Axcelis Technologies, Inc.
Q3 2017 Earnings Call Transcript

Published: 4 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies call to discuss the company’s Results for the Third Quarter of 2017. My name is Brian, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions] As a reminder, this conference 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.

[Mary Puma:]

Thank you, Brian. With me today is Kevin Brewer, Executive Vice President and CFO; and Doug Lawson, Executive Vice President of Corporate Marketing and Strategy. If you have not seen a copy of our press release issued earlier today, 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. Today, Axcelis reported strong third quarter 2017 financial results. Revenues for the quarter were $104.5 million, with gross margins at 38%, operating profit at $13.8 million and non-GAAP earnings per share of $0.38, as explained in our press release. Our systems mix in the quarter was 64% mature process technology and 36% memory. Although both market segments remain robust, we saw significant activity in the image sensor market during the quarter especially in Korea. This image sensor activity, combined with continued strength in memory, provided a geographic mix of our systems shipments weighted towards Korea, which accounted for 61% of our shipments. China was 24%; the U.S. and Europe, 5%; and Taiwan, the remaining 10%. Our business outlook remains positive. In the fourth quarter, we are forecasting revenues of approximately $107 million to $112 million; gross margins of 37% to 38%; operating profit of $14 million to $15.5 million; and non-GAAP EPS of $0.37 to $0.41, excluding any impact of ASU 2016-09. We expect to end the quarter with approximately $130 million of total cash. In the fourth quarter, we also anticipate a systems mix of approximately 70% mature foundry/logic and 30% memory. We now expect 2017 revenues to exceed $400 million, narrowing our implant market share to between 27% and 28% based on an implant TAM of $1 billion. Systems revenue for the year will be weighted in favor of the mature process technology segment. All Purion products continued to gain momentum. In Q3, Purion accounted for 94.4% of our systems revenue. The high energy market was strong in both memory and mature process technologies, while the Purion H footprint continued to grow. We closed two evaluations during the quarter and received follow-on orders from both customers. The first was a Purion VXE used for advanced image sensor devices. The second was a Purion H qualified by a DRAM manufacturer. With this new customer, Purion H is now in production at eight customers in 11 different fabs. We expect additional new Purion H penetrations in the fourth quarter. Overall market conditions remain very strong. Market indicators also suggest this strength will continue into 2018. The drivers of this cycle have not changed. The Internet of Things continues to grow. Automotive and industrial applications have been the strongest segments. Image sensors, custom logic devices and silicon carbide power devices have been especially strong for Axcelis in the mature process technology segment. All of these connected devices are generating massive data flows requiring storage and analytics. This is driving both 3D NAND and DRAM demand. This demand continues to outstrip supply, thus keeping CapEx levels healthy. Memory customers are investing heavily in 3D NAND and metering their spending in DRAM strength and additional wafer starts. This behavior is expected to continue into 2018, and is good for the industry and good for Axcelis. Additionally, many memory customers are already talking about significant capacity investments in 2019. Purion’s continued success and these market trends support Axcelis’ target business model as outlined in our investor presentation. We have a plan to achieve our target business model over the next two years to three years. This plan includes achieving the following

[Kevin Brewer:]

Thank you, Mary. We delivered another strong quarter of financial results with revenue, operating profit and total cash finishing above 10-year highs set in Q2. We also finished ahead of consensus estimates and have guided Q4 above current expectations. The continued strength in the overall semiconductor market is providing Axcelis an opportunity to firmly establish Purion across a broader customer base. We captured six new fab penetrations during the quarter and have plans to ship and close additional Purion evaluation tools during the fourth quarter of 2017. Gross margins were in line with our guidance, driven by revenue mix and a closure of two additional evaluation systems

[Mary Puma:]

Thank you, Kevin. This is a good time to be in the semiconductor industry. It is rare to have a prolonged cycle with steady growth like this. The last comparable period was in the late 90s. There are major similarities between these two time periods. In the late 90s, millions of people were adding connectivity with the advent of the web browser and the introduction of the search engine. This drove a surge in PC upgrades as well as storage and communication requirements. Now we are witnessing billions, if not trillions, of devices being connected. Data is being accumulated in proportions never before seen, along with the development of advanced analytics and AI. We believe that we continue to be in a sustained growth cycle that is now expected to extend into next year and potentially beyond. In order to capitalize on these favorable market conditions, our focus is on driving revenue growth, profitability and market share gains. The Purion product family is highly competitive and provides Axcelis the opportunity to offer customers a strong alternative in ion implantation that will result in market share leadership. We are now closing in on the financial and market share goals we laid out several years ago and have been steadily executing against. With robust end markets and strong execution, our path to achieving our target business model is clear and within reach. Before closing, I would like to take the opportunity to thank our employees who tirelessly work to satisfy our customers and continually improve our products. This great year would not be possible without their hard work and dedication. With that, I’d like to open it up for questions. Brian?

