Axcelis Technologies, Inc. (ACLS) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies call to discuss the company's results for the first quarter. My name is Liwei, and I will be your coordinator for today. [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.

Thank you, Liwei. With me today is Kevin Brewer, Executive Vice President and CFO; Russell Low, Executive Vice President of Global Customer and Engineering Operations; 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 pass this milestone and as I pass 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 of $298 million, driven by Purion demand and strength in the power market. For the second quarter of 2023, we expect revenue between $255 million and $260 million, gross margin of roughly 42%, operating profit of around $55 million and earnings per share of $1.44 to $1.48. At the beginning of this year, we expected 2023 revenue to exceed $1 billion. We are now forecasting to beat that estimate by $30 million, exceeding $1.03 billion. This represents revenue growth of approximately 12% in a year in which overall wafer fab equipment is expected to decrease by over 20%. In the second half, in addition to stronger revenues, we expect significant margin expansion driven by mix and improved costs. The mature process technology market continues to be an area of strength for Axcelis with 89% of first quarter system shipments going to mature foundry logic customers and 11% to memory customers composed entirely of DRAM. The geographic mix of our system shipments continues to be distributed globally and representative of spending patterns in each geography. In the first quarter, China accounted for 45%; the U.S., 17%; Korea, 14%; Taiwan, 4%; Europe, 2%; and the rest of the world, 18%. The power device market continues to drive our growth during this industry downturn. We are actively engaged with all customers in this high-growth market segment, winning business from new customers and expanding our footprint at existing customers. We expect over 55% of our system revenue in 2023 to come from this segment with greater than 50% of total power device system revenue coming from silicon carbide applications. In addition to significant pull for our Purion M silicon carbide tool, we also see increasing adoption of Purion H200 silicon carbide and Purion XE silicon carbide systems. As a result, we expect revenue from silicon carbide customers to be spread relatively evenly across the Purion power series product family. Purion power series products for silicon carbide have been designed to support the technical challenges facing our customers as they ramp to high volume in support of their automotive customers. Axcelis is the only ion implant company that can deliver complete recipe coverage for all power device applications. The full Purion power series family of products allows customers to optimize their fabs for high-volume manufacturing and to continuously improve their power device performance. Axcelis is considered by power device customers to be the technology leader and supplier of choice providing the best product family and manufacturing capabilities. This means that using Axcelis tools provides the lowest risk path to high-volume manufacturing required to support aggressive fab ramp plans. Axcelis places significant value on enabling our customers to succeed in this exciting market by providing differentiated product performance and a high level of customer satisfaction. Although our memory and advanced logic customers are experiencing a downturn, Axcelis continues to stay close to them to support their installed bases and understand their technology and manufacturing needs. It is during downturns that there is an increased ability to collaborate with our customers to expand opportunities for Axcelis during the next upturn. We have multiple evaluation systems in the field and many customer engagements designed to increase our footprint in these market segments. As the industry exits this downturn, Axcelis will experience significant growth as these traditional semiconductor segments recover. This, combined with continued strength in the power and mature markets, will drive Axcelis to our $1.3 billion model and beyond. Now I'd like to turn it over to Kevin.

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 due to solid execution and continuing strong demand for Purion. Q1 revenue was $254 million with systems revenue of $195.2 million and CS&I hit $58.8 million. Strong bookings and quoting activity for systems in the Power segment continued in the quarter, which supports our expectation that greater than 55% of revenue will come from this market in 2023. CS&I revenue will fluctuate quarter-to-quarter but it should be modeled at approximately $245 million for 2023 to $300 million and our $1.3 billion revenue model. 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 a significant gross margin improvement in the second half of the year as costs improve 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 margin take greater than 45% and the $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 tightly control spending while investing in areas of the business that support business growth, solidify our technology advantage in the specialty market and increase our footprint in memory and advanced logic markets. Additionally, we will continue to invest in our employees and the infrastructure required to achieve our financial models. One example of infrastructure investment is our new state-of-the-art logistics center in Beverley, Mass, located just a short walk from our headquarters. The facility is scheduled to open this summer and provide centralized logistics and flex manufacturing capacity. We also plan to further ramp our Beverley in Korean operations as capacity needs grow. We are comfortable at this point that we have the initiatives underway that support our $1.3 billion model. We ended Q1 with $445 million of cash, cash equivalents in short-term investments and generated $34.6 million of cash from operations. In the quarter, we repurchased $12.5 million of stock and have returned over $145 million of cash to our shareholders while curtailing share count growth. Axcelis has a rare opportunity to grow revenue and profitability during a significant industry downturn. This is a result of a strong product positioning in the power device market and continued strong execution in a challenging environment. We also look forward to continued growth in memory and advanced logic as the overall semiconductor market recovers. Once again, I want to thank the entire Axcelis team for their continued outstanding performance. I also want to thank our supply chain partners for their hard work supporting Axcelis and our customers for their confidence in Axcelis to deliver. I will now turn the call back to Mary for closing comments.

