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 of 2018. My name is Brian, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions] As a reminder, this conference call maybe recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mary Puma, President and Chief Executive Officer of Axcelis Technologies. Please proceed, ma'am.

Thank you, Brian. With me today is Kevin Brewer, Executive Vice President and CFO; and Doug Lawson, Executive Vice President of Corporate Marketing and Strategy. 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. 2018 was a successful year for Axcelis. One year-ago at our year-end earnings call, we set a revenue objective of $450 million and we came very close with full-year 2018 revenues of $442.6 million, only a couple of tools short, despite the significant slowdown in memory spending for the entire second half of the year. We accomplished this as a result of hard work over the last few years and the successful execution of a few critical initiatives. First, we expanded the Purion installed base to a large and diverse group of customers. Second, we focused on key market segments in the mature process technology area such as image sensors, power devices, and mature foundry/logic. And finally, we developed Purion product extensions specifically for these segments and became key partners with these customers. As a result, when memory slowed, Axcelis kept growing. All of our financial metrics improved in 2018, revenue increased by…

Thank you, Mary. Axcelis delivered solid fourth quarter results hitting Company guidance and consensus estimates across the Board. Full-year 2018 financial results also finished strong, but revenue and gross margin at our highest levels in 12 years. Cash generated from operations in 2018 was $49.9 million which drove our year-end cash balance to $184.9 million. Margin improvement continues to be an area of focus across the business in 2018 as we targeted improvement initiatives on the things we could control. In 2019, we expect to realize additional product cost out through value engineering and lean, supply chain optimization, and strategic investments in CS&I project. With regards to operating expenses, we are aligning incremental spending with initiatives are expected to drive customer satisfaction, margin expansion, and growth opportunities that support our $550 million business model and beyond. Based on the Company’s strong financial performance and solid cash position, we announced on January 14 that Axcelis Board had authorized a one-year $35 million share repurchase program. We believe this program which is meaningful in size and we executed all impacting our strategic growth initiatives. Now turning to our fourth quarter financial results. Q4 revenue finished at $105.7 million compared to $95.4 million in Q3. Q4 system sales were $64.6 million compared to $56.4 million in Q3. Q4 CS&I revenue finished at $41.1 million compared to $39 million in Q3. Full-year 2018 revenue was $442.6 million up approximately 8% compared to $410.6 million in 2017. Systems revenue for the year was $280.4 million up approximately 7% compared to $262.7 million in 2017. CS&I revenue was $162.2 million compared to $147.9 million in 2017, up approximately 10%. Q4 sales draw top 10 customers accounted for approximately 83% of our total sales compared to 80% in Q3, the five customers at 10% or above. Q4…

Thank you, Kevin. Our customers have a choice in implant and as the number show, they are choosing Axcelis. They choose Axcelis for Purion platform technology for solutions tailored to their needs in the form of Purion product extensions and for the innovation benefit they gain from a more competitive ion implant market. In 2018, Axcelis approved through our financial performance that we are much more than a memory company. I am confident that with the continued focus on customer needs, the technology development to support those needs and the dedication of our employees, Axcelis will continue to grow and will achieve market share leadership in ion implantation. With that, I'd like to open it up for questions. Brian?

Thank you. [Operator Instructions] Our first question will come from the line of Craig Ellis of B. Riley FBR. Your line is now open.

Yes. Thanks for taking the question and congratulations on all the financial accomplishments from 2018. Mary, I wanted to start just with a follow-up on your point on 2019s objectives and maybe tie that into the potential for revenues in 2019 to be down in the 5% to 10% range. Can you just help us with some of the milestones associated with each of the three objectives and in the way that plays into the potential revenues that Axcelis could realize on a longer-term basis as we look at 2019?

