Good day, ladies and gentlemen. And welcome to the Axcelis Technologies call to discuss the Company's results for the First Quarter of 2019. My name is Joelle, 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] I would now like to turn the presentation over to your host for today's call, Mary Puma, President and CEO of Axcelis Technologies. Please proceed, ma'am.

Thank you, Joelle. 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 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. Q1 was a solid quarter for Axcelis despite continued difficult market conditions. Revenue for the quarter was $91.5 million, with better than forecasted earnings of $0.18 per share, driven by strong systems gross margins and tightly controlled spending. Memory accounted for only 30% of our shipments in the quarter, with the bulk of shipments, 70%, going to mature foundrylogic customers. We expect the full year to reflect a similar imbalance in our segment mix. The geographic mix of our segment's system shipments for the first quarter was Korea, 28%; China, 16%; Taiwan, 26%; U.S. and Europe, 17%; and the rest of the world, 13%; highlighting the memory market slowdown as well as delayed investment activity in China. We anticipate weakness in the broad market throughout 2019 resulting from continuing softness in memory and in mature process technologies in some geographies. Lower fab utilization across the industry is expected, as customers manage their inventories,…

Thank you, Mary. I'm very pleased with the company's gross margin and earnings per share performance in Q1 given the market conditions. We're 100% focused on managing through this extended downturn for profitability without sacrificing our future growth. I'm managing our costs assuming revenues could be down 15% below 2018. Currently, we anticipate Q2 and Q3 to be at bottom of the cycle, the recovery beginning in Q4. As a result, we have cut planned 2019 operating expenses by approximately $12 million through reductions in headcount, variable compensation and some push-out of infrastructure-related projects. While we reduced our expected expenditures, we have not delayed key product development efforts critical to resuming a strong growth trajectory as we exit this downturn. We're also continuing to work on gross margin improvement initiatives required to achieve margin targets in a long-term business model. I'll turn to the first quarter financial results. Q1 revenue finished at $91.5 million compared to $105.7 million in Q4. Q1 system sales were $57.1 million compared to $64.6 million in Q4. Q1 CS&I revenue finished at $34.4 million compared to $41.1 million in Q4. We expect CS&I revenues to continue to be under pressure in 2019 as customers more tightly control expenses. This will likely result in a reduction in sales of upgrades, spare parts and consumables. At this point, I recommend modeling CS&I quarterly revenue at $35 million for the next couple of quarters, with a slight recovery towards the end of the year. Q1 sales to our top 10 customers accounted for approximately 83% of our total sales, flat to Q4, with three customers at 10% or above. Q1 system bookings were $46.8 million compared to $42.1 million in Q4, with a Q1 book-to-bill ratio of 0.83 versus 0.67 in Q4. Backlog in Q1 including deferred revenue…

Thank you, Kevin.The success of Purion products, along with the large and diverse nature of our customer base, have allowed Axcelis to remain profitable through this downturn without sacrificing development projects critical to our future growth. I am confident that with our continued focus on customer needs, the technology development to support those needs and the dedication of our employees, Axcelis will continue to grow and achieve market share leadership in ion implantation. With that, I'd like to open it up for questions.

[Operator Instructions] Our first question comes from David Duley, with Steelhead.

I was wondering if you could highlight for us what you think the second half revenue will do versus the first half. I know you mentioned, I think, that revenue would be down or could be down 15% for the year. Could you just talk about the implications for the second half of the year?

Well, we said that we think that Q2 and Q3 are probably bumping along the bottom at this point. And then, we expect an improvement in Q4.

And what do you think would get better in Q4?

So what we're looking at right now is we think that the memory recovery has actually pushed from late this year likely into early 2020. What we think will get better towards the end of the year is the mature process technology segment. That should start to pick up late in the year. And along with that, we expect improved fab utilization, which would also provide some improvement in our CS&I or aftermarket revenues.

And then, you mentioned some geographic weakness. Could you talk about where you are seeing that?

Yes. What we're seeing right now is actually, a lot of it is tied to China, and the fact that there have been some delays in new projects based on both fab construction issues and also market conditions. And this is the overlap that we're seeing mainly with the mature process technology segment. I mean, obviously, there is some slowdown on the memory side as well in some of what I'll call the global customers. But in the mature process technology area in China, that's certainly something where we've seen some weakness.

Final question from me. Could you talk about, this calendar year, what sort of expectations you have for the high-end foundry/logic space and Japan?