[Operator:]

[Operator Instructions] Your first question comes from the line of Craig Ellis from B. Riley. Sir, your line is now open.

[Peter Peng:]

Hi, this is actually Peter Peng calling in for Craig Ellis. First off, just I may have missed this, but what is the system mix breakdown for Q3?

[Mary Puma:]

The shipments in terms of the regions or customers...

[Peter Peng:]

Just between memory and mature foundry.

[Mary Puma:]

Memory was 36% and mature process technologies was 64%.

[Peter Peng:]

Great. And then just looking at your market share, it seems like you’re tracking towards the 30% range for the year. Could you just kind of provide some color on where the share gain is coming from?

[Mary Puma:]

So the share gain is actually coming from a number of places. If you take a look, we’ve had 14 new penetrations this – we’ve had 28 penetrations since the first quarter of 2016. It’s about an even split between new customers and existing customers and new fabs. This year alone, we’ve had 14 new Purion placements, and again, it’s about an even split between the new customers and the existing customers but putting a tool into a new fab. It’s a mix in terms of exactly where the penetrations have come. If you take a look at where we’ve penetrated, about 3/4 of those penetrations have come from mature process technology, the other 1/4 from memory. And I would say the majority this year of new penetrations have come from high energy, with the remainder coming from a split between high current and medium current.

[Peter Peng:]

Great. And one last question before I hop back into the queue. Some of your peers are talking about industry growth of mid-single digit to high single digit for calendar 2018 and then with a profile that’s half-on-half growth. So first half growth over second half 2017. Is there any reason that Axcelis won’t be in line with that?

[Mary Puma:]

No, there’s no reason we wouldn’t be in line with it. But again, remember, our story is very much predicated not only on strong markets, but it’s on gaining market share. So this year, we expect to be between 27% and 28%, up from about 17% last year. If you take a look at our target business models that are in our investor presentation, they represent 32% market share and then 40% market share. So 32% at the 450 model, 40% at the 550 model. And our goal is to continue to grow our revenues and gain market share and likely, when we get to the February quarter, we’ll – or in February when we report on the full year, we’ll also give some insight into what we believe will happen in 2018 from a market share perspective and the growth we expect to get.

[Peter Peng:]

Great, thank you. And congratulation on the strong execution.

[Kevin Brewer:]

Thank you.

[Mary Puma:]

Thanks.

[Operator:]

Our next question comes from the line of Edwin Mok from Needham & Company. Sir, your line is now open.

[Arthur Su:]

This is actually Arthur on for Edwin. Thanks for taking our questions and also congrats on the great quarter. Hey, so the first question is just on the guidance for the second half 2017. I just want to understand what drove the upside versus your prior guidance. And I know you don’t want to provide any quantitative targets for 2018, but how has that shaped your initial views for 2018 from a qualitative perspective?

[Mary Puma:]

So I think it’s actually strengthened in both of the markets that we’ve talked about all year, the mature process technology area as well as memory, both 3D NAND and DRAM. And the real kicker has come from the share gains that we’re seeing. I mean, if you think back to what we’ve been talking about throughout the year, we talked about our market share. Well, I guess, at about midyear, we were at 26% to 28%. And now exiting the year, we’re taking a look at 27% to 28%, so we’ve been getting share gains actually in both of those segments.

[Arthur Su:]

Got it, okay. And so, Mary, you talked about how systems mix in 2017 was mostly weighted for mature foundry/logic. How do you think that mix might shift as you go into 2018?

[Mary Puma:]

I don’t think we expect to see any shift because most of – both of the markets are expected to remain strong. From interactions with our customers and projects that we’re seeing that they’re planning for at least the first half of 2018, we think that both of those segments will have strength. And we will continue to gain market share as well as part of that.

[Doug Lawson:]

Arthur, the weighting – this particular quarter in Q3, it was more heavily weighted. But in general for the year, it’s going to be weighted towards mature, but it’s not too far off the center point likely, so – which is what we’ve been seeing over the last couple of years.

[Arthur Su:]

Got it, okay. And Kevin, I guess my last question is just on gross margins. I know that – I think you just mentioned that on the call, that you expect fourth quarter gross margin of between 37% and 38%, and it’s partially impacted by strong Purion H shipments. Can you just kind of talk about some of the gross margin improvement initiatives you have on Purion H, and to what scale would we need to be, to be at a point where the Purion H is mature enough to have – to be corporate gross margin accretive?

[Kevin Brewer:]

Yes, so what I’ll say in terms of gross margin overall, we’re continuing to make solid progress across three products

[Arthur Su:]

Got it. Thanks so much and congrats on the great quarter again, guys.

[Kevin Brewer:]

Yes, thank you.

