Axcelis Technologies, Inc. (NASDAQ:ACLS) Q3 2023 Earnings Call Transcript

Axcelis Technologies, Inc. (NASDAQ:ACLS) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: Good day, ladies and gentlemen and welcome to the Axcelis Technologies Call to discuss the company’s results for the Third Quarter. My name is Corey, and I’ll be your coordinator today. [Operator Instructions] Please be advised that today’s conference call is being recorded. I would now like to hand the conference call over to your host for today’s call, Doug Lawson, Executive Vice President of Corporate Marketing and Strategy.

Doug 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 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. Now I will turn the call over to President and CEO, Russell Low.

Russell Low: Good morning. Thank you for joining us for our third quarter 2023 earnings call. Axcelis continued to execute at a high level in the third quarter, driven by strength in the power market. Third quarter revenue and EPS exceeded guidance of $292.3 million with earnings per share of $1.99. We are guiding fourth quarter revenue at approximately $295 million with gross margin of approximately 45%, operating profit approximately $73 million and earnings per share of approximately $2.00. 2023 annual revenue is expected to be greater than $1.1 billion, representing year-over-year revenue growth of around 20% in a year in which overall WFE is expected to decrease by 20% to 30%. Backlog remains strong at $1.2 billion, with quarterly systems bookings increasing slightly to $198 million.

The book-to-bill ratio was 0.83, primarily due to increased shipments in the quarter. The power market continues to be an area of strength for Axcelis, representing more than 60% of our system shipments for the third consecutive quarter. The overall mature process technology market generated 99% of the quarter system shipments with just 1% going to memory customers composed entirely of DRAM. The geographic mix of our system shipments in the third quarter was much more balanced with the combined U.S. and Europe representing 38%, China at 35%, Korea at 12%, Taiwan 4%, Japan 3%, and the rest of the world at 8%. The power device segment and in particular, silicon carbide has driven our growth during this downturn. We continue to win business from new customers and expand our product footprint with existing customers.

We expect greater than 60% of our shipped system revenue in 2023 to come from power with around 35% of total system revenue coming from silicon carbide applications. The full Purion Power Series product portfolio is important to our customers, and we continue to see increased adoption of Purion H200 silicon carbide and Purion XE silicon carbide systems. In Q3, we shipped a 200-millimeter Purion EXE silicon carbide system to a leading Japanese power device manufacturer. We also have 3 Purion H200 silicon carbide system evaluations underway with customers in multiple geographies. Two of these systems are 150 millimeters and 1 of the 200-millimeter system. These evaluation use give our customers a head start qualifying productivity limiting recipes as they ramp to higher volumes.

It – it also enables the customer to conduct optimization work on their devices, utilizing the higher energy and dose capabilities of the Purion H200 silicon carbide system. The importance of the three implant types in silicon carbide is highlighted by the relatively even revenue split across the full Purion Power Series product family in 2023. Axcelis is the only ion implantation company that can deliver complete recipe coverage for all power device applications. We are considered a 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 implants. Axcelis places significant value on enabling our customers to succeed in this exciting market by providing differential product performance and a high level of customer satisfaction.

Axcelis has a large number of customers in the power market, which is currently expected to remain healthy in 2024. This will provide good support for Axcelis even as the industry downturn continues and now includes increased softness in the general mature markets. While our customers are managing through this downturn, Axcelis remains close to supporting their in-store base and working with them on the future technology and manufacturing needs. Recently, we shipped a Purion Dragon to a leading research institute focused on advanced logic process development. This tool and the associated collaboration will be critical to our advanced logic customers’ development for next-generation technology. Additionally, we have multiple evaluation systems and many customer engagements designed to increase our footprint across all segments.

As the industry exits this downturn, Axcelis will return to healthy growth in these markets. This combined with continued strength in the power segment will drive Axcelis to a $1.3 billion model and beyond. Now I’d like to turn it over to Jamie.

Jamie Coogan: Thank you, Russell, and good morning, everyone. Before turning to the results for the quarter, I want to say that I’m excited to be joining the Axcelis team. Over the past few years, this team has worked diligently developing cutting-edge ion implant products, establishing a strong product position in the power device market and creating a rare opportunity to grow revenue and profitability during a significant industry downturn through strong execution. I look forward to adding my experience to this team and meeting many of you at our future investor events. Now turning to the quarter. We are pleased with our financial results for the period. And as we look to the full year, we are reiterating our full year revenue expectations of greater than $1.1 billion, which represents year-over-year growth of approximately 20%.

