Axcelis Technologies, Inc. (ACLS) Q3 2013 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and thank you for calling in to the Third Quarter 2013 Axcelis Technologies Earnings Conference Call. My name is Ryan, and I'll be the conference operator for today. [Operator Instructions] Now I'd like to hand the conference over to your host for today, Ms. Amy Rasimas, Director of Investor Relations.

Thank you, Ryan. This is Amy Rasimas, Director of Investor Relations. Welcome to our conference call to discuss our third quarter 2013 results. With me today is Mary Puma, Chairman and CEO; Kevin Brewer, Executive Vice President and CFO; and Doug Lawson, Senior Vice President of Strategic Initiative. 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 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. Our system revenues grew 22% quarter-over-quarter and 59% since the first quarter of 2013. System revenue growth, based on our innovative Purion platform, combined with tight fiscal discipline, are the keys to achieving our 3 strategic financial objectives: returning to profitability in Q4 2013, achieving last quarterly peak revenues during the current industry upturn and sustaining profitability through the full cycle. System revenues cost and gross margins were in line with our Q3 plan. Cautious European spending at the end of the quarter caused our GSS revenues to come in under plan, resulting in our total revenue falling slightly short of guidance. Discussions with customers in this region confirmed that this was a timing issue as fab utilization in our GSS business remain healthy. Summarizing our overall performance in the third quarter, our third quarter revenues were up 3% quarter-over-quarter, with system revenues up 22%. System revenues related to our Purion penetration strategy played out as planned during the quarter. System bookings were up 60% in the third quarter, and system backlog was up 35%, both indicators that industry fundamentals and Axcelis' position continue to improve. As a result of tight cost controls, even on lower-than-expected revenues, our operating loss of $2.8 million and loss per share of $0.04 came in within guidance. Our loss per share included approximately $0.01 of non-operating expenses related mainly to foreign exchange losses. Cash was above our guidance and we closed the quarter with a balance of over $50 million. The $15 million mortgage that was secured during the third quarter plus the $10 million line of credit that was recently reinstated will provide sufficient cash to invest in our future and fund this upturn. Turning to fourth quarter guidance, we are expecting revenues to increase by approximately 25% to between $58 million and $63 million. We expect to return to profitability in the quarter, delivering between $1 million and $3 million of operating profit and earnings per diluted share of $0.01 to $0.03. Cash will be in the mid-$40 million range, down slightly due to a growing receivable balance based on the timing of shipments in the quarter. Gross margins will remain in the mid-30% range, and combined SG&A and R&D spending will be in line with our model, coming in between $20 million and $21 million. We have great confidence in our ability to control our SG&A and R&D expenses as a result of the level of commonality in the Purion platform. This platform provides our business model significant leverage in both earnings and cash generation from increasing revenues. The keys to unlocking our earnings potential are holding our strong market share in high energy with the Purion XE and gaining 10% to 20% share in the medium current market with the Purion M. Continuing with our guidance, our visibility into system orders has improved, giving us confidence that we will see further growth in revenues moving into the first quarter of 2014. Based on improving market conditions, plant capacity expansion and the adoption period of the Purion M in DRAM, NAND and foundry, we expect our system revenues will be weighted towards high energy for the next 2 quarters, with medium current orders ramping up in late Q1 2014. The Purion XE has very high market share and it's the system of choice for leading memory manufacturers. We have recently secured multiple orders for the Purion XE and expect to shift against these purchase orders into the fourth quarter. Quote activity for the Purion XE remains high. We are currently running demo wafers in our advanced technology center in Beverly for chipmakers who have not yet adopted the Purion XE. All have been impressed with the product's outstanding performance and the improvement in their device results. All indications are that the memory segment and our high energy business will continue to be strong well into 2014. We also believe that the foundry business will be robust in 2014 and expect that this segment will become a more significant contributor to our revenues as the Purion M gains additional traction throughout the year. As reported, we successfully closed the first devaluation of the Purion M at a large customer in Q3. This customer evaluated the product for NAND, DRAM and logic processes and is currently using the system for high-volume manufacturing of advanced next-generation NAND devices. Two additional evaluations are underway, one at a memory customer and one at a pure-play foundry. Both are going very well and will close as expected in the next 3 to 6 months. In addition, we are running demo wafers on the Purion M for several additional customers in our advanced technology center. Customers have been quite pleased with the evaluation results, which demonstrate a number of areas of competitive advantage for this new product. The Purion M was designed for purity, precision and productivity, and these attributes are highlighted in the results from these evaluations. In terms of purity and precision, there are several design features, which ensure optimized device yield. The innovative beam line, including the advanced angular energy filter, delivers lower levels of particles versus the competition. This is especially important in foundry and logic applications. The beam line design also results in lower levels of metal contamination, which is important to all devices, but especially critical for image sensor applications. Additionally, Purion M introduces the ability to deliver very low energy implants at high levels of productivity, something previously unavailable to the industry and important as device features continue to shrink. The systems innovative angle control system results in excellent uniformity in process control for the manufacture of more challenging devices, especially today's advanced 3D structures. From a productivity perspective, the Purion M has lower energy consumption, up to a 50% reduction in cost per wafer versus the competition. Energy consumption is a large driver of cost in fabs, particularly implanters, which require a lot of power. This advantage adds up to significant cost savings across the customer's implant bay over a relatively short period of time. The Purion M's 500 wafer per hour end station contributes to higher productivity as well as an absolute higher total output of wafers. It offers the broadest energy range up to 1 keV, guaranteeing flexibility and allowing customers to run high energy implants on this medium-current tool. The Purion M is especially effective and productive paired with the Purion XE in memory fabs. The performance of the Purion M in the field confirms that this system has exceeded our customers expectations in terms of productivity, process results and cost of ownership. Although equipment we use may impact the timing of orders from some customers, we believe that all 3 evaluations will result in repeat orders for the Purion M during 2014. As a result, we will make good progress in gaining market share in medium current, a $350 million segment that we have previously underserved. As you can see, we are very excited about the potential of the Purion platform. Each Purion product is designed to meet customer's production requirement today and process requirements in the sub-10 nanometer future. The Purion platform is targeted at advanced next-generation devices including FinFETs and 3D NAND. Specifications, performance and features were defined and developed in collaboration with key customers to provide solutions for emerging technology challenges. The Purion platform is the key to Axcelis' success. And the first 2 products, the Purion XE and the Purion M, are delivering the purity, precision and productivity that our customers require and expect. With that, I'll turn it over to Kevin to provide more color around our third quarter results.

