Good day, ladies and gentlemen, and welcome to the Axcelis Technologies call to discuss the company's results for the Second Quarter of 2022. My name is Chamberlin, and I will be your coordinator for today. [Operator Instructions] I would 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, Chamberlin. With me today is Kevin Brewer, Executive Vice President and CFO; and Doug Lawson, Executive Vice President of Corporate Marketing and Strategy. We are all participating in this call remotely, so I would like to apologize in advance for any technical difficulties. If you have not seen a copy of our press release issued yesterday, 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. Good morning and thank you for joining us for our second quarter earnings call. Business continues to be robust for Axcelis, especially highly implant intensive mature process technology segment. In the second quarter, 84% of system shipments and 95% of system bookings came from this segment. Automotive and Industrial applications are extremely strong as evidenced by the growing strength in our power -- strength in power devices. We recently posted a new presentation on our website on this exciting market opportunity. We remain focused on customer satisfaction with on-time shipment and installation, a key metric. To date, despite the challenging supply chain and logistics environment, solid execution by the full Axcelis team has allowed us to keep up with this high level of customer demand, meet shipment and installation dates and maintain levels of…

Thank you, Mary, and good morning. Axcelis delivered exceptional second quarter financial results, beating company guidance and consensus estimates across the board. Favorable mix with higher gross margin and solid execution drove these positive results. Supply chain disruption was significant in Q2 caused by pandemic-related shutdowns, nagging chip shortages and capacity. Throughout the quarter, our purchasing and engineering teams work closely with suppliers to implement both strategic and tactical measures to address these issues. Our manufacturing team addressed challenges created by material availability, while sales and service teams were sit with customers to support fab ramp plans and high utilization rates. As Mary mentioned, 2022 is on track to be another great year for Axcelis. We now expect full year revenue to be greater than $875 million. Visibility remains good and customer demand remains strong. Like others in the industry, we are dealing with similar supply chain disruption and higher costs. We try to include these anticipated challenges into our Q3 and full year guidance, but the situation changes almost daily. The only content right now is that the industry is supply chain constrained. We have continued to make improvements in our manufacturing capability in both Beverly and South Korea. In the second quarter, we significantly ramped production at the new Axcelis Asia operation center in South Korea and began additional projects to increase manufacturing capacity in Beverly. These efforts will enable us to support greater than $1 billion in revenue. Moving to our second quarter financial results. Q2 revenue finished at $221.2 million and above our guidance compared to $203.6 million in Q1. Q2 systems revenue was $165.4 million compared to $151.8 million in Q1. Q2 CS&I revenue finished at $55.8 million compared to $51.8 million in Q1. CS&I posted very strong margins in the quarter due to mix…

Thank you, Kevin. It is a very interesting time in the semiconductor industry. Concerns over a reduction in consumer and memory descending signaling industry slowdown in 2023. However, any impact on Axcelis will be moderated by several factors. Supply chain and logistics challenges continue to create a supply-limited environment for our customers, likely helping smooth over any slowdown in end user demand. Government spending programs like the U.S. chips are globally incentivizing semiconductor companies to build fabs. And lastly, and very important to Axcelis, is the electrification of the automotive industry. The investments required for this long-term trends are rapidly expanding the ion implant TAM and driving significant growth in our business. The capabilities of the Purion power series uniquely position Axcelis to benefit from this. With that, I'd like to open it up for questions. Shandralyn?

[Operator Instructions] Our first question will come Mr. Patrick Ho with Stifel. Patrick? Mr. Ho? [Technical Difficulty]

Shandralyn, we just got a message that people are getting repeated confirms that their hand is raised, and they have spoken when they've been called on. But apparently, we can't hear them. So I'm not sure how you might work on troubleshooting that.

I'm working on in. Just a moment. [Technical Difficulty] Mr. Ho -- Mr. Patrick Ho with Stifel, are you able to dial star 11 and pose your question, please?

Hello?

Yes. Mr. Ho?