Okay. Well, first let me clarify. We said that we could be flat to down 5% to 10%. So right now really what's driving, I'll call it directional information on where our revenues could go, has to do with where we are in the cycle. And we said the long-term cycle remains intact, but the slowdown that we're experiencing, which is mainly driven by memory, is really what potentially will have an impact on our revenues this year. So like our peers and others in the industry, we expect memory spending to begin picking back up likely sometime in the second half of the year, maybe starting with DRAM and then spreading to 3D NAND. So in terms of the objectives that we have for the year, what's going on right now really doesn't change any of the initiatives that we have or the milestones that we have. So we talked to three – objectives we talked about our growth within – growing our Purion footprint within our existing customer base. So really what's going on right now in the market doesn't have any impact on that, potentially it's just a timing issue with the memory customers. We're going to continue to focus on penetrating Japan and the advanced foundry/logic market. And again, all of those initiatives will continue as planned. And then finally, we're going to continue developing product extensions for some of the specific market segment where we feel like there's a good opportunity to win new business and expand our business. So again, we've talked about in the past, power devices, CMOS image sensors and advanced logic and memory. So again, none of those things other than potentially timing based on, in some of those memory customers will have an impact on what we're doing in 2019.

Hey, Craig. This is Doug. Let me just add a little bit more color on the products. One of the things that we're really focusing on this year is bringing product extensions to the high current market with Purion H. There’s a very different need in high current for the mature markets compared to the advanced markets. And so, as you know, we've worked very closely with image sensor companies and power device companies to tailor the Purion product family to those markets. And now we're looking at doing the same thing with the high current markets, especially as we looked at productivity for mature, which has been a strong point for us.

That's very helpful. My next question is on gross margin. Kevin, really strong gross margins in the quarter and the outlook, you've been clear for 18 months or so that there are cost down initiatives that the company is executing. So as we look at gross margins, not only in the near-term, but with the target model increasing, how much of what we're seeing is really the fruits of those cost down initiatives versus other things like mix and the product customization benefits that you'd be getting versus any change in the competitive landscape?

Yes. So as you highlight, I continue to say that we've been driving cost out of the projects, the value engineering, the supply chain optimization, we put a lot of work in that. The product extensions which brings some premium pricing along as well. So we still have a large number of opportunities to drive for the cost out of the products. Purion as it's matured over the last several years, we’ve been able to move more parts into our low cost suppliers or we're continuing to look at that at this point in time. And going forward, as Doug just kind of mentioned and Mary did as well, we're investing in these products right now for more product extensions, which is further going to help the gross margins. And if I look at the target model, we've up that, I think the last model we had out there had us at 40% to 42% at $550 million. We've up at the 42% to 43%. It's a combination of the cost out, the product extensions and the mix is more of a thing quarter-to-quarter that we've talked about depending on mix of service to system is or the mix within the Purion products. But in the updated investor presentation, the slide that shows our relative standard margins of the three Purion products. You'll see as we get all to that $550 million model. That's the good news is the H, more closely aligns with high energy on the standard margins, which is good because that's a large opportunity for us still. So we're growing in that area and the margins are also accelerating that area.

That's helpful. And last one for me before I get back in the queue. The share buyback announcement earlier this year, material development for the Company, material in size, can you just help us understand how you would approach utilizing that buyback. One, have you started to do anything? And two, is that something that could be used on a more readable basis or matrix basis? Just help us with a framework per use.

Yes, so we're not using a 10b5-1 program. So our plan is to be opportunistic when we purchase these shares. I want to make sure that we're utilizing the company cash in a manner that's a good investment for both the Company and the shareholders.

Thanks very much.

Thank you. And our next question will come from line Patrick Ho with Stifel. Your line is now open.

Well, thank you very much and congratulations also. Mary, maybe first off in terms of the mature technology node, opportunities and the strength you saw in the December quarter. You talked in your prepared remarks about CMOS image sensors – and power semiconductors. Where there any other types of devices where you saw straight and whether that mix changes in terms of the devices in Q1?

