Good day, ladies and gentlemen. And welcome to Axcelis Technologies Call to discuss the Company’s results for the First Quarter. My name is Levi, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating question and answer session towards the end of this conference. As a reminder, this conference is being recorded for replay purposes. 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, Levi. With me today is Kevin Brewer, Executive Vice President and CFO; Russell Low, Executive Vice President of Global Customer & Engineering Operation; and Doug Lawson, Executive Vice President of Corporate Marketing and Strategy. 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 first quarter 2023 earnings call. In March, we celebrated the 45th Anniversary of the founding of Axcelis. As we passed this milestone and as I passed the leadership baton to Russell, I’m happy to report that Axcelis is in a great place. We have a solid balance sheet, the strongest product portfolio in our 45-year history, and an excellent team of employees, suppliers and customers. We are well positioned for future growth and profitability. Exiting the first quarter of 2023, demand for the Purion product family remains extremely strong especially in the high growth silicon carbide power segment. Revenue for the first quarter was $254 million with earnings per share of $1.43. Backlog set a record at $1.27 billion with quarterly bookings at $298 million, driven by Purion demand and strength in the…

Thank you, Mary, and good morning. We are pleased with our first quarter 2023 financial results and are excited about our full-year revenue, which is now expected to exceed $1.03 billion, representing year-over-year growth of approximately 12%. Looking at our first quarter, revenue finished well above guidance through the solid execution and continuing strong demand for Purion. Q1 revenue was $254 million with systems revenue at $195.2 million and CS&I at $58.8 million. Strong bookings and quoting activity for systems perspective in the Power segment continued in the quarter, which supports our expectation at greater than 55% of revenue will come from this market in 2023. CS&I revenue will fluctuate quarter-to-quarter, but should be modeled at approximately $245 million for 2023 and $300 million in our $1.3 billion revenue models. Q1 gross margin finished at 40.9%, slightly lower than guidance, due to CS&I being a lower percent of total revenue. We expect margins to improve to approximately 42% in Q2, but still remain under pressure caused by higher material costs and mix. We are forecasting significant gross margin improvement in the second half of the year is cost improved and we move to a more favorable product mix. This should allow us to achieve our full-year gross margin target of approximately 44%. We remain laser focused on margin improvement and have numerous initiatives underway to lower the cost of goods and drive higher sales of Purion product extensions. This allows us to target gross margins at greater than 45% into $1.3 billion model. Turning to operating expenses, the first quarter ended at 20.7% of revenue and better than our guidance. We expect OpEx to be relatively flat in the second quarter at approximately 21%. As always, we will continue to slightly control spending, while investing in areas of the business…

Thank you, Kevin. As I did last time, I will end this call by outlining the Axcelis’ business thesis, which supports over $1.03 billion in revenues in 2023 and $1.3 billion over the next few years. It is based on the following five key points. First, the implant TAM has more than doubled in the last few years with mature market segments representing greater than 60% of the total TAM. Second, power devices and image sensors are highly implant intensive and the general mature nodes have increasing implant intensity peaking at 28 nanometer. Third, high value Purion product extensions were designed to optimize power and image sensor device manufacturing, uniquely positioning Axcelis to benefit from high growth in the mature process technology markets. Fourth Purion product differentiation has propelled Axcelis to implant leadership in these high growth specialty device market segments. And fifth, we have strong long-term customer relationships and a fundamental cultural desire to win by making our customers successful. I have worked closely with Russell and the rest of the executive team to develop and execute the strategy I just outlined. Axcelis will continue to execute this strategy, as Russell and I transition into our new roles. I have great confidence that Axcelis will continue to be a leading capital equipment supplier to the semiconductor industry. I want to thank our employees, suppliers, customers, and investors for your past support and I hope that you will continue that support into the future. With that, I would like to open it up for questions.

Thank you so much presenters. [Operator Instructions] And our first question comes from the line of Tom Diffely [DA Davidson]. Your line is now open.

So just on the gross margin front, when you are getting into new contracts and looking at the materials on a go forward basis, are prices back to kind of pre-COVID or levels they were a couple years ago or we at a permanently higher level that is just a fact of business today?