Yes. Yes. Congrats on the nice quarter and actually your results and outlook speak for themselves. Kevin, maybe first off for you. I know it's always a challenge in the supply-constrained environment, managing systems, deliveries as well as the CS&I business. Given your strong results and outlook, how are you managing that to ensure customer satisfaction on both of those fronts because, obviously, they want to keep their fabs running at the highest utilization, yet at the same time, they're trying to expand fab capacity. How are you prioritizing your shipments on both sides of the businesses?

Yes. So it's a good question, Patrick. There's no doubt there's a bit of a juggling act. But first and foremost, we have to pay attention to customer satisfaction. So priority to keeping the field up and running always goes first and then system deliveries after that kind of a second, it's -- I think probably the most difficult situation in this quarter was the continuing chip shortages that were hitting some of our OEMs. But I do think some of the good news that came out of a couple of other companies, they have announced that our OEMs, they've been talking about improving supply chain. So I think if we can get the OEMs back on track, get beyond some of these chip charges, that's going to go a long way to improving things. We have plenty of capacity in place right now in terms of manufacturing. So it is all about supply chain. And then the costs have been escalating. We're paying the cost right now because we'd have to make deliveries, but there's going to be some work to do to start rolling back some of this as the situation starts to recover and commodity prices start dropping, but -- so yes. So to your original question, a bit of a juggling act, but the top level thing is customer satisfaction. So there's a tool down in the field, we got to get it up running. And if that means a part as they come out of something on our shipping dock and that's what's going to have to happen.

Great. That's helpful. And maybe as my follow-up question for Mary. Obviously, the demand trends and booking trends continue to be very robust and solid go who would be. But obviously, there's a lot of market concerns out there. What gives you confidence when you talk to your customers that these are whole real demand orders that we're looking at for 2023 at this point? What gives you the confidence that some of the [indiscernible] concerns that at the head bake just cancel orders if need be? I guess what's your take on the situation?

Well, we stay very close to our customers, and we're talking to them constantly. Just over the last couple of weeks, we've had discussions with two of our customers who are in the Mature Process Technology area. And basically, while they say, yes, there are some certain segments of their businesses that perhaps are softening a little. Their business in some of the areas that we talked about, so specifically Automotive and Industrial, are very, very strong. And so what they're able to do is now cover everything that they -- that those customers, specifically need. So I think everybody is just watching and waiting, but the demand remains very strong even in the Memory segment where we understand that there's potentially some slowdown being driven by calling PC and phone sales. We believe that our business is going to be steady in 2022. And into 2023, perhaps maybe there will be, again, some softening. But the Mature Process Technology segment is really overshadowing all of that. And we have not had any push offs to date that have been related to any customer telling us that there has been a softening in demand. We had pretty normal in and out, but it's other factors that are impacting it, like perhaps a delay in their investment or a delay in their staff, construction, things like that. So at this point, Patrick, again, we feel very confident that all the trends are in place. The long-term trends have not changed, and we're very well positioned with our Purion product lines. Our execution is really excellent. Kevin and the team has done a fantastic job. And so we're very bullish about the future at this point.

Our next question will be from Mr. Christian Schwab with Craig-Hallum.

Congrats guys on a fabulous quarter and outlook. My question is you have continued to have obviously very strong visibility. Can you talk to us as far as the future bookings that are going out kind of the mix between mature nodes and silicon carbide? And then a follow-up to that would be by the end of calendar '23, how many different silicon carbide manufacturers do you think you'll be selling ion implant to?

Well, we haven't given a forecast out for the full bookings that we have in place. We have talked about our bookings for the quarter, 95% of our bookings were from Mature Process Technology; the other 5%, obviously, were from Memory. But from what I know about the backlog, clearly, the Mature Process Technology continues to overshadow the Memory segment at this point in time. And we've talked about how, from a TAM standpoint, 65% of the TAM as Mature Process Technology, about 22.5% is Memory, Advanced Logic is about 15%. So I think that, that will give you a feel for the fact that the major business for ion implant is going to come from Mature Process Technology. And last year, 82% of our systems revenue was Mature Process Technology. This year, we're talking about the fact that it will be approximately 80%. So Christian, you'll have to read into that without any -- having any specific numbers, but I think the trend will continue.