Okay, So, I'll have Doug respond to that

Hey, Patrick. So those two product lines continue to be strong. One thing that we've started to focus on is the silicon side of power device. Last year there was a lot of activity in silicon carbide. What we found as we've really done this market segment approach is we get very, very close with the customers and oftentimes with their customers. And so we're able to understand their roadmaps in more detail and then go back and create extensions that can focus in on that area. So one of the places that that we're very focused on right now is, in the mature foundries where product mix and productivity are a big deal, and high current typically is a bottleneck for them. Purion H has done well there. But we see some opportunities in that market to really focus there. And then in the advanced logic, we've had an evaluation going on, so we've gotten much closer to the process needs and requirements there. And so now we're really looking at how to tailor Purion H even more for some of those more advanced notes. So that's the activity there.

Great, that’s helpful. And maybe as a follow-up question, you talked about the extensions and how in the past productivity improvements are a key variable in driving sales for the extensions. Is that still the only variable that drives these extinctions? Are you seeing other factors, I guess drive your – I guess needs to create more of these extensions that you described on the call?

It varies by market segment. So for example, in image sensors, metals contamination and infrared and deep red implants, they require a much higher energy. So that's an area that's – that affects yield effects, the device performance. In power device market, it's a thermal control. It's a silicon carbide substrates and now as we move into silicon. There's different device, our requirements there. So it's not just productivity. Oftentimes it very much gets back to device performance and yield issues.

Great, and final question from me for Kevin. Obviously, the timing of a memory recovery is still very uncertain and that's a big swing factor for the industry as a whole. From a supply chain management and the optimization you talked about on the call. How are you managing that in your inventory levels given that uncertainty and I guess helping to keep your gross margins in that 40% to 41% range?

Yes. So what we do when things start to slowdown typically that we have a lot of inventory that's very short lead time. So it's really the longer lead time inventory we have to manage through. So we'd have planning bill of materials that we continue to drive and based on what we're hearing from the sales team and where we think the second half is going to be the long lead stuff, we will continue to drive that. But again, the short lead, you can easily turn that off. And we've also got a lot of our suppliers setup on a pull right now, so it's easier to hold the material back when you don't need it and then have it though when we get ready to turn back on. But we're keeping a close eye on things because we got to make sure that we certainly don't want to miss a ramp up. So we're, like I said, we're closely monitoring that Patrick.

Great. Thank you very much.

Okay. Thanks.

Thank you, Patrick.

Thank you. And our next question will come from the line of David Duley with Steelhead Securities. Your line is now open.

Yes. I had – just a couple of clarification questions. There was a big jump in deferred revenue in the quarter. I think from $14 million to $19 million. Could you explain what that was?

A lot of it's on the timing of the shipments.

Yes. There was a lot that went up in December, right at the end this year.

Right.

Okay. And then recently when you reported around $95 million, if you had higher earnings levels then I think you're forecasting the operating income forecasting for the current level. And I'm just wondering what the key reasons are for that. I think it's an operating expenses. Maybe you could just talk about the incremental investment and operating expenses that you're making?

Well, yes, I mean it is the operating expenses and the call, I think we talked about we're going to continue to invest for this cycle, product extensions that we have lined up, we're going to invest in because those are all things we need to get us to the 550 model. So if we pull back right now on a spending, we're going to really jeopardize was 550 model and beyond. So the margins have been brought up, offset some of that. But there is higher spending probably then, I'm not sure what model are you looking at, but certainly it's probably higher than what you're saying.

Well, I was just comparing it. I think to the third quarter of 2018 when you did $95 million and operating income was $10.7 million and now you're guiding it to a lower number.

Yes. And then also and I mean if you want is a little bit heavier, but there is one-time expenses that we get in Q1 that we don't see in other quarters. So that doesn't help the Q1 numbers.

Okay. The key Dave is really going back to that investment. This is – we're somewhere in the bottom of this cycle and as it turns around we want to make sure we've got the product sets. If you look on the updated revenue chart by year, you can see that we've invested pretty heavily in new product introductions. There are need to the down cycles and that's the key to driving success in the up cycle.