So that is a good question. So they are certainly getting better. I think getting back to pre-pandemic levels is going to be difficult in some areas, while there are some others where we have more opportunity to change suppliers, for example, and some of the commodity level things. There is a little more opportunity to get the cost out. But we are - I think the good news right now, Tom, is we are starting to see favorable costs coming in on material, which should start hitting us in the back end of the year in Q3, Q4, which is why we feel comfortable taking the margins back up on a full-year basis to about 44%. And as you know, that suggests we have got to get 300 to 400 basis points better in margins in those last two quarters. And based on mix and based on what we are seeing with current supply chain cost and using up some of the high-cost inventory that we have had, which has been the other problem, we feel comfortable getting back and hitting our full-year gross margin. So I guess, a quick summary is some things are probably never going to go back to where they were, but there is opportunity through supply chain and rationalization to get costs back down and maybe even better on some pieces of it.

Okay. And then following up on that, when you look at your logistics center that you are opening this summer, will there be a material impact on the model as far as increased cost structure goes for that and ultimately do you expect that to decrease the cost going forward or just it is more just to increase the efficiency of making sure things get where they go on time?

Yes, so I mean, we have had to cost that in the models. So when we talk about the full-year gross margins and full-year operating expense at approximately 20.5% that is in there, Tom. But the reality of it is we have a lot of random buildings all over the place where we are storing material right now, which is, which has lease cost with it. So, when we initially open, we are going to have some duplication, but over about a six-month period to maybe as far as nine-months, these other locations the leases run out. So the net impact of it is going to be favorable, both from an efficiency point of view and from the ability to have everything in one location. So we are going to have a lot of robotics and very sophisticated material handling in this new facility. And again, we are going to exit several buildings that are scattered around the Beverly campus, in surrounding communities right now, once this thing is up and running.

Sounds like it would be a good place for an analyst meeting.

It will, and we can give you a ride on it.

The last question for Mary. When you look at the non-mature markets and non-power markets, memory and high-end logic, can you just talk a little bit about how you are positioned to take advantage of the recovery in the industry when that happens over the next couple years?

Sure. So as I mentioned in the script, we are working very closely with our memory customers right now to qualify both new Purion tools and additional recipes. Obviously things are slow right now, but as things do improve, we expect to be able to leverage the work that we are doing right now to actually increase our business at our existing customers and make some additional headway even with some customers where we haven’t been particularly strong in the past. In terms of Advanced Logic, we have talked about this at length. We continue to work with all the major Advanced Logic customers to find opportunities, particularly where Purion is differentiated, where we can bring them, bring that differentiation to improve their cost of ownership in their device performance that is ongoing. And we also have talked about how we have recently placed a Purion dragon into an Advanced Logic customer that is going, it is an evaluation system that is going extremely well. And we expect that to result in more business. And we have also recently closed on an evaluation for a Purion- H for Advanced Logic, and we expect that to grow into additional business in the future as well. So nothing really has changed Tom, in terms of what, what we are focused on, we are focused on just meeting our customer’s requirements not only in terms of their install base, but also in terms of their emerging technology and manufacturing challenges.

And Tom one other thing, just to note is, so the things Mary is talking about are the things that will drive us to that $1.3 billion model. So as memory recovers, as we continue to make deeper penetrations into Advanced Logic, that combined with continued growth in mature markets and power are what drive us to the 1.3 billion model.

Great. Thanks Doug. Thank you three. I appreciate it.

Thanks Tom.

Thank you.

Thank you so much. And your next question comes from the line of Craig Ellis of B. Riley Securities. Your line is now open.

Yes. Thanks for taking the question this morning. And Mary, I just want to start by congratulating you on the transition. You have had a remarkable career in really transitioning at a spectacular place in terms of where Axcelis is over that arc. So with that said, let me just start with the first question. So as I was talking with investors through the quarter, but especially through March and April, there was a lot of concern about some of the things they were seeing in the automotive market, and it seems like a lot of your prepared commentary really addressed the Company’s momentum. But can you just talk about whether, uh, you did see any order movement as you went through March and April or even very early May to date and any signals that may be coming out of automotive related to potentially slowing EB uptake or anything else?