Thank you, Mary. In Q3, we continue to drive quarter-over-quarter improvement in operating performance further strengthen our balance sheet. Combined R&D and SG&A expenses finished at our lowest levels since 2009 and our quarterly break-even revenue of $57 million represents the third consecutive quarter below our targeted goal of $60 million. Cash, cash equivalents and restricted cash finished at $50.7 million, up from $34.7 million in Q2. Included in the cash balance are the proceeds from our $15 million term loan and positive cash flow, and we recently reinstated a line of credit with Silicon Valley Bank for $10 million, which can be used to provide additional liquidity in the business ramp. In Q4, we are projecting a return in profitability as the Purion platform gains traction and tight expense controls remain in place. Looking at the details of our Q3 results, revenues were $48.8 million, up 3% from Q2. Within total revenue, system sales were $20.2 million, up 22% from Q2 and 59% from Q1. GSS finished at $28.6 million, down 7% from Q2, higher than Q1. During the quarter, approximately 71% of our shipments were to memory customers, primarily Flash, while 29% were to foundry logic customers. We expect the percentage of memory shipments to remain strong as the memory market improves. Sales to our top 10 customers accounted for about 74% of our total sales, with 2 of these customers above 10%. Q3 system bookings of $26.4 million were up 60% from Q2 and up over 200% from Q1. This positive trend continues in our book-to-bill ratio, which increased to 1.44, up from 0.97 in Q2. System backlog, including deferred revenue, finished the quarter at $30.5 million, an increase of 35% over Q2. As Mary mentioned, these positive trends bode well for Axcelis moving forward. Moving on to gross margins, we finished Q3 at 34.8% and within our guidance. During the quarter, system gross margins strengthened from higher factory utilization across all the initiatives. Q3 inventory ended at $94.3 million, down from $96.4 million in Q2. This reflects our continued progress on improving inventory turns and cash-to-cash cycle. Combined R&D and SG&A spending of $19.6 million, came in favor with our guidance of $20 million to $21 million, reflecting some favorable timing of expenses and tight spending controls. Looking at the details of our expenses, R&D for the quarter was $8.1 million and SG&A finished at $11.5 million. Operating loss for the quarter was $2.8 million and at the midpoint of our guidance, reflecting an 18% improvement in performance over the prior quarter. Net loss for the quarter was $4.8 million or $0.04 per share. Included in this number is $1.2 million of foreign exchange loss and cost associated with recent financing. We remain focused on controlling R&D and SG&A expenses without compromising strategic investments. Our new Purion platform provides for a high degree of hardware and software commonality on our newest Purion products. This commonality will drive manufacturing efficiency through earlier launch of ship-from-cell and higher volume on material purchases. The Purion platform also provides significant leverage of our R&D spending across multiple products, bringing efficiencies to our R&D efforts. With our improving financials, strengthened balance sheet and long-term -- our Purion platform, we are well positioned to leverage our business model as the industry recovers and Purion products gain footprint. Thank you, and I'd like to turn the call back to Mary.