And it's not just the R&D it's also in the infrastructure to support growth. So we've been talking about our relationship with SCREEN and how that's going to drive our growth in Japan. We've shipped Purion H there that's going to be coming online, becoming available for demo and training in Q1. So their expenses like that where we're just going to continue to make the investment because it's the right thing to do.

…as well as additional evals.

Yes. Additionally evals we've got an additional infrastructure in China and then also some to support the leading edge foundry/logic. So those are all the right things to do to prepare us for the 550 model and beyond.

Okay. Help us understand what's embedded in your expectations for the year from the two new markets, either Japan or the high end foundry/logic market?

At this point in time, we've talked about this a lot. Those are two markets that are very difficult to penetrate. We are working very hard to – well we have an evaluation unit and at an advanced a foundry customer and that's going well. And so that will just continue to expand over time. Again, it just takes time to get additional follow-on orders from that. And in Japan, I would hope that we would place some of our initial units, whether their evaluation or actual outright sales into Japan in 2019. But again, we're not going to see any significant volume coming from either of those segments this year. It's likely to start next year.

Okay. And then, Kevin what do you expect the tax rate to be during 2019?

We always model the 21%. We've obviously been doing a little bit better than that because there's R&D tax credits and this year it’ll allow us to fund whole tax and things, but I would just use 21%, Dave.

Okay. That’s it for me. Thank you.

Thanks Dave.

Thank you.

Thank you. And our next question will come from the line of Christian Schwab with Hallum Capital Group. Your line is now open.

Hey. Good morning, guys. I apologize in advance, but I jumped on a little bit late. So on 2018, you expect your revenue year-over-year to be flat to down 5% to 10%, correct?

Yes.

Fabulous. Can you – what were the one, two to three reasons that you gave for your dramatic outperformance of what wafer front-end equipment spending in aggregate will do this year being down mid-to-high teens?

What do you think is going to continue to drive our growth this year? Is that what you're asking?

Yes. Well, I guess my question is why are you outperforming CapEx spending in general, which is expected by most to be down mid-to-high teens year-over-year and you could do as well as flat? So I'm looking for the two or three reasons why?

Okay. So first, it does have to do with market dynamics. And we talked about – we've been talking about how we're more than just a memory company. We have a very strong customer base and revenue base in the mature process technology area and that's likely going to have a much higher percentage – represent a much higher percentage of our revenues in 2019 and that segment remains strong. We've also had good Purion market penetration. So we've got a diverse customer base. And we just talked about how we're going to continue to focus on increasing our presence on Purion footprint. So we talked about Japan and advanced logic. There's some new memory applications that we're going after and there’s some specialty applications, and again, we've talked about power devices and image sensors. And so we're working all of those things and we're continuing to gain market share despite the fact that the market, the actual CapEx spending is likely to be down this year. And then the final thing, Doug talked about this a few minutes ago, the new product extensions, we're going to continue to invest in that. And some of those new products and upgrades and things that are going to enhance our ability to meet some of these new applications are going to start to come out in 2019 and we expect those to start to get traction at the end of the year. So this year, again, I said this earlier, but it's really – the flat to minus 5% to 10% of revenues is really being driven by the memory downturn. And we expect things like our peers do to potentially pick backup sometime in the second half of the year and that will drive where our revenues end up in 2019 verses 2018.

Okay. So not to put words in your mouth so let me restate what you went through there. So you would say that mature node spending remains robust in 2019 versus 2018. You would continue to expect to gain market share throughout 2019 versus 2018, and if memory comes back in the second half of the year it will be closer to flat. If it doesn’t, it will be closer to down 10. Is that fair?

Again, I don't know. We're not giving guidance for the year in terms of exactly where we'll end up for the year. But what we are saying is the memory recovery and timing of the – the timing and strength of the memory recovery will impact our 2019 revenues.

Okay, great. Thanks. No other questions.

Thank you. And our next question will come from the line of Mark Miller with Benchmark Company. Your line is now open.

Thank you for the question. So pursuing that recent line further up with smartphone production expected to be down this year, what gives you confidence that memory will be bouncing back in the second half of the year?

