Good day, ladies and gentlemen, and welcome to the Axcelis Technologies Call to discuss the company's results for the Third Quarter of 2022. My name is Ali Blotter, 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, Ali. 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 third quarter earnings call. As a result of robust demand for the Purion product family and continued strong execution by the Axcelis team, we are pleased that our third quarter financial performance was above our guidance. Revenue for the quarter was $229.2 million, with earnings per share of $1.21 and gross margin of 45.1%. Cash, cash equivalents and short-term investments were $342.1 million. Revenue from our aftermarket business, CS&I, was $58.1 million and contributed significantly to our high gross margin. The mature process technology market continues to be an area of strength for Axcelis, with 88% of third quarter system shipments going to mature foundry logic customers and 12% to memory customers comprised of 5% NAND and 7% DRAM. The geographic mix of our…

Thank you, Mary, and good morning. Axcelis delivered strong third quarter financial results meeting company guidance and consensus estimates across the board, solid execution and continuing demand for our products drove these positive results. In fact, we are guiding continuing strength in Q4 and now expect 2022 to be greater than $885 million in revenue. And we are forecasting additional growth in 2023 based on strong customer demand in our current backlog. In addition to focusing on the growth opportunities ahead of us, we are continuing to manage through headwinds impact in the entire industry. Supply chain disruption continued to provide significant challenges in Q3. Throughout the quarter, our sourcing and engineering teams work closely with suppliers to implement both strategic and tactical measures to address these issues. Our manufacturing team address challenges created by material availability and performed at a very high level. While our sales and service teams worked closely with customers as a part fab ramped wins and high utilization rates. As noted by others in the industry, these supply chain disruptions are resulting in higher costs. We remain focused on reducing these costs, but also impacting customer satisfaction. As I have mentioned on past calls, we should begin to see more sustainable improvements in the supply chain beginning in 2023. Moving to our third quarter financial results. Q3 revenue finished at $229.2 million and above our guidance, compared to $221.2 million in Q2. Q3 systems revenue was $171.1 million, compared to $165.4 million in Q2. Q3 CS&I revenue finished at $58.1 million, compared to $55.8 million in Q2. CS&I posted very strong margins in the quarter, due to mix and lower cost. We expect Q4 CS&I revenue to be around $56 million. Q3 sales to our top ten customers accounted for 62.8% of our total sales,…

Thank you, Kevin. Axcelis is well positioned to grow during the anticipated 203 industry slowdown. Two long-term trends continue to drive our business. First, Purion Power series products continue to gain strength, driven by electrification of the automotive industry. Axcelis maintains a technology advantage and leading share in this market. We expect to maintain this leadership position and do not see this market slowing. And second, the growth of IoT benefits the implant intensive mature process technology segment, greater than 80% of our system revenue comes from the mature segment, which includes image sensors and power devices and other mature devices. Everyone in the industry is facing challenges and many are planning for a slowdown in 2023. At Axcelis, we are focused on continued growth and believe we are extremely well positioned for the future. With that, I'd like to open it up for questions.

[Operator Instructions] Our first question comes from Craig Ellis at B. Riley. Your line is now open.

Hi. It's Craig Ellis, I wasn't sure if that was to me the operator kind of broke up. I'll just plow ahead. So, team congratulations on the very strong execution in the quarter and the outlook. I was hoping to follow-up on the points that you had mentioned in your prepared remarks, Mary, and see if you or Kevin could quantify the three items identified: one, the degree to which supply chain costs are impacting gross margins, I think in the past it's been around 175 basis points? one; two, can you quantify what the BIS China shipment allowances in the quarter; and then just any color quantitatively on the 4 times issue to start? Thank you.

Yes, Craig, let me grab the first two. So on the headwinds from supply chain what we've been saying this year is that there's about 250 basis points of headwinds from both our suppliers and from logistics. So if you combine, it gives us about 250 basis points. So that's -- yes, that’s still about the impact we're seeing. And one of the things I have mentioned is that I would expect in 2023 that we could get back at least half of that through better pricing on material, there's a lot of things we're doing with value engineering still. We are starting to see some improvement in freight, so that is a bright spot. So again, it's about 250 basis points in total and anticipating in about half of that back starting next year. So the other piece of things that's impacting the earnings, we did mention FX a couple of times. In the quarter, if I look at all the puts and takes across the P&L, there's about $0.15 of negative EPS on the FX side of things. And then the final question, I missed that, because either you were breaking up or I was breaking up, but I think you had three or four points you make, correct?