Thank you, Kevin. We are seeing the beginning of a trend that will drive quarterly revenues to at least $90 million, the peak achieved during the last upturn. Our products, business model, organization and alliances are all aligned and focused on driving our success. We are poised to gain market share with the Purion platform. The Purion XE continues to hold market leadership in the high energy space, and the Purion M is gaining traction in the medium current segment through our evaluations. We are keeping our cost in check and our cash at levels that allow us to make the investments we need. We will be profitable in Q4 early in this cycle. Based on our business model, this will result in a reasonable return for shareholders and position us well for future improvements in our earnings power. With that, I'd like to open it up for questions.

[Operator Instructions] And our first question comes from the line of Christian Schwab.

Mary, it's Christian Schwab. So as we look at the Purion M medium current implanter, can you give us a broad range given the traction you're seeing with numerous customers, how many you would expect to ship in 2014?

So Christian, we've said that we expect through the next cycle, so as the majority of that, we believe, will take place in 2014, we expect to gain between 10% and 20% market share. So if you take those numbers and you multiply that against the total available market of about $350 million and then divide by 3, that will give you a rough number of what we are expecting to happen.

Fabulous. And then, obviously, we're thinking some time in 2014, we get back to $90 million in revenue, should we assume that it will be a multiple quarter type of event like it was the last time we got up there or how do see that playing out? Obviously, you talked about Q1 being up on a sequential basis, is that going to be kind of a linear path as we go through 2014? Is that the way we should be thinking about it?

I think that is the way you should think about it. We do think that returning to peak quarterly revenues from the last peak is something that will be a multiple quarter event. We do believe that our revenues will build through the year. And I think this is what basically we've been saying now is that we have a very strong GSS business. We have a very strong high energy business with the Purion XE. We've gone out there and we've done a good job seeding the market with the Purion M through the 3 evaluations that we have. We've talked about how those 3 evaluations are at large customers, who have the capacity and likely will buy in quantity in 2014. And so you take that solid base at GSS and high energy, start layering in the medium current on top of that, and that is really what's going to give us the momentum to reach those higher level revenues in the cycle.