Well, I think the exact timing of when memory bounces back Mark, is still up for debate by everybody in the universe. But memory spending isn't just being driven by the smartphone, the data center and analytics and so forth are very big drivers. So we feel like most everyone that we're in a fairly typical memory cycle. In the middle of a stronger wave, which is more or less data-centric wave and as the supply and demand come back into line, the memory will kick back in. We feel that DRAM probably kicked in a little sooner than 3D NAND at least for implant and then 3D NAND will kick back in again as the supply and demand come back in line. So the exact timing, we're not trying to guess exact. We certainly would prefer it to happen sooner than later.

Okay. Just from your guidance for the current quarter for the year in terms of the topline. What's going to be driving the big? It looks like a very significant increase [indiscernible] in your revenues. Is it going to be more of the mature process, the memory rebound or basically share gains? What's going to be the biggest driver of the Delta, and the second half of the year of revenues?

So the driver, as we look at the year is going to be the mature markets and our continued spread, we got a large diverse customer base there. So increasing our footprint, which we are doing by focusing in on key application needs, and that's driving a lot of our R&D investment, relative to the product extension. So that's, that's probably a number one. And again, as we said before, when memory comes back, that that will impact, if it comes back sooner than – we’ll be higher. If it comes back later than you know, we'll be lower. We know that's a big piece of the market.

You mentioned advanced logic I believe is one of the evals. Could you give us a little more – update us on where the evals are going currently?

In terms of where they are?

Right.

Okay. So we have three evals right now. One is in advanced logic, one is in memory and one is in image sensors.

Okay. And finally, is the market from the domestic Chinese, now manufacturers, that's similar to press right now, but you were expecting that's going to pick up or is that somewhat stronger than the overall memory market?

Well, I mean if you look at China, China is obviously comprised of multiple customers in multiple types of segments and China overall, there clearly have been some delays in new China projects based on both fab construction delays, and also on market conditions and certainly the memory slowdown is impacting those customers who are serving the memory market. But China continues to be 20% to 30% of Axcelis’ revenues. Although I just want to remind people that a significant portion of our business in China comes from the global semiconductor companies versus the domestic customers and for the slowdowns and fab constructions that that tends to be with the domestic Chinese customers.

And Mark, let me just add to that. I think the other thing that's notable is if you look at our geographic spread, this particular quarter, China was still above 20%, but the mix – the spread was pretty interesting. It was around 20% for a Korea, around 20% for China, around 20% for the U.S. and Europe. And then we had our first shipments to Japan, which accounted for a 10%. And so it's a much more diverse grouping then you would typically see when memory is very strong in which we see a much heavier weighting towards the Korean market.

Thank you.

Thanks.

Thank you. [Operator Instructions] Our next question will come from Quinn Bolton with Needham & Company. Your line is now open.

Hi, Mary and Kevin, congratulations on the strong gross margin in the December quarter. I want to just – you've talked a lot about the mix shifting for memory, did mature logic/foundry in 2019. I'm just kind of curious, do you expect the mature logic/foundry business to actually increase year-on-year or is it more likely to be flat, given just the overall decline in WFE?

Go ahead, Doug.

Yes. I think it's year-over-year as a mix. It's kind of interesting in the last three years is come out over the year pretty much a split. I mean even this year it's for the year, it's relatively close to split fairly evenly, whereas the first half was much more weighted towards memory in the second half, much more weighted towards mature. It's hard to say at this point, when memory is coming back, so will next year be heavily weighted towards mature. This year, 2019, it will be weighted towards mature? Really depends on when the memory market comes back. In terms of exact revenue year-over-year, we don't break that out specifically. We have a very strong and diverse customer base there that continues to grow when with us focusing in on many of their needs, like the image sensor, power device market. So productivity needs a mature foundry. We think that's fertile ground to grow share.