[Operator:]

Our next question comes from the line of Christian Schwab from Craig-Hallum Capital. Sir, your line is now open.

[Christian Schwab:]

Hey, congratulations on another great quarter. What is your guys’ current outlook for China in 2018 and 2019?

[Mary Puma:]

So we see a number of projects beginning to ramp up now for – to be prepared to take equipment in 2018. We are planning for that. We have added FSEs, field service people, opened some new offices. We’re making the investments that Kevin alluded to earlier in his script to be able to support that business. And furthermore, some customers are actually even starting to talk about projects in 2019. So we expect at least 2018 and into 2019 to be strong, and we expect to get our fair share of those projects.

[Christian Schwab:]

And what is the mix of that, whether it’s memory or nonleading-edge or leading-edge? Can you give us an idea of what you’re working on?

[Mary Puma:]

Yes, we’re working on projects in both of those areas. It’s a mix of memory and mature process.

[DougLawson:]

Yes, right now, Christian, it’s more weighted towards mature process technologies. As we get into 2018, we’ll really start to see the memory stuff start to come on. And as far as 2019 goes, it’s too far out to really judge what the mix will be.

[Christian Schwab:]

Okay. Can you give us the number of aggregate new fab projects in China that you’re – that you believe you have an opportunity to sell into, on an aggregate number?

[Mary Puma:]

No. I mean, we’re working on all of them right now. So I’m not going to conjecture on exactly what the number will be.

[Christian Schwab:]

Okay, perfect. All right. I’ve no questions. Thanks.

[Doug Lawson:]

Thanks, Christian.

[Operator:]

Our next question comes from the line of Patrick Ho from Stifel. Sir, your line is now open.

[Brian Chin:]

Hi, good afternoon. This is Brian Chin calling in for Patrick. Thanks for letting me after couple of questions. First congratulations on the results in the quarter. I am kind of curious though, it does appear that system mix in Q3 and second half is somewhat flipped relative to what was previously expected, with a much stronger tilt towards the mature products. Can you discuss what’s transpiring here? How much of this is the upside from things like image sensor or power versus any maybe delay or kick out in memory activity perhaps into next year?

[Doug Lawson:]

No, Brian, actually, the mix is similar to what we were expecting. Memory continues to be very strong. There has been additional activity, more activity in the mature process technologies. There’s been a lot of activity in image sensor. We specifically highlighted increased activities, especially with the VXE, which is one of the product extensions on high energy in Korea where there’s some large image sensor manufacturers in Korea. Most of the time, people think of it just as a country that makes memory. And so there’s been a lot of activity there, and the Chinese market has also been – continued to be strong. We’ve said all along this year that it would be somewhere between 25% and 35 – 30% of our revenue, and it continues to be right in that range.

[Brian Chin:]

Okay. And just to make sure I heard correctly, it sounds like the mix is, in Q3 and similar in Q4, is sort of 36% memory, 64% mature. Was that right?

[Mary Puma:]

I think we said it was going to shift more towards mature in Q4. It was more of a 70-30...

[Brian Chin:]

Okay. And maybe – I thought it was more of an expectation that memory would be stronger in the mix. Another question on gross margin – I’m sorry, go ahead.

[Doug Lawson:]

Yes, the fourth quarter is going to be closer to 70-30 mature. For the year, it’s going to be weighted towards mature, but they’re not too far off from pretty equal. So it’s very similar to what we’ve seen the last few years. Quarter-to-quarter, it varies quite a bit, but when you look at it over the year-over-year, it’s been split relatively close down the middle.

[Mary Puma:]

Yes, and I think the key takeaway is that everybody continues to think, or many people continue to think, that Axcelis is just a memory company, and it’s very important when you take a look at these statistics to understand that we have expanded our footprint significantly, not only to get more recipes at our existing memory customers and add some new memory customers. But we’ve really added a lot of footprint in the mature process technology area to the point where, as Doug said, it’s equivalent to a slightly higher percentage of our business overall for the year.

[Brian Chin:]

Sure. Yes, that is impressive. A quick question on – just a question on gross margins, not really on the product side, more on the service side. We have noticed that year-to-date and in Q3, the service gross margin’s tracking pretty far below what they were last year. This is clearly less than 10% of your overall sales. But it is a little bit of a drag on the overall gross margin. So I’m kind of curious if you could explain sort of what that dynamic is this year and if that is something that can normalize or change next year.

[Kevin Brewer:]

Yes, I mean, the only thing we really talk about is CS&I, which is the service, the spare parts, consumables, used tools upgrades, and that part of our business continues to be very accretive. The pure service part, which is the labor, which we – gets broke out, and that’s what you’re picking up in the financials, that does fluctuate back and forth. It is down a little bit this year, but it’s just kind of more around where the mix of stuff is happening right now. But overall, that impact really isn’t creating a drag on the overall CS&I business. And we are – we do talk a lot about what we’re doing on the system side, obviously, because that is where a lot of the lion’s share of the growth is coming from. But we also have made an investment in the service side of business this year in terms of developing and driving new upgrades to the field. And the upgrades are the things that really drive the margin higher on that side of the business. So we’re doing things over here to not only gain some additional revenue but certainly prop up the margins even higher around that CS&I side which includes the service space.