Yes, thank you very much Craig. It has been a pleasure working with you. We have not seen any significant changes at all particularly in the mature process technology area related to power devices. I mean, they are always minor shifts here and there, depending on fab readiness, but we haven’t seen anything move out. And in fact, if anything, our customers are basically in some cases asking for more. They are asking for more and they are asking for it more quickly. So I think that that is a very positive sign. Russell and I had dinner last night with a major player a customer who produces power devices and that was really the gist of the conversation that things are going extremely well. They are looking for additional capacity, there are all sorts of things going on with new fabs that are currently being announced and built. So we do not have any data points right now that indicate that there is an issue and I know people in particular sometimes worry about China, but China is very strong right now, particularly in the power device area. That is definitely a growing area for investment for those customers. So right now, everything seems fine, we haven’t seen any significant changes.

That is really helpful color, thank you. The next question is really related to the new 1.03 billion plus view for calendar 2023. So thanks for providing that update. The question is this, if I incorporate the first quarter result and 2Q’s guide, it could imply flattish sequential trends in the back half and that seems to fit with some of the larger companies that we have heard from this reporting season to date. I’m just wondering, without providing guidance, could you just provide some qualitative color on how you see the back half of the year?

Well I will take that Craig. So, I guess, I will start by saying, we did say we expect to exceed 1.03, so, doesn’t mean there couldn’t be more there, but right now, that is a 12% year-over-year growth as we said. Mary just talked about this continued strong demand. I will also say our book-to-bill in the quarter came back up to 1.5 and I think last quarter was 0.99. So it was one roughly. So, things are still on a positive side for us, Craig. So, it doesn’t mean there can’t be more there, but at this point this is what we are comfortable with the record backlog that we have right now and customers clamoring to want to pull things in, we will do our best to try to exceed that 1.03.

Great and then I will just finish up with a question that is related to that, Kevin, but it goes back to some of the prepared comments on gross margins. So acknowledging that the back half means, a 300 to 400 basis point rise from here, but with some of the issues working out prior higher cost inventory, it would seem to suggest that more of the step up would be in the fourth quarter than in the third, just given the underlying cost dynamics that are at play. Is that a reasonable way to look at things?

Yes. We are going to say incremental improvement, we obviously have to come up quite a bit in Q3, so but it will be incremental as it comes through in the back half. And again, based on everything I see right now with a mix, and the cost profiles we have, we should get very close to that 44%, which considering kind of the whole, we bet ourselves starting out full-year will be good. And I think that is the other point on make too, I always tell, and this as well, I always tell people look at Axcelis gross margins on a full-year basis, because so much can move quarter-to-quarter. But I honestly look at, always look at full-year, and everything we do with programs to make things better, we are looking at a full-year average. So you are going to have to step it up a little bit in Q3 though to get there. But it will be a little incremental. And then back to your prior question, any revenue growth would probably be the same way. It would be incremental, as the quarters come on, if things grow beyond the numbers we have put out there.

Got it. Kevin, Mary, thank you very much for the help, and congratulations on the very strong execution.

Thanks Craig.

Thanks Craig.

Thank you so much. Your next question comes from the line of Christian Schwab of Craig-Hallum. Your line is now open.

Hey guys, congrats on another solid quarter. Mary, as we are looking at China, we have heard from applied materials and [Lam] and others talk about the significant investment that is going on in the mature nodes, a lot of that obviously power, and kind of a strategic gift to align domestic production with domestic demand, which looks to be maybe a three to four-year endeavor at least. So are you guys very optimistic about that type of market, or are you just happy with the strength today and watching it closely?