Looking at our third quarter, revenue and earnings per share finished well above guidance due to solid execution and continued strong demand for Purion, especially in the silicon carbide power market. Q3 revenue was $292.3 million, with system revenue at $231.5 million and CS&I revenue at $60.9 million. Q3 earnings per share of $1.99 was well above guidance due to higher-than-expected revenues and gross margin as well as lower overall operating expenses. Despite some of the softness in the general mature market, bookings and quoting activity for systems in the power segment remains solid and continue to support our expectation that greater than 60% of shipped systems revenue will come from this market in 2023. CS&I revenue will fluctuate quarter-to-quarter, which should be modeled at approximately $245 million for 2023 and $300 million for our $1.3 billion revenue model.

Q3 gross margin finished at 44.4%, above guidance, driven by lower costs and deferrals and benefiting from a slightly improved mix. We expect Q4 margin to come in higher at approximately 45%. Full year 2023 gross margin will be approximately 43.6%. We remain laser focused on margin improvement and have a number of initiatives underway to lower cost of goods sold and drive higher sales of Purion product expansions. Execution on these initiatives allows us to model gross margin at approximately 45% in our $1.3 billion revenue model. Turning to operating expenses. The third quarter ended at 19.8% of revenue, better than our guidance. We expect OpEx in the fourth quarter to remain flat as we continue to tightly manage spending. Investments will continue to be an area of focus for us to ensure we are supporting business growth, solidifying our technology advantage in the specialty markets and increasing our footprint in the memory and advanced logic markets.

Most importantly, we will continue to invest in our employees and infrastructure to ensure we have the necessary skills and equipment required to achieve our financial models. We recently completed one of our more significant infrastructure investments, our new state-of-the-art logistics center in Beverly, Mass. The new logistics center located just a short walk from our headquarters will be fully functional during the fourth quarter. This facility will provide significant efficiency, improving our material handling and flow to our operations. The fourth quarter also marks the 2-year anniversary of the opening of the Axcelis Asia Operations Center in South Korea. This facility has been critical to our revenue growth and is expected to have shipped over $300 million of systems by year-end.

We plan to further ramp both our Beverly and Korean operations as capacity needs grow and are comfortable that we have initiatives in place that support our $1.3 billion revenue model. Moving to our balance sheet and cash flow. We end Q3 with $461 million of cash, cash equivalents and short-term investments, and we generated $24 million of cash from operations in the period. We saw a higher volume of shipments later in the quarter, which increased our outstanding receivables. We continue to execute against our previously announced share repurchase program, buying back $12.5 million of stock in the quarter. In total, we’ve returned over $170 million of cash to shareholders since 2019 through our share repurchase programs. In my first few weeks with Axcelis, I’ve been impressed with the team and their dedication to innovation and their drive for improving efficiency and operational performance.

These qualities were essential in allowing Axcelis to reach the level of performance we see today. Once again, I would like to reiterate my excitement in joining Axcelis and look forward to helping the team take the company to new heights in the future. I will now turn the call back to Russell for his closing comments.

Russell Low: Thank you, Jamie. Axcelis expects to achieve revenue of greater than $1.1 billion in 2023 and is targeting revenue of $1.3 billion in 2025. This growth is achievable due to the following factors. 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, the 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 cultural desire to win by making our customers successful. I want to thank our employees, suppliers, customers and investors for your continued support. With that, I’d like to open it up for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Charles Shi of Needham & Company. Charles, your line is open.

Charles Shi: Hi, good morning, Russell and nice to meet you, Jamie, welcome aboard.

Jamie Coogan: Thank you.

Charles Shi: Just for – thanks. Really want to start my first question around backlog. Well, I mean, the backlog is only good if you can ship that, but how confident is management at this point to ship those backlog on time? And how much risk do you see there in terms of push – potential push-outs given the fact that one of the leading silicon carbide player facing the – in the West seems to suggest that their CapEx or maybe capital intensity is trending lower than they previously expected into 2024? Thanks.