It was BIS.

Yes, the final one was the BIS impact, Kevin.

Okay. Yes, so right now we think there's minimal impact and in Q3, I can tell you there wasn't any impact to us. So we've gone through our due diligence, looking at the new restrictions, looking at who our customers are and we -- at this point, we believe to be minimal impact.

Great. And then the follow-up question before I get back in the queue. Mary, very helpful to get the indications on calendar ‘23 being a year of growth for the company and stellar outperformance industry by the way on that. The question is, can you provide any color on how the linearity of the year might play out, not looking for specific guidance in any particular quarter. No, that wouldn't be appropriate at this early juncture, but any broader color on the arc of things would be helpful, if you could.

Yes, we don't really have any details on that at this point in time. Craig, I guess the one thing I will put out there is that we are very focused on achieving our $1 billion model. And right now, we're saying that's a couple of years out. So again, that's something that's hanging out there. And it really will be a function of market conditions. But at this point, there isn't anything. We'll give you more as we get into 2023.

Got it. Then with calendar ’22 being within 11.5% of that, it seems like you're well on your way. I'll hop back in the queue. Thanks for the help on those two items, Kevin.

Yes. Thank you, Craig.

Thank you.

Thank you. One moment while for the next question. Our next question comes from Christian Schwab at Craig-Hallum. Your line is now open.

Hey, thanks for taking my questions. Can you remind us or as you guys look at silicon carbide, how many customers that you're shipping to now in production? And what that may look like in a year or two, as far as a potential number of customers?

Christian, we haven't given the specifics in terms of the number of silicon carbide customers. It continues to grow as more companies get into silicon carbide. But Axcelis is definitely the leader in terms of silicon carbide frying implant, driven primarily by technical advantages of the Purion line and the ability to have the full product families of medium current, high current and high energy family. And so that combined with us having started work on this over six years ago has given us a good advantage. So we expect the number of customers to continue to grow through 2023 as folks get into it and then we'll see where it goes from there.

And, Doug, any more confidence or increase confidence, I know you guys laid out some wafer start expectations and I think a doubling of them every few years. Do you have greater confidence in that? Or could it even be -- growth rate even be faster than that now?

Well, we have confidence in that when we put that up there. We're going to probably provide some additional insight at the beginning of the year. We're going through our strategic plan right now and we'll give more insight in terms of what we see 2023 looking like for silicon carbide, but we do see 2023 as a growth year for silicon carbide as I think is generally accepted by the industry at this point as well.

And then just on the exposure to China, I know there's sometimes a lot of investor confusion about that, given that there's fabs not by Chinese nationalistic people who have restrictions on buying equipment and other people who have licenses. Can you just walk through exactly who you're selling to? If you can give us some additional color in your Chinese exposure?

So I can't give you a lot of names, Craig [sic] [Christian], but I'm sorry, I can't give you a lot of names, but at this point, we are obviously selling to -- we've talked about this SMIC and we are -- we do continue to get export licenses where appropriate for those. In terms of the other customers that were recently put on the list, I think everybody knows that the four multinational customers, who are added actually now have approval from the U.S. government. They have so that equipment suppliers can ship to them at least over the next year. So that just leaves some domestic customers that are really focused at this point. And for logic, it would be less than 14 nanometer and then there were some advanced parameters put out there for both DRAM and for NAND and those tended to focus mainly again on domestic customers. And those are the customers that have been impacted and where we had to take immediate action to stop shipments of parts, systems, provide technical support, service and we did that. But at this point in time, as Kevin said, we really have seeing a minimal impact if you look at the mix of our customers, in China, many of the domestic customers that we are working with are customers who are focused more on the general mature process technology or the mature process technology area and we have many, many power customers. And so those customers have not or were not impacted by the ruling that came out on October 7th. And that's why if you take a look at the mix of our customers in China, the impact was in fact minimal. We've done what we've needed to do, but we feel very good about what's going on right now and that at this point we don't see any future issues.

