $13.8 million, a sequential increase of about $3.6 million, primarily to support our investments in our Purion platform. Now I'd like to provide some insights into the current quarter and briefly comment on the remainder of the year. We expect to see improvement in market conditions in Q2 and are currently projecting Q2 revenues to be in the $45 million to $50 million range. We expect that the sequential increase will come primarily from system sales. Q2 gross margins are projected to be in the mid-30% range. Q2 operating expenses should be essentially unchanged from Q1, excluding an $800,000 milestone payment that we received from Lam in April. As a result of these factors, we expect to report a Q2 operating loss of approximately $3 million to $6 million and an earnings loss of approximately $0.03 to $0.05 per share. We are projecting that our cash balance will decline in Q2 and that we will end the quarter with a cash balance in the mid-$30 million range. This reduction will be driven primarily by our projected operating losses, restructuring payments associated with the previously announced actions and continued R&D investments in our Purion platform. As a result of our continued strong cash managements, we've lowered our breakeven revenue to about $57 million in Q1, which is below our target breakeven of $60 million per quarter. While our breakeven revenue level will fluctuate quarter-to-quarter as our gross margin fluctuates, we are comfortable that we have positioned the company for profitability and positive cash generation at revenue levels above $60 million. We continue to remain debt-free with our line of credit available to cover any short-term cash requirements. And we remain optimistic that we will see a recovery in the second half of the year and that we will return to profitability and positive cash generation. With that I'd like to turn the call back to Mary.

Thank you, Jay. We are gaining confidence in a market recovery and in Axcelis' ability to grow in an improving industry environment. Our competitive implant portfolio, led by our Purion platform products and our Optima HDx, provides strong positioning. And we see real promise in creating potential customer value and competitive advantage from our partnership with Lam. As Axcelis grows, we remain committed to our focus on strong fiscal management, which will accelerate our return to profitability and will drive higher shareholder value. With that I'd like to open it up for questions.

[Operator Instructions]

Okay. Well, if there are no questions, I'd like to thank you for joining us today. We will be attending the Craig-Hallum Conference on May 29 and we also plan to be at SEMICON West in San Francisco in July. We hope to see many of you at these events. Thank you.

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