Doug Lawson: Hey, Charles. Thanks for the question. This is Doug. Let me start at sort of on the back end of your question relative to the silicon carbide question. Our business in silicon carbide is global with a very large and diverse customer base. And so we see – we continue to see good bookings and solid quote activity in that area globally. And so I think looking at just one customer within that is not the right way to look at Axcelis’ backlog within silicon carbide or in general. As far as backlog goes, it’s – it continues to be strong. I’ll let Russell comment on the front end of your question.

Russell Low: Yes, Charles. So the backlog, I think currently sits at $1.2 billion. As we’ve kind of noted, there are some weaknesses in the business in and around memory and image sensors, and we’ve talked a little bit about softening of general mature. But as Doug mentioned, when it comes to kind of – when it comes to backlog, bookings and quotes – requests for quotes, the power market is still strong for us, which is kind of why we’ve been able to say, reiterate greater than $1.1 billion revenue for 2023. And we expect this – the strength in power to continue into 2024. And so – and a lot of the backlog is in power.

Charles Shi: Thanks for the color. Maybe the second question about the China exposure. It seems like at least from a shipment standpoint, your China exposure in Q3 seems to be down sequentially from Q2 level. It seems to be the reverse trend of several of your semi-cap peers that – who also actually saw a big massive pickup of the China revenue into Q3 and potentially into Q4. Just really wonder is the relative – I mean, lower exposure of China you saw in Q3, is that temporary or you see this is probably going to be more dominated by the rest of the world in terms of your shipment for the next few quarters? Thanks.

Russell Low: Right. So I think we’ve typically said it’s between 30% to 50% in any given quarter. And as you note, it’s kind of in the 30s for this quarter. I think China is still always going to be a growing area for us. But I think we’ve benefited also from other areas coming online. So like Doug said, power is definitely a global phenomenon. And we saw a good progress in Europe and U.S. and we’ve also seen it in other regions around the world. So I’d say that we continue to see strength in China. We will continue to find that as a very good opportunity for us given our focus on mature markets, but we are also seeing a lot of strength globally, particularly in power.

Charles Shi: Thanks.

Operator: Thank you. [Operator Instructions] Our next question comes from David Duley of Steelhead Securities. David, your line is open.

David Duley: Yes. Thanks for taking my question. Russell, you mentioned that you’ve seen some weakness in the second-tier foundry and logic business. Could you just talk about which geographic regions that’s coming from or applications?

Russell Low: So I guess with my second-tier foundry logic, you’re kind of talking about the mature foundry, the kind of typically the non-FinFET stuff, right?

David Duley: Yes.

Russell Low: So I think there is – so the foundries that are more related to consumer spending have been soft for a little while. We’re now seeing a little bit of softening in industry. And I think you probably saw the note by one foundry this morning about softening in power. That actually doesn’t – we don’t seem to see the softening in power across the board, but I think industrial has started to soften along with consumer, which was already there.

David Duley: Okay. And then a follow-up on gross margins. I think your gross margin target for Q4 is essentially your target for the $1.3 billion model. So maybe help us understand how gross margins might progress next year if revenue grows or how we should be thinking about gross margins going forward?

Jamie Coogan: Yes. So as we think about margin, obviously, mix is going to be an important part in that process as the mix between systems and CS&I revenue on a forward basis. And as you know, utilization – fab utilization is going to be the primary driver of the CS&I revenue on a forward-looking basis. The teams are right now in the process of working through our 2024 model specifically, but we do expect to maintain strong gross margins going into next year.

David Duley: Okay. Final one for me is you clearly outperformed this year, as you mentioned, WFE being down 20%. You guys are up 20%. If the market is flat to up next year, do you think you continue to outperform?

Doug Lawson: Yes, Dave, this is Doug. At this point, we’re not providing any guidance for 2024. We see the $1.3 billion model coming in for 2025. We continue to see good bookings and good quote activity. And so we’re optimistic on 2024, but we’re not ready to give any specific guidance.

David Duley: Thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from Craig Ellis of B. Riley Securities. Craig, your line is open.

Craig Ellis: Yes, thanks for taking the question. And congratulations on the third quarter. Jamie, welcome aboard. I look forward to working with you.

Jamie Coogan: Yes, thank you.