Great. Thanks for that clarity. No other question. Thank you.

Thank you.

One moment please. Our next question comes from Hans Chung at D.A. Davidson. Your line is now open.

Thank you. This is Linda on behalf of Hans Chung. Thank you for letting us ask the questions. So I guess my first question, what was your breakdown of the order book, specifically with mature segment? How much is in power versus image sensor in general mature?

So Linda, we really at this point in time only in terms of shipments are only splitting out the mature process technology segment and the memory segment. And for the quarter, it was 88% mature process technology and 12% memory. We did split out memory into 7% DRAM and 5% NAND, but we don't break out the mature process technology any finer. It's possible that when we get to the end of the year and we get to our call in February, we'll put out more color around that. But for right now, we're not providing that information.

Yes, Linda, this is Doug. One of the reasons we don’t do that on a quarterly basis is when you break it down too fine, it moves around quite a bit based on customer projects and so forth. So we tend to provide that breakdown once a year based on the full-year.

Okay. That's helpful. Thank you. And with the expectation of another growth here in ’23, what is the trends that you're seeing in different applications that is in memory, mature, power, and image sensor? Any color that would be helpful?

Okay. So in terms of what we're seeing right now, we're seeing the demand is strong in the mature markets, but we do see a slowdown in memory. But as you know, memory currently accounts for only about 15% to 20% of our systems shipment. So this slowdown is not having a measurable impact on our business. The mature process technology markets, on the other hand, remain robust. And Linda, as we said, we adjust the mature process technology to account for more than 80% of our system shipments in 2022. If you take a look and break down the segments within these markets, image sensor and the general mature foundry business remains strong, although there is some slowing in some consumer related parts of this market. But for us, the real story is empowered devices, demand there is extremely strong and growing due to the long-term commitment to the electrification of the automotive market. And as you know, we have leadership in this market with our Purion Power theories and that's really created sustainable growth opportunities for Axcelis. On top of that, as Kevin mentioned, customers are actually ordering initial tools now for projects to go into 2023 and 2024. So all of these factors are really what's driving our expectation that we're going to see revenue growth into 2023. It's really just more the same in terms of what we've been seeing in 2022, we're going to use that as a foundation and then build upon that.

Great. Thank you.

One moment. Our next question comes from David Duley at Steelhead Securities. Your line is open.

Congratulations on nice results and nice outlook. And thanks for taking my question. Kevin, just out of curiosity, I noticed that obviously the cash flow was a very strong number this quarter, typically when you have increases in receivables and inventories, you don't generate a ton of cash, but I noticed there's a huge increase in deferred revenue. Could you just talk about why that was?

Yes. So David, that's really centered around the number of prepayments we've had this quarter, I think one of the things we have mentioned over the various quarters is that we're receiving prepayments from certain customers. And in this quarter, we had a pretty big increase in prepayments for tools. So that's basically what's driving it. And as you pointed out, the offset is undeferred revenue. So is really not much more beyond that, except for the rest of it. As you know, as we had a pretty good quarter in terms of net income, what's relevant for the cash.

Yes, basically net income equaled cash even though receivables and inventories went up big, and so to offset what's the increase in deferred revenue?

Yes, on [Technical Difficulty] as you point out, our AR did go up this quarter. So, normally, our AR goes up, you're going to be talking about cash is down, but like I said, we had a pretty significant increase of prepays.

And as far as the prepayments go, could you -- is this -- do they put down a deposit? Is it a full payment? Maybe just talk about some of the terms there of the prepayments?

Yes. I mean, typically, it's enough of payment that cover our material costs. In some cases, it may be a little bit more or a little bit more, in other case, a little less. But in general, we're looking to cover our material costs on these prepays. As we're going to -- as we've talked about, we've got orders going way out into 2024. We want to make sure that on some of these orders if we feel that there's any risk, we want to make sure that we're not exposed for material.