Okay, great. And I guess kind of – it doesn't sound like it, but I'll ask the question. Obviously a lot of weakness in a premium handset markets that could impact the CMOS image sensor business. It doesn't sound like you've seen any sort of slow down, related to the smartphone end of the image sensor market.

Well, the interesting thing there is a lot of our focus is on, the image sensor customers, future needs and so forth. And one of the strong growth areas from an implant perspective is in infrared and deep reds, which are less driven by the mobile phone market. And so those require higher energies. So our product extensions like the VXC have done extremely well in that market and those sell for much higher price than a standard high energy tool.

Got it. And then lastly, Kevin, if I heard you correctly said gross margin for Q1 would be in the 41% range, but for the year, margins expect to be 40% to 41%. You've talked a lot about the cost improvement programs. It looks like volume, certainly would be working in your favor as you come sequentially through the years. So what's the offset to gross margin to have it sort of trend down to say 40.5% for the year from 41% in the first quarter.

Yes. So we're 40.6% last year, so then point is we're basically flat year-over-year. A lot of the impact this year to the flatness is this – the overall mix it we have in there. And I will say that we are experienced some headwinds from the tariffs right now. We expect that some point to recover a lot of that through a duty drawback program, but we still have not been accepted into that program but expect that to happen. So and we have in the other thing is to the number of evals is that we have going to be recognized this year with some drag on the margins. So I think got us out of the fact is.

Okay. Thank you.

Thank you. And our next question will come from the line of Gus Richard with Northland. Your line is now open.

Yes. Thanks for taking the question. Typically going into a quarter, how much backlog coverage do you have? What's the range?

Well, I'll be point as a backlog is right now into this quarter. So I don't think we're over a $100 last year, but I think more importantly is the backlog number. Although its sounds important, many times will – we'll get an order booked and shipped in the same quarter and depending on the customers, we have some customers that give us a purchase order within a few days of shipping. So whereas you'll have on the customers, but the purchase order out there several months ahead, which ends up in your backlog? So yes, I'm not going to say I don't like a healthy backlog number, but it's not really indicative of what the current quarter is going to be doing.

Right. I was just curious what the range was. Is it typically two-thirds to 120 is it 52 – just what the ranges?

I have to go back. I don't really have that. I mean I've told you last year, I don't think it's about 100. So 40 to 100. I can take back to last year give you that.

Okay. And then in the mature markets, excluding power and imaging, you've got a lot of mature that’s foundries. What's the Geo location of that demand? Is it out of China? Is that U.S., Europe, where is it?

It's planet wide. So it's driven by IBMs that there's a bunch of IBMs in Europe it's driven by foundries in Asia, it's driven – it's just everywhere. It's the big driver is – there's just such a large product mix that are flowing into these fabs, that the high current implant, steps become bottlenecks for the fabs. And so that's, that's probably the number one driver in terms of the productivity. And then in – more specialized markets like image sensor and powered device. There's very specific implant needs that can be optimized to improve their yields and device performances.

Okay. Got it. Thank you. And then my last one for me, you mentioned that the demand and CMOS image sensors was more in the infrared, deep-red. Is that are your customers building sensors for computer vision and autonomous vehicles? Is that the incremental demand?

They don't specifically tell us exactly what they're selling – their products too, but in general, the infrared and reds are automotive, aerospace, defense in other industrial applications. So a lot of vision type applications. So it's beyond – well beyond the mobile phone, although by enhancing the reds on the mobile phone, you do end up with better quality image sensors. So I think it cuts across the board, Gus.

Okay.

I think your backlog number for six quarters? Going back to three, sorry. So it's anywhere from 58 as high as 89. So 58, 89 over the last six quarters.

Thank you. That's very helpful.

Thank you. This concludes the question-and-answer portion today. I will now turn the call back over to Mary Puma, who will make a few closing remarks.

Thank you, Brian. So we are looking forward to an exciting year for Axcelis and as always, I want to thank you for your continued support and hope to see you in the coming months and one of the several investor trips we have planned. And this includes the SFG Eighth Annual Technology Conference on March 12 in New York City. Thank you very much.

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