Axcelis Technologies, Inc. (NASDAQ:ACLS) Q1 2024 Earnings Call Transcript

Axcelis Technologies, Inc. (NASDAQ:ACLS) Q1 2024 Earnings Call Transcript May 2, 2024

Axcelis Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen and welcome to the Axcelis Technologies Call to discuss the Company’s Results for the First Quarter 2024. My name is Crystal Love, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a 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, Doug Lawson, Executive Vice President of Corporate Marketing and Strategy. Please proceed.

Douglas Lawson: Thank you, operator. This is Doug Lawson, Executive Vice President of Corporate Marketing and Strategy and with me today is Russell Low, President and CEO; and Jamie Coogan, Executive Vice President and CFO. If you have not seen a copy of our press release issued yesterday, it is available on our website. Playback service will be also 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 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. Now I’ll turn the call over to President and CEO, Russell Low.

Russell Low: Good morning and thank you for joining us for our first quarter 2024 earnings call. We are off to a strong start to the year with first quarter financial results exceeding our forecast. Our revenue came in at $252.4 million. On the bottom line, our earnings per diluted share were $1.57, which increased 10% from $1.43 in the year ago period. Higher earnings were primarily driven by more than a 500 basis point improvement in gross margin as a result of the product mix shipped during the period, partially offset by higher selling costs, R&D and taxes. Continued execution by the Axcelis team combined with strength in the implant intensive silicon carbide power devices segment and strong customer shipments to China enabled Axcelis to achieve this performance.

Based on current booking levels and quoting activity, we expect these two trends to continue for the foreseeable future. Looking forward, our goal is to extend our lead in the power market and establish a position in advanced logic. We have focused R&D sales and marketing efforts in key areas critical to the next phase of growth. These include joint development engagements and the use of evaluation systems to help grow our market share. Currently, we have evaluations at customers across nearly all market segments and multiple technical customer engagements designed to improve capabilities and increase our footprint. We have the Purion Dragon, our most advanced high current implanter, and a leading European research institute focused on our advanced logic process development.

We also have a second Purion Dragon under evaluation with a leading advanced logic customer. These tools and the associated technical collaboration will be critical to the customers’ development of the next generation logic technology. In Japan, we continue to experience success in the power market due to the strength of the Purion Power Series, and we are engaged with multiple Japanese customers in additional market segments. Turning to our systems revenue breakdown in the quarter and beginning geographically, China represented 59% of sales, U.S. 17%, Japan 7%, Europe 4%, Korea 4%, and the rest of the world at 9%. By market segment, mature nodes, which include power devices, comprised 99% of shipped systems revenue in the first quarter with only 1% of shipments to DRAM.

Comparing this to the first quarter of 2023 where we saw 89% of systems shipped revenue to mature nodes and 11% to DRAM. Breaking down the mature nodes in more detail, power continued to lead systems shipments with 55% of total systems revenue. The other general mature segment was 41% and image sensors contributed 3%. Breaking down total revenue in power a little further, of the 55% recognized in the quarter, silicon carbide and silicon IGBTs were split 76% and 24%, respectively. We continue to monitor the recovery in our end markets, specifically memory and other general mature process technologies. The exact timing of this recovery is difficult to predict. We expect revenue levels to increase in the second half of 2024 over our expected performance in the first half with power continuing to be an area of strength.

We anticipate silicon carbide and silicon IGBTs will combine to represent approximately 60% of our system shipments for the second consecutive year. Our other markets are expected to strengthen the second half depending upon economic conditions. This will be underscored by a long-term trend for increasing demand as mature technologies are utilized in Internet of Things, connected devices, consumer electronics, and our growing advanced electronics market. The timing of a DRAM recovery is now expected later in the year than our previous expectations, and NAND is not expected to recover until 2025, when DRAM and NAND are forecast to have a strong year. We expect China to represent 40% to 60% of our quarterly systems revenue, with the remaining revenue spread relatively evenly across the other geographies.