Well, we are proceeding with the plans that we have in both of those segments. We have an evaluation in the advanced foundry/logic segment that continues on and that we expect could provide some additional revenue in the future. And in Japan, we're making continued progress with SCREEN Semiconductor. We had their management team over here a couple of weeks ago. And there's a lot of progress that's been made in terms of getting the customer accounts' plans in place and activities rolling there, as well as with the demo and training center in Hikone. So again, that's proceeding as planned. But that, as we've talked about, both of those segments, in fact, are places that we've talked about, where it could take some additional time to see any meaningful revenue from those two segments.

Our next question comes from Patrick Ho, with Stifel.

Mary, maybe as a follow-up to your comments on the mature process node, are you seeing specific applications that are driving, I guess, the slowdown in spending by the customers? I guess, what I'm getting at is like automotive, smartphone -- are you seeing those specific applications driving the slowdown in that segment?

Yes, Doug is going to respond to that.

It appears that it's kind of spread. It's sort of geography-based, as Mary said, with the Chinese economy. And China in general will be driving a bunch of it. That's led to a lot of high inventories by many of the customers in this segment. So that allows them in general to ramp down some of their fab capacities a little bit. As that inventory bleeds off, then we would expect these utilizations will go back up, helping our service business and then leading to additional system sales. So I don't think it's one specific segment.

Great. Kevin, maybe as a follow-up -- gross margins are hanging in really well despite the projected decline in revenues for the June quarter. Are you still seeing, I guess, the cost out initiatives you talked about in the past having an effect? And as we progress through this year and into 2020, they become a bigger impact, allowing you to keep gross margin at 40% and above, especially at these lower revenue levels?

Yes. I mean, we are making continued progress on the cost out, Patrick. We've had these multiyear gross margin improvement roadmaps in place. The business is executing well to those. There are still a number of cost improvement projects that are teed up through engineering as well as supply chain. And also, too, on the product extensions, these are areas where we've been able to deliver better pricing. So the product extensions are also helping move the margins. But we're still working the margins very hard. As I said in the call, we've pulled back on some of the operating expenses. But things critical to future growth or margin improvement, we're still spending in those areas that drive improvement.

And Patrick, just one other thing to add. Both Mary and Kevin commented on investing in the new products. All of those new products are being designed very much with improved gross margins in mind.

And final question from me, on the product extensions front. That's obviously a great way to, one, keep your existing customer base on the Axcelis platform; but also present potentially new opportunities. How do you balance, I guess, the requirements or, I guess, the productivity improvements that customers are looking for and providing the right extensions? I guess, what I'm trying to get at -- how do you invest appropriately, and not across the board just because a customer requests something?

So we have a strong marketing group that spends a lot of time with our customers. We actually spend a lot of time with, in the case of foundries, our customers, to really understand where the market's going and what the needs will be, so that we can balance that versus an individual customer request, versus what the market overall needs. And then we make our decisions based on that.

Thank you. Our next question comes from Craig Ellis, with B. Riley. Your line is now open.

Hi. This is actually Peter Peng, filling in for Craig Ellis. And thanks for taking our question. On your memory shipment, the 30% -- can you provide a rough radar between DRAM and NAND mix?

Yes. The DRAM was about 12% of the 30%, and Flash was the remaining 18%.

And then, just on the gross margin, if I look at your Slide 20, there seems to be a visible improvement the last two quarters. It looked like a point improvement per quarter. Can you talk about the underlying drivers there?

Yes. So it's continuing to come from margin improvement initiatives that the company has ongoing, which include supply chain, value engineering, improvements in the warrantee and install costs as these tools become mature, and repeat orders go in fabs; we see those costs come down. And then, again, it's the product extensions that we were just discussing. We get better pricing with the extensions, so that's helping to drive the margins. As you know, we've made a lot of progress over the last years focusing really on the systems margins. We always say that the service side of the business of CS&I is very accretive. And in our investor presentation, you can see the improvement in standard margins that come across really in the Purion platform. So the good news is we haven't run out of ideas on how to improve things more. And we're working through a number of initiatives still. So that's what's really propping these gross margins up to the point where we feel comfortable keeping the full year at 40% to 41% and our longer-term model at the 42% to 43%.

And then, one more for me. Can you talk about what the triggers are for activating your share buyback program?

The only [indiscernible] I can tell you is that we're going to be opportunistic. We're in a blackout period right now, and it's something that Mary and I will review from time to time. And we've discussed some trigger points to the board as well.

Our next question comes from Gus Richard, with Northland.

Just to follow up on mature products, is it reasonable to assume that the power semiconductor guys [indiscernible] CMOS semi sensors remains strong, and then you've got some weakness in emerging companies in China? Would that sort of be a good explanation of the weakness?