And Christian, this is Doug. The other thing to think about there is we're heavily leveraged right now to memory, and the Purion M through these evaluations opens the foundry market up as we move into 2014.

Right, right. Of that type of share, once I back in to those numbers, what -- on the Purion M, what would you expect that mix to be between memory and foundry? Heavily...

I think we -- we think it -- well, given that 2 out of 3 of them are with memory customers, I think we believe that the mix would be slightly, probably tilted towards the memory market. But again, given the size of the customers who would be buying and the projects that we believe they have planned in 2014 and we've been talking to them about, we believe that we'll gain some significant traction in the foundry area as well.

Fabulous. And then as far as gross margins as we go throughout 2014, will we be able to get up in -- to that 38% to 40% type of range or do you expect gross margins to stay relatively stable in the mid-30s as we go to the next 5 quarters here?

Yes. Christian, this is Kevin. I think what you're going to see next year is we're going to hold fairly stable where we are now. Because remember, our GSS is very accretive. System gross margins will improve significantly next year, but they'll become a much bigger part of the overall revenue. So it will kind of mute the topline gross margin improvement. So I think modeling in the mid-30s is probably what we should be looking at. And again, there will be a significant margin improvement on the systems level. But systems, as I said, are not as accretive as the GSS, so that'll become a bigger part of the revenue.

Great, that makes perfect sense. And then, I guess my last question relates to the partnership that we had with Lam, and just wondering if you have any updates on that collaboration effort.

So the collaboration continues. We have multiple technical experiments underway between the 2 companies. We've begun discussions with some key customers in areas that we think there is opportunity for these process-enabling implants and it continues to go well.

Great. Do you think that relationship will lead to new customers and new process opportunities and, obviously, revenue for you in 2014 or is it still a little bit too early to tell?

I think it will lead to revenue opportunities in 2014 and it will very likely lead to new applications for implant.

Can you elaborate a little bit on the new applications that you and Lam are being able to go tackle that you couldn't tackle before?

We don't like to necessarily tip the competition to what we're doing in those spaces, Christian. But basically, at a high level, it's using implant to improve the etch process capability and give the customers a wider process window, which leads to better device yields and better inputs for their parts.

And our next question comes from Edwin Mok, Needham. Tony Grillo - Needham & Company, LLC, Research Division: This is Tony Grillo, calling in for Edwin. So just to start off, you mentioned that you see some indications that point to strong memory spending into 2014. I was hoping you could maybe discuss these trends in a little more detail, and then also kind of relay how your positioned to memory spending maybe outside of the expected orders of Purion M?

Well, Tony, we've -- memory is the place where high energy is primarily used. And so, we have a very high market share in high energy. And so, as memory expands, both NAND and DRAM, we see a great opportunity with the high energy tool, and that's basically what leads us to the statement that the next 2 quarters will be heavily weighted to high energy. That's a result of the memory build that's occurring right now. On the NAND side, there is actually more high energy than on DRAM. And so with the buildout of all the NAND fabs, that's very encouraging for us. On the Purion M, on the medium current side, that opens up another implant segment for us, both in memory and in foundry. And since over the course of time, we've been a little more leveraged to high energy and memory, the Purion M is a big opportunity for us to sort of level load the market segments. Tony Grillo - Needham & Company, LLC, Research Division: Okay. That's very helpful. And then also looking at the high current space, I'd love to know if you guys are working in this space, and maybe if -- when you could expect to maybe gain some traction here, whether it's 3 months out or to a 2-year horizon?

Yes, we have an offering in high current, the Optima HDx, and that has some very good performance in some applications, for example, carbon and germanium applications and also for damage engineering. There are a number of customers using this system in the field. We've had some successful evaluations closed out earlier in the year, and we expect that customers will continue to buy that system for those applications moving forward. Tony Grillo - Needham & Company, LLC, Research Division: Great. And I guess may last question is, looking back at Purion M, you mentioned some follow-up evaluations and you mentioned possible multiple orders coming from your bigger customers. Is there any way to possibly quantify the type of magnitude you're expecting there?