In the power segment, in particular silicon carbide, we have developed a large and diverse customer base and we continue to win business globally from our customers as well as expanding our product footprint with existing customers. The full portfolio of Purion Power Series products is valued by these customers, allowing them flexibility at both 150 millimeter and 200 millimeter to ramp their fabs in the most productive and cost effective manner. Fabs will often start up by establishing a core of Purion M silicon carbide tool and then adopt the use of the Purion H200 silicon carbide and Purion XE silicon carbide systems to improve productivity, cost of ownership, and device performance. As a result, we have seen a significant increase in the adoptions of Purion H200 and Purion XE silicon carbide systems.

Axcelis is the only ion implantation company that can deliver complete recipe coverage for all power device applications. We are considered the technology leader and the 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. Looking ahead, we’re even more excited about the upcoming several years. We will discuss this in more detail at our July 11th Investor Day, but here is a quick summary of how our future growth will be driven by several fundamental industry trends. First, rapidly growing electrical power requirements for transportation, industrial and overall energy needs would demand a significant increase in semiconductor power device capacity.

Silicon carbide, silicon and gallium nitride chips will be used in high volume applications such as EVs, various forms of hybrid automobiles and their charging support, energy generation, transmission and storage applications, including the global adoption of solar and wind and AI data center power requirements, including generation, storage, distribution, cooling and servers. Remember that power chips are one of the most implant intensive semiconductor devices to manufacture, making this a strong growth driver for Axcelis. The second significant industry trend is AI. This trend will impact every device segment in the industry. First, the GPU requirements will drive advanced logic processes and require significant manufacturing capacity additions.

Second, in addition to high bandwidth memory associated with each GPU, AI will drive DRAM demand beyond the AI data center, including increased PC and phone requirements. Third, AI will generate data that will drive storage demand, including NAND requirements. And finally, AI will also drive a third wave of IoT using the sensors and connected devices as a primary source of data. This will drive capacity in image sensors, analog chips, and mature logic process nodes. AI will drive fab capacity growth in all segments, including implant intensive memory and IoT types of chips. At Axcelis, we are excited to play a significant role in the next wave of technical change and expected to drive our growth for several years. Now, I’d like to turn it over to Jamie.

Jamie Coogan: Thank you, Russell, and good morning everyone. We are pleased with our financial results for the first quarter and look forward to a solid 2024. We are guiding second quarter revenue of approximately $245 million with gross margins of around 43.5%, operating income of approximately $47 million, and earnings per diluted share of $1.30. Looking to the remainder of the year, power is expected to remain solid throughout the year, and as Russell noted, we are monitoring the expected recovery in the other mature markets and memory. Although the timing of the recovery is difficult to predict, we continue to expect revenue levels to increase in the second half of the year over our expected performance in the first half.

Looking at our first quarter, revenue and earnings per diluted share finished above our guidance due to solid execution and continued demand for Purion, especially in the silicon carbide power market. Q1 revenue was $252.4 million with system revenue at $195.4 million and CS&I at $56.9 million. These revenue levels reflect flat system volume and a modest decline of CS&I compared to the prior year. Q1 earnings per diluted share of $1.57 was driven by higher than expected revenues and gross margin, as well as lower overall operating expenses. This compares to earnings per diluted share of $1.43 in the prior year, which marks an increase of 10% driven primarily by mix. For the first quarter, systems bookings totaled $107 million and we ended the period with systems backlog of $1.1 billion.

The general mature market and memory markets remained soft, but bookings and quoting activity for systems in the power segment remains solid and continue to support our revenue expectations. As a reminder, neither our bookings figures or our backlog reflect orders associated with the CS&I portion of our business. CS&I revenue was down quarter-over-quarter due to lower tool utilization. Given this lower fab utilization, we are revising our expectations for CS&I revenue for the year to approximately $250 million. Q1 gross margin finished at 46% driven by product mix, exhibiting proof that achievement of these margin levels is well within Axcelis’ abilities. In 2024, we expect to see a year-over-year improvement in gross margin. However, quarterly gross margins will fluctuate based on product mix.