[Brian Chin:]

Sure. At least, it does seem like it’s up a good amount this year. And maybe lastly, doubling back on – I think there was a question on China earlier in the queue. But just looking at the various initiatives that you have going on, Axcelis-specific as well as sort of the industry tailwinds. Throwing China in there, but also including the market share gains at potential new memory customers, penetration of advanced logic/foundry customers, maybe discontinuation of the trends and strong execution on the mature products. Looking at all those various initiatives, what do you think will be the biggest incremental growth driver for the company next year?

[Mary Puma:]

Well, don’t forget reentering the Japanese market, that’s really the fourth big piece of our growth strategy to achieve our target business model. I think next year, we’re going to see ourselves continue to grow footprint and add some additional share at existing customers. But probably the biggest driver that is new to the mix would be China. There is a lot of activity in China right now. And as I said, we expect to win our fair share of that. So I think for 2018, that’s probably going to be the biggest driver.

[Brian Chin:]

Okay. Thanks, Mary. Appreciate it.

[Operator:]

[Operator Instructions] Our next question comes from the line of David Duley from Steelhead Securities. Sir, your line is now open.

[David Duley:]

Thanks for taking my question.

[Kevin Brewer:]

Hey, Dave.

[David Duley:]

I was wondering if you might take a stab at what you think the overall size of the implant market is going to be next year.

[Doug Lawson:]

It’s going to be around $1 billion. So – I mean this market’s been $1 billion plus or minus $100 million for a long time, and we continue to see it that way. And we’ll continue to gain share of that $1 billion. That’s where our focus is.

[David Duley:]

Okay. And the – you talked about your market share ending up, I guess, 27% or 28% of the overall market. What do you think you’ve been able to achieve in the big segment of the market in the part that the H addresses?

[Mary Puma:]

What do we expect our market share to be for Purion H?

[David Duley:]

Well, yes, the large part of the market, right, the part that you’re trying to penetrate. What do you think your market share is now? Or maybe give us a baseline of what it was last year.

[Doug Lawson:]

We haven’t really broken out the H at this point. To be honest with you, Dave, this year really has been more focused on new customer penetrations than pure market share. It’s really setting up significant share gain next year. So honestly, we haven’t really looked at the exact number. And so we’re really looking at the full market with all the products at this point.

[David Duley:]

Okay. And I guess kind of as a follow-on there, you keep mentioning you’re focused on penetrating new customers and getting new recipes of current customers. And it would seem like you had a very significant number both in 2016 and 2017 as far as new customers go and new recipes that you’ve outlined. So is there any reason to think that the trajectory of your market share gain changes based on all these new customer wins?

[Doug Lawson:]

No, we – if you look at the plans within the long-term model at 32% and 40%, the trajectory is there. So we said in the script that the next two years or two years, we have a plan to achieve the model. We’ve got that on the share gain graph and so...

[David Duley:]

I guess, say, you kind of have the customers in hand now as they ramp up to achieve those goals, I guess is what I’m ultimately digging at.

[Doug Lawson:]

We have a lot of the customers to achieve those goals. There’s still more customers to be had. So Japan is open. There’s a lot of new customers coming online in China, and we’ve got leading-edge logic to crack. So we’ve still got a lot of doors to open, but we’re in a lot of places at this point with 28 fabs and 14 customers just in the last two years.

[Kevin Brewer:]

But we still – we’ll continue to have evals outstanding and right into next year because, as Doug says, we have more to go after, and we’ve got those evals planned.

[David Duley:]

Okay, final question from me is, as far as further penetration in Japan, I guess, to me that was significant progress that would be penetrating the memory customer there. When is there – do you have plans or targets as to when we should see progress on that front?

[Mary Puma:]

Well, we continue to engage with a number of customers in Japan. And we feel like we’re making progress. We have run demos. We continue to get results and run additional wafers here in Beverly. So our target would be to show some progress in 2018.

[David Duley:]

Okay, thank you.

[Operator:]

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

[Mary Puma:]

Thank you, Brian. We’re pleased with our third quarter performance and prospects for a strong year for both Axcelis and the industry. As always, I want to thank you for your continued support and hope to see you in the coming months. We will be attending the 8th Annual Craig-Hallum Alpha Select Conference in New York City on November 16, and we will be back in New York for the New York City Summit on December 6 and the Needham Growth Conference on January 2017 and 2018. Thank you.

[Operator:]

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