Christian, this is Doug. The only other thing I'd add to it is that we do continue to see very strong bookings from the power grid. We said we did expect 35% to 40% of our systems revenue for the year to be coming from that segment. So that's reflective of what the business is like right now.

Our next question is from Mr. Craig Ellis with B. Riley. Craig?

Can you hear me?

Yes.

Congratulations on truly stellar execution. I had a couple of clarifications before a bigger picture question. The first clarification on the calendar '22 guidance for $875 million plus in revenues, can you just help us understand the variables at play with respect to what the plus could be caused by? Is it really just supply chain dynamics? And if so, to what extent would that be internal Axcelis versus broader issues? And if you can provide any color on magnitude that would be helpful.

Yes. Mary, let me take that. So there's no doubt, Craig, that we've got strong demand. And I think there's probably more customers that would take early deliveries versus, as Mary said, we're not really seeing the pushouts. The supply chain is probably the number 1 challenge right now in terms of how much more quickly we can ramp things up. Although I think we've done a great job, we've had significant growth year-over-year. And we certainly have been getting our fair shape from our supply chain partners that are all working very hard with us. So I think any additional upside to greater than $875 million at this point, if I said it was an other than supply chain, then I'd be disingenuous. So that is the challenge right now.

Got it. That's helpful, Kevin. And then the second question is on the backlog. So very dramatic numbers well above $850 million. My question is this, Mary, is the backlog a 12-month backlog that the company provided? Or does that include some of the multiyear orders that you had described? And to the extent you can characterize how much in backlog would be 12 months versus beyond 12 months, that would be great.

Kevin, do you want to take that?

Yes. Well, the backlog number does include everything. So there is some stuff that goes all the way out into in 2024. I don't have the specifics of how much is 12 months versus what's beyond it. I mean the majority of, I'm going to say, is over next 12 months, for sure. But I'm not going to tell you there's not some in that backlog that's out a little bit further.

Got it. And then finally, in the last week. We've seen one semiconductor company increase its view for silicon carbide, 3-year shipments by $1.4 billion up to $4 billion. And so the question is, as we go back and look at that [indiscernible] summary that the company provided a SEMICON West, moving up to $2.25 billion in light of some of the recent development in silicon carbide, do you think that Sam do you really captures the magnitude of strength coming from silicon carbide? Or are we starting to see trends that will put upward pressure on that $2.25 billion?

Yes. So Craig, I think that the numbers that we put up that are in the presentation are our current view. We're constantly evaluating it and as we talk to customers and get their input in terms of what their demand is, we'll continue to update it. But the charts that are in the presentation show our current view.

All right. Got it. A very good execution.

And our next question will come from Mr. Tom Diffely. Tom is with D.A. Davidson.

Hope you can hear me this time?

Yes, we can.

So just following up on the last couple of questions on the power side. Obviously, we think about silicon carbide and EVs. But maybe just talk a little bit about what else is driving this really strong power segment for you right now in terms of either Industrial or just traditional cars.

Well, as you can look at the investor presentation that we posted and also the one from SEMICON, Automotive is very much driving the bulk of silicon carbide in terms of its volume. There's many other applications in smart grid applications and other industrial applications. But Automotive is the biggest driver. And then there's a split between silicon IGBT-type devices of silicon carbide. And that really depends on the automakers' decision on what they want for their first round of EVs.

Okay. Great. And then Mary, you did a good job of laying out your minimal exposure to the advanced logic market today and the consumer. But curious, obviously, most of your mature business is driven by power and LED, image sensors. But what is your exposure on the mature side to the consumer?

There's some exposure in the general mature area. But again, from talking to customers, while they see some potential softness in some of the consumer-related devices. There are -- as I said, most of them are seeing strength in some of the other areas. So at this point in time, that's actually been able to offset any weakness that our customers are seeing there. So as I said, we haven't seen any major impact on Axcelis as a result of that. Our order book is very strong. Projects are booking out right now into 2023 and into 2024. As Kevin said, and customers just remain -- that are tied to the general Mature Process Technology areas, specifically the power devices, as Doug said, are really pushing. We've had -- we have customers still telling us that they like to pull order shipments take in. So again, things they remain intact and they remain quite good.