Okay. You know, just another question on the gross margin. When I look back like over like almost last 10 quarters your product gross margins have been remarkably consistent between like 44% and 46% and I realize you're guiding gross margins down sequentially. Could you just talk about the magnitude of the two or three things that you listed and kind of the magnitude between Q3 and Q4? And then as a follow-up, I think a big chunk of this might have been currency or what could we expect in Q1 gross margins, if the currencies are essentially flat where there are now?

Yes. So it’s a good point. I mean, we are guiding margins down quite a bit in Q4 and people are probably wondering, why I'd say as expected and I say as expected, because we've given our full-year number for the last couple of calls and I think on the last call when I said we expect to see 42.5% full-year, I got to ask that question, well, that employees are going to go below 40% in the fourth quarter and I think my answer was there don't be any less than a four in front of it. So we knew this was coming and it really is mix. As you know in the investor presentation, we've got a chart that shows the mix of our products in the standard margis and there's no mystery or surprise that high current is much lower than high energy and even a little bit lower and medium current. So I don't have to mix work here. We have a big shift to high current in the fourth quarter. We knew it was coming. The other piece of it, which was a little bit of anomaly, was basically the way we have our supply chain costs coming back. This quarter was a little bit heavier than prior quarters. So I don't expect that to repeat, so that's also putting additional pressure. And again, that's not a surprise, I knew it was coming out of us. But I think the positive news is David, I think back in the beginning of the year, we said we expected full-year to be greater than 42% and then we ratcheted it up to 42.5% and today we're saying it's going to be greater than 43%. So despite all the stuff that's going on out there with headwinds, we're…

Okay. Thanks. That was actually really good color. I appreciate it. Just one final one from me and I'll pass and on to somebody else. Do you have -- I guess, an idea what the size of the TAM is for the non-leading edge foundry and logic business? And the reason I ask is, if I you’re your percentages of revenue you've been giving us over the last few years and apply it to total revenue and I realize that's not the exact math that you would do, because we're including CS&I in that. But if I just look at the 80% of total revenue essentially going into non-leading edge foundry and logic, it's a big number now, greater than like $700 million in 2022. And that's more than double in the last two years. So I'm just kind of wondering what you think the size of the TAM is and obviously if you could give us a shot at what your market share is? It appears it's probably above 50%, but I don't want to put words in your mouth?

Hey, David. So the mature market accounts for greater than 60% of the implant TAM, so it's over 60% of that $2.25 billion. And in terms of market share, we don't break it down. You can probably take that $2.25 billion and look at our systems revenue and get a relative idea as an average. What I will say is that we have much higher than average share in the mature markets and especially in the power market. And so in the high growth areas Axcelis has leading share. And overall, we continue to grow the total share.

I guess that would imply you probably do have greater than 50% share of this power market?

Yes, we haven't given a specific number, so I’ll let you know. I'll draw your conclusion on that.

I’ll find out. Thank you very much.

Thank you. [Operator Instructions] And our next question comes from Craig Ellis at B.Riley. Your line is now open.

Hi, it's Craig Ellis. I don't know if that question was directed to me again. The operator broke up, but I'm going to jump ahead, significant increase in cash in the quarter. Congratulations on that execution. The question I had was really a strategic one. The company has talked about M&A in the past and with cash now at such robust levels. I was hoping to get an update on how you're looking at that and some of the steps being taken internally to develop diligence capability? And any color if you can provide it on either technology areas of interest or geographic area of interest, as you potentially get ready to redeploy capital in that area? Thank you.

Yes, Craig. So as you know, we hired a new VP of Corporate Development earlier this year, and his mission is to focus on our growth strategy and M&A to grow beyond implant. He is in the process right now of doing extensive research and analysis on potential opportunities. And in fact, we'll be sharing some of his initial findings and thoughts with our Board next week. So we're still in what I would call the very early stages of this, but it is moving forward. And there's really nothing at this point to share, but as we get to the point where there is, we will certainly do that.

Got it. Thanks for that color, Mary, for the follow-up [indiscernible].

Thank you. 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.

Thank you, Ali. So I want to thank everybody for joining us today. We're going to be on the road for multiple invest meetings in November and we will also be participating in the New York City Summit on December 13th and the Needham 25th Growth Conference on January 11th, both are in New York. We hope to see you at one of these events and we thank you for your continued support.

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