So we are very happy with what we are seeing right now in the mature process technology area. And we have talked many times about how we have leadership in implant, in the mature process technology area, and we have talked about power devices and we have talked about image sensors, and that all holds true. We believe that this strength will continue on into the future. Right now, there are still new fabs being announced. There is a lot of new construction, there is capacity expansion, and we expect that to continue on. What I actually expected you to ask me about is if we had seen any change in some of the export control regulations, and we have not seen anything there. Things continue to flow for us from a licensing and export control standpoint. And we continue to monitor that extremely closely. And at this point believe that that situation will continue, that things will continue to be positive. So we are very bullish about China, right now.

Hey Christian, this is Doug. The other comment I would like to make is that China represents one of the largest opportunities for electric vehicles. Government incentive programs and so forth have pushed that country, last year it was over 30% of new cars sold were EVs. So there is a lot of activity in the supply chain, which is where we play with the silicon carbide devices. So we are very optimistic over the next few years for that to continue.

Yes. And then, and every day I read about somebody else getting more funding from somebody in China to, add to their capacity that, so extremely strong target market, on that is a great segue, not only in China, but keep listening to the large automobile manufacturers and who are getting more and more ambitious goals about the number of shipments that they expect to ship or cars delivered, if you will. Is the every three years doubling of silicon carbide wafers what are the puts and takes of that, three-years from now we could look at that or two years from now and say that that was probably too conservative.

Well, we are still, you know, that is the data that we have got right now. We will be re-looking at that. There is certainly, lots of people tell that in one-on-ones that we are being conservative there. But the numbers vary all over, there is a lot of variables depending on EV adoption rate, depending on the types of devices that are built, depending on the yields, depending on the ramp of 200 millimeter versus 150. So there is a lot of variables, Christian that go into the equation. So we are very comfortable with the doubling every three-years and we will revisit that over, you know, probably over the next six-months.

That is great. Alright. Great. No other questions. Thank you.

Thanks.

Thank you.

Thank you so much. And your next question comes from the line of Quinn Bolton of Needham. Your line is now open.

- for Quinn and congrats on the continued success. So for my first question, as more power devices and auto shift to silicon carbide, what do you expect the impact to be on the traditional silicon power device market over the coming years? Will it still be a growth segment for some time or do you see an inflection point where that market will decline? Thanks.

So Quinn, I will take that one. The, we expect looking market to continue to grow, solid state power applications do continue to grow and there is lots of places where the silicon is deployed better than IGB and a lot of silicon places carbos, lots of places where -. So there is three solid technologies that really depend on the application. So what we expect to see is silicon carbide will probably dominate the offshore end overtime, although there will be applications for silicon in auto. And then silicon carbide will start to make some growth in other areas in energy, for example, as cost comes down, as a result of volume that driven by the automotive side. And then silicon has lot - just silicon is always going to be a less expensive substrate. There is lots and lots of silicon and so, that is always going to be a consideration. So we expect growth in both. If you look at the trends that we have guided in our presentation, you can see silicon carbide is currently overtaking in terms of the amount of implant tools, but silicon continues to be very, very strong.

Thanks, very helpful. And so for my second question, could you provide any color into the XEmax image sensor market? Is the ongoing weakness mostly driven by the consumer inventory corrections and I guess through your conversations with customers, are you seeing any signs of a demand recovery in this segment?

Yes, let me take the first part of that, the slowdown in image sensor certainly is driven by the consumer market, so by primarily by phones. And so as that turns around, we would expect that business as a whole turns around. The thing that is going on right now is, we have got the XEmax out there in evaluation. We have got one system that is already in production. The customers are prepping for the turnaround and they are more advanced devices for the next phase. The other piece that is big for image sensors is all the ADAS stuff and that continues to be strong. When you look at the folks that have announced in the last week or so, our model continues to be strong and image sensors are a piece of that. So, we would expect that image sensors turn around pretty strong as the consumer market turns around.

Thank you and one more quick one if I may. So how much of the margin improvement in the second half is a function of a mix shift to high energy versus the alleviation of some cost headwinds any additional color there would be helpful.