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 5 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 market. 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'd like to open it up for questions.

[Operator Instructions] And our first question comes from the line of Tom Diffely.

Materials today, are they back to kind of pre-COVID or pre-inflationary levels? Are we at a consistently higher rate than we were, say, 2 years ago?

I only got half of that question. I don't know if -- Doug or Mary, did you get the whole thing?

No.

No. Tom, can you repeat?

Is that better?

Yes, yes. So I missed the first part. So if you want to...

Okay. Yes, my first. So just on the gross margin front, when you're 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 of years ago? Or are we at a permanently higher level that's just a fact of business today?

So that's a good question. So they're certainly getting better. I think getting back to pre-pandemic levels is going to be difficult in some areas. While there's others where we have more opportunity to change suppliers, for example, and some of the commodity level things, there's a little more opportunity to get the cost out. But we are -- I get the good news right now, Thomas, is we are starting to see favorable costs coming in our 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've got to get 300 to 400 basis points better in margins in the last 2 quarters. And based on mix and based on what we're seeing with current supply chain costs and using up some of the high-cost inventory that we've 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's opportunity through supply chain rationalization to get costs back down and maybe even better for some pieces of this.

Okay. And then following up on that, when you look at your logistics center that you're opening this summer, will there be a material impact on the model as far as increased cost structure goes before that? And ultimately, do you expect that to decrease the cost going forward? Or just it's more just to increase the efficiency of making sure things get more the goal on time?

Yes. So I mean we have the cost of that in the model. So when we talk about the full year gross margins and full year operating expense at approximately 20.5%, that's in near time. But the reality of it is we have a lot of random buildings all over the place where we're starting material right now, which is -- which has a lease cost with it. So when we initially opened, we're going to have some duplication. But over about a 6-month period to maybe as far as 9 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're going to have a lot of robotics and very sophisticated material handling in this new facility. And again, we're going to exit several buildings that are scattered around the Beverley campus in surrounding communities right now once this thing is up and running.

Sounds like you'd be a good place for an analyst meeting.

Well, we can give you a ride.

Last question for Mary. When you look at the nonmature markets, nonpower markets, memory and high-end logic, can you just talk a little bit about how you're positioned to take advantage of the recovery in the industry when it happens over the next couple of years?

Sure. So as I mentioned in the script, we're working very closely with our memory customers right now to qualify both new Purion tools and additional recipe. Obviously, things are slow right now. But as things do improve, we expect to be able to leverage the work that we're 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've 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 -- it's an evaluation system that is going extremely well, and we expect that to result in more business. And we've also recently closed on an evaluation for 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 we're focused on. We're focused on just meeting our customers' requirements, not only in terms of their installed 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.

And your next question comes from the line of Craig Ellis of B. Riley Securities.

Yes. Mary, I just want to start by congratulating you on the transition. You've had a remarkable career and 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 address the company's momentum. But can you just talk about whether 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 EV uptake or anything else?

Yes. Thank you very much, Craig. It's 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 there 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're asking for more, and they're asking for it more quickly. So I think that, that's 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're 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's 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's really helpful color. The next question is really related to the new $1.03 billion plus view for calendar '23. So thanks for providing that. 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've 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'll take that, Craig. So I guess I'll start by saying we did say we expect to exceed $1.03 billion. So...

That sounds right so...

Doesn't mean there couldn't be more there. But right now, that's a 12% year-over-year growth, as we said. Mary just talked about this continued strong demand. I'll also say our book-to-bill in the quarter came back up to 1.5. And I think last quarter it was 0.99. So it was 1 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're comfortable with. But with the record backlog that we have right now and customers clamoring to want to pull things in, we'll do our best to try to exceed that $1.03 billion.

Great. And then I'll just finish up with a question that's related to that, Kevin, but it goes back to some of the prepared comments on gross margin. So acknowledging that the back half means the 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 the third. Just given the underlying cost dynamics that are at play, is that a reasonable way to look at things?

Yes. Yes, we're 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 the mix and the cost profiles we have, we should get very close to that 44%, which considering kind of the whole, we dug ourselves starting out full year will be good. And I think that's the other point I'll make, too. I always tell and you know 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're looking at a full year average. So yes, so I would -- you're going to have to step it up a little bit in Q3, though they'll get there, but it will be 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 number we put out there.

Got it. Kevin, Mary, congratulations on the very strong execution.

Thanks, Craig.

Thanks, Craig.

Your next question comes from the line of Christian Schwab of Craig-Hallum.