We expect Q2 gross margins to moderate from the levels we saw in Q1, given the product mix for the period and the anticipated closure of several evaluation systems in the period, which typically have lower gross margins due to costs incurred during the evaluation period. We remain laser-focused on margin improvement and we are using 2024 to implement a number of actions designed to improve operational efficiency specifically focused on gross margins. One such action is a retirement incentive program with the realization of cost savings beginning in the second half of the year. It is the continued execution on these types of initiatives, the use of flexible labor by operations teams, and most importantly, our drive to reduce the cost of supplied components that provide us the confidence to model gross margin at greater than 45% over the long-term.

Turning to our operating expenses, the first quarter ended at 23.6% of sales. We expect OpEx as a percentage of sales in the second quarter of 2024 to be flat with the first quarter and will improve as revenue increases during the second half of the year. Investments in R&D for the first quarter were 10.2% and are expected to be between 9% and 10% of revenue for the year. The incremental funding of R&D will be focused on the continued development of our Purion product extensions and upgrades to strengthen our position in power and to grow our position in Japan in advanced logic. As you would expect, we will continue to tightly manage spending while continuing to support the future growth of the business by solidifying our technology advantage in the specialty markets, increasing our footprint in the memory and advanced logic markets, and most importantly, continuing to invest in our employees and infrastructure to ensure we have the necessary skills, equipment and facilities required to achieve our financial models.

Moving to our balance sheet and cash flow, we ended Q1 with $530.2 million of available cash and generated $42.2 million of cash from operations in the period. We continue to execute against our share repurchase program, buying back $15 million of stock in the quarter and have $175 million remaining on our $200 million authorization. In total, we returned over $200 million of cash to shareholders since 2019 through our various share repurchase programs. We have a very active calendar of investor events in the coming months, including attendance at 11 conferences through the end of the year, the details of which are on our website. As a reminder, we intend to host an Investor Day on the morning of July 11 in San Francisco. At this event, we will provide our next long range financial model and we look forward to seeing many of you there.

With that, I will now turn the call back to Russell for his closing comments.

Russell Low: Thank you, Jamie. Axcelis is off to a good start in 2024 and our long-term growth is achievable due to the same factors discussed last quarter. First, the implant TAM has more than doubled in the last few years and is expected to continue to grow with mature market segments representing greater than 60% of the total TAM. Second, power devices, especially silicon carbide devices, are highly implant intensive and the general mature nodes have increasing implant intensity peaking at 28 nanometers. Third, high value Purion product extensions were designed to optimize power and image sensor device manufacturing, making Axcelis the only company with a product line capable of covering all implant recipes in these key markets.

This uniquely positions Axcelis to benefit from high growth in the mature process technology markets. And finally, Axcelis has strong long-term customer relationships and a fundamental culture desire to win by making our customers successful. In closing, I want to thank our employees, suppliers, customers and investors for your continued support and look forward to seeing you in our up conference in our Investor Day. With that, I’d like to open it up for questions.

Operator: Thank you. At this time, we will now conduct our question-and-answer session. [Operator Instructions] Our first question comes from the line of Craig Ellis of B. Riley Securities. Your line is now open. Good morning.

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Q&A Session

Craig Ellis: Hi, good morning. Thanks for taking the question and nice job in the quarter, guys. I wanted to start just with a higher level question to get better insight into some of the near-term dynamics you’re seeing and I’ll put it this way, if we rewind the clock three months, we had seen a very strong fourth quarter order profile. But early 1Q shipments that saw some push outs, and in early 2Q we’ve seen softer 1Q orders. And I am hoping you can give us some insight into what’s happening with order activity as it stabilizes. There is still a little bit more movement. And then related to that as we look at the potential for a rise in second half sales, any color on linearity, not looking for specific 3Q or 4Q guidance, but linearity color would be helpful.

Russell Low: So, hey Craig, it’s Russell.

Craig Ellis: Good morning.

Russell Low: Good morning. We are currently running at a $1 billion run rate in the first half. We are expecting a stronger second half. While we’re not actually providing the full year guidance, basically, as you know, it’s just coming down to the timing and magnitude of the coming upturn, which is dependent upon the market conditions. We have seen an increase in the Q1 quoting activity over Q4. We have seen a slowing of customer push outs and a couple a small uptick in pull ins and we are fortunate to have our $1.1 billion of backlog, which as Jamie mentioned, that systems only. So we are expecting a second – a stronger second half with the continued improvement in the end markets that we serve.