Yes, I mean, I’m not really going to break that up, but what I would tell you is that supply chain has been a constant problem for us for the last year, year and a half. So, assuming that is a good chunk of it, it is probably not bad. But as you know from our investor presentation, high energy does carry better margins than high current. So, I think in Q1, when we did the guidance, we talked about a bigger mix of high current, for example. So, that is part of it. The other thing that is in there as well is on the freight side of things, we are seeing improvements with freight. As the supply chain has continued to recover, it is allowed us to not be doing overnight shipments or air shipments and getting back into containers and getting stuff brought in at much lower cost methods. And then even container shipments from coming from Asia for example, they are probably, I don’t think they are back to where they were pre pandemic, but they were up four or five times, they are probably up two times right now. So, there is a lot of pieces coming, starting to come through. And the last thing really was - we had mentioned that in the last call too of that we had quite a bit of higher priced inventory. So, that is burning through and starting to be replace with [Indiscernible]. So without giving a percentage, those are all -.

No worries. I appreciate the color.

No problem. Thanks.

Thank you so much and your next question comes from the line of David Duley [Steelhead Securities]. Your line is now open.

Good morning, thanks for taking my question. Mary, I just wanted to echo Craig’s comments. Congrats on a great run and we are all very happy shareholders. First question from me is Kevin, I guess the math works out, you are kind of guiding the first half gross margins at 41.5% to get to 44% you are going to have to average 46.5% in the back half of the year. That is just the way the math works out. Now, my question there is, would that be the starting point for gross margins in calendar 2024, is there any reason to think that we would have a dip back down in gross margins?

Well, I mean, we have our $1.3 billion model out there and if you look at kind of the pieces of gross margin, we always say CS&I is very accretive, right. So as we grow to $1.3 billion, CS&I will not grow as fast, systems will grow faster which in reality, if those margins aren’t as good as CS&I, that puts a little pressure. So I don’t think, I’m prepared as anything, Dave, beyond that we have a $1.3 billion model that suggests at least 45% gross margins. As we have made a lot of improvements on gross margins over the years. It continues to be, as I always say, an area where a laser focused on. I think, I have got deep hands into the business too when it comes to margins. So, I’m constantly looking for ways with the team to find how we can make things better. So if we can do better, we will do better. But for now, we are trying to get back to that 44%. And it is hard for me to say, even in Q1, right. I don’t know what the mixer is going to do necessarily, right. So that is why we say, look at the full-year. Don’t hold me quarter-to-quarter, but we will on a full-year basis, we are going to get you to where we say we are going to get.

Okay. And then kind of as a follow up to an earlier question, either on the 12% revenue growth that you have this year, or the 39% revenue growth you had last year, how much of that comes from units increasing, and how much of that comes from ASP increases?

Well, it is mostly all units. We haven’t, I mean, as we have, I guess if you are asking, I mean, the product extensions have higher ASPs, which helps our margins. But it is not like we are all getting a lot - we are not getting price increases on products we have been selling, for example, right. So it is really, it is units we are shipping more systems, we are shipping more CS&I, and yes, so that is a simple answer.

Okay.

I mean, we announced that we had shipped the 500 Purion systems earlier in the year. And so system shipments have certainly increased dramatically here.

Yes.

Okay. And then as far as the backlog goes, or actually not the backlog, there was a big increase in deferred revenue, both sequentially, and I think year-over-year it is up like 2.5 times. What is the reason behind that?

The simple answer is we are getting a lot of prepayment sand, we have got $445 million of cash at the end of the quarter with short-term investments included. We have a, what I will call a meaningful amount of prepayments. So probably the biggest thing moving at Dave is the fact that prepayment balance continues to increase on systems. And the other piece of it is, as we are shipping more tools and there is a piece of the revenue that gets hung up until the install is complete. So that is growing. But I would say the most significant reason why we have popped over the last few quarters is it is coming through in a prepay and then it is getting hung up deferred revenue.

And just so I understand, the accounting of this, the prepay - are they giving you the full cost of the system? Is it a deposit to, or are they, are customers trying to secure future capacity, just the nature of these payments?