Okay. Well, I -- I probably should have done the math, but it's really the same math that I just mentioned to Christian, it's we expect to gain 10% to 20% market share with the Purion M in the next cycle. The majority of that will fall into 2014. If you assume about a $350 million total available market for the medium current segment and about $3 million ASP, that will give you a rough estimate of the number of units that we expect to ship, mainly falling into 2014.

And our next question comes from Patrick Ho with Stifel. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: Kevin, maybe first in terms of the finances and operations. As the Purion M begins to ramp up and you talked about these qualifications, how do you look at the working capital inventory management for that product specifically since they won't be recognized as revenues for a couple of quarters out? How do you manage some of the variables in that in terms of not "overbuilding" or taking on too many cost on that front, particularly as we look over the next 2 to 4 quarters?

Yes, so as you know, the eval tools, when they do go out, the inventory stays in our inventory number reports, so it basically stays in our wph number. So 1 tool did convert and that was the announcement we made a few weeks back. And there are 2 additional evals out there. Going forward, the advantage of the commonality in this platform that shares some commonality with the Purion H -- or Purion XE, we can manage inventory because rather than driving one-for-one, on forecast, we can -- if we've got order for an XE -- or forecast for an XE or forecast for an M, we can drive one, for example, because there's some commonality there. So we're being very careful in terms of moving forward what we're driving for inventory, but we're also making sure that we're going to be ready for the ramp. So what we use, Patrick, is planning bombs basically for long lead material, which is tough to get, and the rest of material we keep within about 60- to 90-day window, so we can quickly get it. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: Great. That's really helpful. And my second question on a big picture basis, obviously, you guys are generally biased towards memory just historically with your customer base, but the medium current market, obviously, has a big opportunity on both the logic and foundry side of things. Can you give a little detail on the type of applications that the Purion M is targeting that will hopefully allow you guys to break into more of the foundry segment as you mentioned?

So the Purion M is targeting the medium current space, which are sort of your workhorse implants within the fab. And the reason the Purion M is excelling and we think that we're going to gain good share within the foundry space, has to do with the angle control on these devices, the 3D structures. The angle control provides a lot of opportunity for us to be much more efficient, much more precise. The low energy capability of the tool opens up an area of implant that hasn't been possible in the past. And then on the productivity side, it's just a -- it's a faster tool, a more productive tool, when you look at an overall recipe mix, whether it's in memory or in foundry use. And then the last thing really is the energy savings which is, based on the first evals data, 50% per wafer, which is a significant electrical savings that go straight to the cost of ownership. So as you know, the foundry game is all about cost, and this tools got a great cost of ownership advantage and the ability to take the technology into these 3D devices.

[Operator Instructions] And your next question comes from Beth -- Brett Piira with B. Riley.

Most have been answered. Maybe just for Kevin, a quick housekeeping question. It seems like your tax rate jumped up a little bit several levels, but how should we think of modeling that for with your outstanding NOL basis?

Yes. So if you look at the NOLs on -- at a federal tax level, we could make about $250 million of profit before we'll pay any taxes on that. So I guess the best way to look at it, Brett, is, moving forward, we're not going to pay a lot of taxes. I think if you look in the Q, you'll see we did a little bit of true-up in Asia on some taxes this quarter. But I think, typically, if you look at what our tax had been over the last several quarters, it won't change that much.

There are no further questions. I'd like to pass the call back to Mary Puma for closing remarks.

Okay, thank you, Ryan. We are planning to spend a significant amount of time on non-deal roadshows and at conferences in the coming months. Hopefully, we will see many of you on these trips as well as at 2 New York conferences, the Midtown CAP Summit in December and the Needham conference in January. Thank you much for dialing in.

Ladies and gentlemen, that will conclude today's conference. Thank you, all, for your participation. You may now disconnect and enjoy the rest of your Wednesday.