Jamie Coogan: Yes. And when we think about the linearity of the second half recovery, it is going to be a little bit weighted towards the fourth quarter, Craig. But that is supported by strong order bookings that we already have in the ledger today. Our expectations for CS&I revenue load and we are seeing some positive indicators in the underlying markets, as Russell noted, as the sort of pace of customer requests for shipment changes has shifted from push out to more, a little bit pull in. And we know that’s sort of overly anecdotal, but those are the types of indicators that we are looking at along with the quoting activity that provide us that confidence in the uptick we’re seeing in the second half.

Craig Ellis: That’s really helpful, guys. And then I will ask the follow-up question to Jamie before I hop back in the queue. Jamie, you mentioned that the company was pursuing some gross margin optimization initiatives and you gave one specific example. Can you just talk about the magnitude and the income statement impact timing of those items that investors should look for?

Jamie Coogan: Yes. So on the early retirement incentive, or retirement incentive, I guess I should call it that we’ve offered to folks here, is going to be a second quarter event for us. Current estimates, it is not overly significant in terms of costs, approximately $1.5 million or so is where we are triangulating that as we speak right now. The benefit of that will accrue to us over the back half of 2024. And then ultimately, right now that’s been primarily focused in our operations team. So we would expect some benefits to accrue, modest benefits through the SG&A, with majority of that coming in through our cost of sales line items.

Craig Ellis: Got it. Thanks, guys. I will hop back in the queue.

Russell Low: Thank you.

Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Tom Diffely of D. A. Davidson & Company. Your line is now open.

Tom Diffely: Yes. Good morning. Thank you for letting me ask a question here. Russell, I was wondering, you made a comment that the DRAM recovery was a little bit slower or projected to be a little bit delayed from what you thought previously. And I am wondering if you are surprised by that, because we’re seeing a lot of silicon being used up with high-bandwidth memory now. And I thought that that was going to help accelerate the need for more, just general capacity.

Russell Low: Hey, Tom? Yes, thanks for the question. So, yes, there is certainly a lot of news about the demand for high-bandwidth memory, regarding that, for us as an implant company, we really don’t see a change necessarily in the number of steps to process that memory. So it’s very much about the number of wafers processed in that case. So we will see an improvement in the utilization of memory fabs, and then obviously we will see that will have an uptick in demand. But like I say, we are not a [indiscernible] person getting significant new steps with that particular architectural device.

Jamie Coogan: And Tom, just to add to that in the press, there has been quite a bit of news from several of the memory companies in terms of the beginning plans for CapEx, for new expansions and new fabs.

Russell Low: Yes.

Jamie Coogan: So we’re starting to see that kind of activity and that kind of interest in terms of the customers and the sales discussions. Yes, we are certainly going to stay very close to our customers, and we know from history that this particular market turns on a dime. So we are ready should that occur. And we’ve been keeping very close to our customers.

Russell Low: Yes, just to kind of echo some of those sentiments on the preparedness of the organization, we are making some investments, incremental investments in inventory, in those sort of higher returning, kind of drop in orders that would come through from our memory customers, and maintaining a sufficient level of capacity not only to meet the expected recovery or potential recovery in the second half of the year here, but also for the growth that we see in 2025.

Tom Diffely: Okay. No, I think that’s helpful. So, the recent news about softness in PCs and servers, I guess, is more apt than the longer term projections for high bandwidth memory ramps. So I guess this question is, when you look at the non-power part of the ion implant business, we spend so much time on silicon carbide and power, but in the other mature markets, it’s still a pretty significant level of revenue versus previous cycles. Curious, what are the biggest end market drivers of that part of the business? And when you talk about a second half recovery from a pretty good level today, what are the end markets that are driving that?

Russell Low: So thanks, Tom. I think the long-term cycle remains intact. We are in a data-driven connected world. So some of the items that are going to drive that general matures, the Internet of things is going to drive mature foundry, and obviously the logic market, data storage in 3D is going to drive NAND, data analytics, the AI is going to drive DRAM and Advanced Logic. So outside of the power world, which we’ve talked a lot about, basically the general mature is going to be driven very much by the secular trends we see in the connected world.