Yes, so we are with certain customers, we are requiring money down. It is typically not the full payment, but in some cases it could be the value of the material that goes in a tool. And if I look at the cost of my tools, 85% of it is material, the rest is labor and all the other stuff. So we want to make sure that if somebody decides they don’t want, don’t want the order, we are not left hanging with materials. So, it is a sizable chunk of money in some cases. And again, this isn’t, this is not with all customers, this is with maybe customers where we don’t have a strong relationship. They may be newer customers, they may be in a particular region, where we want to ask for that. And we haven’t had any problems with people kind of phoning us and putting money down, so.

Alright. Thank you.

Okay. Thank you, Dave.

Thanks Dave.

Thank you so much. Your next question comes from the line of Mark Miller from the Benchmark Company. Your line is now open.

Let me also add my congratulations on the continued exceptional performance and Mary, good luck on your new position. I just wanted to follow through, you mentioned you closed a ‘Purion H’ Eval during the quarter. Do you expect to close any other Evals by the end of the year and do you expect these Evals to lead to additional orders?

So we have six Evals out in the field, right now. And if you take a look at where they are and the types of equipment, I think about half of them, Mark will close in 2023, and then the other three will bleed into 2024. And a lot of that is just based on the timing of when they were shipped and also the development that we are doing with the customers out in the field. Sometimes, basically Evals can either close prior to a 12-month period, which is, the exception rather than the rule. And then they can bleed even a little bit over a year depending on the work that we are doing with that customer. The answer is yes, we expect the Evals to turn into additional business. We have a Purion M right now, under valuation for DRAM application at a customer that has multiple Purion types. And we do expect that to turn into additional business. We have an XEmax out at a customer right now. It is a new customer, and that should also turn into new business. Two Purion Hs are out there. One is a new customer and one is a new high current customer. They have other types of Purion. And then, the Purion XE that is out in the field is also for a general mature type of application, but it is a new high energy penetration that customer has other types of Purion tools. And then finally, the Dragon, the Purion Dragon which I mentioned earlier is out for evaluation at for Advanced Logic. And that is at a customer that has multiple types of Purion. So some of these customers are new, but most of them are actually customers that are just adding additional types of Purion products to their portfolio. All of them are in - I mean, we really wouldn’t put the evaluation unit out there if we didn’t expect it to be successful and to turn into future repeat business.

Thank you for all the color. Your taxes came down and tax rate came down this quarter. What should we think about for taxes for the remainder of the year?

I’m glad you asked that, Mark, because I’m going to get asked by a lot of people. What I would say is, I continue to model things at 15%, but I’m going to help you out in Q2 and tell you that I’m modeling at 13% to 14%. So, but I always kind of leave it at 15%. The biggest reason why we are not paying the corporate tax rate of what is it 21, 22. 21, I guess, is because a lot of our shipments go offshore. So is that 50 deduction? I think we pay 13% on shipments that go offshore so that is why I always kind of build at 15. But there is R&D tax credits coming in. There is things with stock comp expense and that impact it from quarter-to-quarter. So use 13 or 14 in Q2. Probably going to need to get to the numbers in, I will just as the year goes on as I feel comfortable, maybe I will take it down. But I will tell you personally in my models, I just leave it at 15% in the, in the Q3, Q4 right now.

Thank you.

Thanks.

Thanks Mark.

Thank you so much. And sir, ma’am, no question at this time. [Operator Instructions] this is 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, Levi. So I would like to thank you all for joining us today. We have a busy investor calendar in the coming months in May, we will be at the B. Riley 23rd Annual Institutional Investor Conference in Los Angeles; and the Craig Hallam 20th Annual Institutional Investor Conference in Minneapolis. We will attend four conferences in June, the TD Cowen 51st annual TDT Conference in New York City; the Steeple Cross Sector Insight Conference in Boston; the Needham Virtual Automotive Tech Conference; and the William Blair 43rd Annual Growth Stock Conference in Chicago. In July, we will be attending the CEO Summit in San Francisco and conducting additional investor meetings at Semicon West. We hope to see you at one of these events. Thank you.

Thank you for presenters and this includes the presentation. Thank you for your participation in today’s conference. You may now disconnect. Have a great day.