Great. And then finally, Kevin, when you look at the margin guidance, can you quantify or split the delta between the second and third quarter between the mix and the supply chain, the impact on the margin?

Yes. So why don't I -- what I'm going to do is I'm going to give you a kind of more of a full year look at this time. And it's back-end loaded. So it is more -- it's a little bit heavier in Q3, Q4, which is one of the things in the margins. But if I take a look at where I think we are in terms of negative purchasing price variances and much higher logistics costs, there is approximately 250 basis points on the full year margins in terms of impact. It is -- in Q3 and Q4, it's a little more heavy in terms of how it's hitting based on when the material is bought versus the timing of when we're shipping the tools. But we're continuing, and it's -- I want to make this point. We're -- although we've got some higher costs coming in, we've also -- we're getting favorable cost, too. It's just the favorability is being offset by the higher stuff, but we're still investing in all the things we've talked about before, our lean manufacturing, we've invested in augmented reality and AI. We're still doing all the value engineering things. We are taking advantage of volumes. So I feel good that we haven't slowed down with our core initiatives. We've the product extensions that we've talked about are adding to it. CS&I, we've got a lot of growth in that business. So we still -- even though we've got some near-term pressure, I think we're set up very well for our gross margin growth that we've talked about in these higher model. So -- and I expect that, as I said, we're -- what I would say is the trough. We're at the low point right now, and we should start working through this. You're not going to see this quarter, obviously, because you already got the guidance and you've got the full year, but I would expect by the time we get through a couple more quarters, we should start seeing things improve. I think the other point I make too, is that on the last call, I believe we had indicated that full year gross margins would be around 42%. We've brought those up about 50 basis points today at 42.5%. So we're continuing to do everything we can on the gross margin side. But we've also got to get material in and if it comes down to pay it or don't get it, we're paying it. So that's kind of where we're at.

Our next question will be from Quinn Bolton with Needham. Quinn?

Can you hear me?

Yes, excellent.

Perfect. Kevin, maybe just a follow-up on the gross margin question that you just got. If I do the math, it looks like gross margin in the fourth quarter could be below 40% to get to that 42.5% for the year. So I just want to make sure that the gross margin in a 39% to 40% range is kind of what you're thinking for the fourth quarter, given those higher material costs and the timing of when those hit the income statement.

Yes. So I will tell you, you won't I'm pretty sure you're not going to see a 3 in front of it. You could see something with a low 4 of those. So I don't think you have to go as low as 39-point-something, but I think your math is going to take you that -- we could have a quarter that was slightly down from Q3. But the other thing I would say is because this is evolving and we're working hard on things, we were able to bring back about 50 basis points since the last call, and we're going to continue to focus on everything that's still [indiscernible] for future shipments. So -- but yes, if you're modeling, Quinn, I don't think you have to go as low with a 3 in front of it, but right now, the math suggests what it does suggest.

Got it. And then I guess, Mary, 2 questions for you, one on the booking strength and mature. Obviously, it's a fantastic bookings quarter. Was that mature strength very broad-based? Or was it driven by most likely power if one area was going to dominate?

Yes. I would say that power was clearly the strongest segment, but there was also strength there from CIS in general mature. So it wasn't totally out of the Power segment.

Great. And then you mentioned in your comments about exposure to consumer not having a lot or really any Advanced Logic exposure in 2022, but you said you might have some in '23. And so maybe I'm interpreting this wrong, but it sounds like Advanced Logic could be a -- maybe not meaningful, but certainly a growth area for you as you look into 2023 that could offset some of the other pressures in the general industry. And so I guess I'm just trying to get a sense from you how meaningful or how much revenue do you think you might be able to generate next year from Advanced Logic.