Yes, I think, Gus, the power devices and [indiscernible] sensors certainly continued to be strong. As you know, the mature segment makes up a very large number of products and devices; it's a very big customer base in terms of fabs, but also in terms of fabless customers. And so it's more on the rest of those products that are impacted. And when you look at the China market, the economy's not doing as well. And that's cut back on some of the electronic spending that's impacted some of the Chinese customers of ours. But it also impacts some non-Chinese customers of ours that ship to China. So it's probably more on the impact of the non-CMOS semi sensor or power device market.

And then, your annual guidance is for roughly down 15%. You also state that Q2 and Q3 are going to expect to be the bottom, which would imply September probably below Q1. If you do the math, you kind of come up with in excess of 20% sequential growth in the fourth quarter. And again, A, am I doing the math right? And B, what gives you the confidence two quarters out?

Yes, I mean, the math is right. We have the Q1 number. We've basically said flat Q2, Q3, kind of the bottom. So the remainder of the delta is sitting in Q4.

Right. And I mentioned earlier that we expect the mature process technology segment to potentially pick up in Q4 and, along with that, the aftermarket or our CS&I business, as we believe fab utilization will begin to improve in that quarter as well. So you're looking at it the right way.

And Gus, I think from a confidence endpoint, if you look at even what our customers and customers' customers especially have discussed during this earnings season, there's been a lot of discussion about their inventory and their plans over the next couple of quarters to bring that down. And so that will drive the improvement in terms of the mature business from a fab standpoint.

Okay. And then, just last one for me. And I'm sorry I didn't do the math on this. I think the cash declined about $15 million in the quarter. Could you just walk me through the uses of cash?

Well, at a high level, it was expenses that were accrued last year. And there was some capital spending in there as well.

Okay, got it. That makes sense. All right. Thank you.

Thank you, Gus.

Thank you. Our next question comes from Mark Miller, with The Benchmark Company. Your line is now open.

You indicated the mature founders in China were weak or weakening. And I was just wondering about the Chinese domestic NAND producers -- are they scaling back? I know other large companies are scaling back. But are they trying to ramp still? Or are they throttling back their capital spending?

They're still planning to ramp. They're still at a very low level in terms of wafer starts, and so probably not really having a meaningful impact on the overall NAND market at this point. But they will plan to continue to ramp through this year and could start to have some meaningful impact on the market as you go into 2020.

Are you expecting any improvements in Europe? Or that's going to remain flat or down over the next couple quarters?

Yes. I think Europe falls into the category of, for us, largely mature process technologies. So it's kind of grouped with that analysis that we would expect that that would ramp up a little bit as we get into the later part of the year.

Excuse me.

I was going to say, Mark, there's a lot of planning going on in Europe right now for some new projects that will be coming online in 2020.

When do you think 5G will start showing up as being a positive impact? That's later in this year or next year, terms of 5G rollout?

Yes. So 5G will affect the entire market. It's not just the 5G devices. So as 5G ramps, it increases the ability to get data from one point to another much faster, which means you tend to increase storage and analytical capability and so forth, in addition to all of the communication devices that are involved. So, I think it's a gradual ramp over the next few years, actually. So it probably provides another kicker even through this cycle as we come out.

[Operator Instructions] Our next question comes from Christian Schwab, with Craig-Hallum Capital.

I jumped on a little late. But Mary, can you talk about what happened during the quarter that you now expect memory weakness into 2020, versus previous expectations of potentially improving near the end of the year, if there's any specifics regarding delayed times and push-outs, or what you're hearing from the customer base?

Well, I mean, there are a number of projects out there that we had originally anticipated potentially could start taking equipment in the fourth quarter. And from discussions with our customers and continuing to pulse the market, what we're hearing now is that those projects will not, in fact, start to take equipment until early 2020. So that's really essentially what changed is just planning on the part of our customers.

And is that on both DRAM and NAND or any other further specifics you could add there?

Yes, it's across the board, basically. I mean, we all know that there are certain large memory customers who have a number of projects in both DRAM and Flash that will proceed at some point. But again, the timing now appears to be early next year versus late this year.

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

So we have a busy investor conference schedule in Q2, and we hope to see you at one of these conferences. We will be at the 20th Annual B. Riley & Company Investor Conference on May 22nd in LA, the 16th Annual Craig-Hallum Institutional Investor Conference on May 29th in Minneapolis, the Stifel Cross-Sector Insights Conference on June 12th in Boston and the Ideas Conference on June 13th, also in Boston. Thank you for your support.

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