Well, we've talked about how -- excuse me, we've successfully closed an evaluation as an Advanced Logic customer, and we expected to get repeat orders in 2022. And so as we move into 2023, again, we expect further expansion in terms of orders from that customer. So the Advanced Logic market is really only about 15% of the overall implant TAM, and we are just breaking into it now. We're continuing to work with the other Advanced Logic, manufacturers as well. And so at some point in time, that will become more meaningful for us. But at this point, as we said, we're really just -- we're starting out.

Our next question will be from Mr. Mark Miller with Benchmark. Mark?

Congratulations again on another strong quarter. Your margin guidance for the year and incorporating the third quarter, it looks like there's going to be a significant reduction in margins in the fourth quarter. I'm just what's driving that?

Yes. So it's a continuing cost increases we're seeing on the supply chain side, Mark. We've actually done really well with labor. We've done really well with factory absorption, obviously, and even our cost for warranty from quality comes you're making have been better. So the headwind right now is coming from the supply chain side. And it's a mix of higher freight costs and just higher [indiscernible] cost. And it's -- if I broke it down one more time from there, I would say, is probably 2/3 skewed towards higher prices on parts with the remainder being the higher freight cost. So again, these are all areas we're working on. We're working with our existing suppliers to see what we can do. Some of these higher costs has just been because of some of the chip shortages. We've had to pay some extremely high prices to get some chips into product. So those are more discrete events. Those will go away. Some of the higher costs have come because of commodity pricing for higher labor costs. I think we are -- now commodities are starting to come down, but it's going to take time for that to flush back through everybody's material inventory. But yes, so it's just a continuation of what we have now. It's supply chain related. And then we did talk about mix to we definitely have a less favorable mix in Q3. And in our IR presentation, I know you're aware of it, we've got the relative margins on the product lines and high energy is obviously our highest margins and high-current and medium-current are less. So when our mix swings a little bit more towards those other products away from the high energy, that can impact it. So that is a piece of the Q3. It is mix and the rest is the supply chain. And it's a similar thing in Q4 markets pretty much the same story.

Would it be fair to estimate that the supply chain was impacting margins by 150 to 200 basis points in the June quarter?

In the June quarter?

In the June quarter, yes.

Yes. Unfortunately, it's not to that level. It's actually gotten worse in terms of our quarter-to-quarter and some of that, again, is how material is brought in and being consumed, but the higher cost material and the cost of that are hitting more in Q3 than Q4. In the current quarter, it was much less. But on a full year basis, as I mentioned earlier, we've got a good 250 points on a full year basis. And it is more back-end loaded than front-end loaded for sure, in terms of how that's sitting?

Tax rate was down again this quarter. What can we should we estimate for the second half of the year for because it's 15%?

Yes, I'd use 15%, Mark. I mean we did start getting the benefit of the foreign-derived intangible income tax deduction we talked about. So tools that the material actually the systems that we're shipping offshore, it's a 13% tax rate in those versus the standard corporate tax rate. And because we've used up all our NOLs, we qualified now to be able to use this other this city deduction. So that's really what's been giving us the favorable pickup in the quarter 2. There's some other pickups from some stock comp expense and things like that. But I'd use 15% if are you -- if you are in 21%, you're going to be way too high.

And finally, CapEx for June. What was CapEx?

CapEx in June was $1.9 million, which was up a little bit from Q1. Q1 was $1.5 million and Q2 was $1.9 million. But still within our normal run rate or if we run anywhere from -- if you go back over the last couple of years, anywhere from $1 million to $3 million a quarter. So we're -- I guess, you could argue we're still on the lower end this year compared to last year.

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

Well, I'd like to thank you for joining us today. I'd also like to apologize for the technical difficulties that we experienced. But in terms of future investor events, we will be participating in the D.A. Davidson Big Sky Technology Summit in Montana in the Needham Third Annual Virtual Conference both in August. We hope to see you at one of these events, and thank you for your continued support.

This concludes the presentation. Thank you for your participation in today's conference call. You may now disconnect the call. And again, we would like to thank you for your patience during our technical difficulties. Please have a wonderful day.