Q3 2019 Earnings Call
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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 Axcelis technologies. Please proceed ma'am.
Thank you Judy with me today is Kevin grower Executive Vice President and CFO , and Douglas and Executive Vice President of corporate marketing strategy.
If you've not seen a copy of our press release issued last night is available on our website.
Back 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 FCC Safe Harbor provision. Each 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 reports and other FCC filings, which we urge you to review.
Our actual results may differ materially from our current expectations, we did not assume any obligation to update these forward looking statements.
Axcelis has achieved five years of consecutive quarterly profits, we believe Q3 to be the low point of this cycle and expect gradual recovery.
Based on this we are also marking the first time, we have maintained through cycle profitability as a public company.
Our accomplishments provided strong indication of the many successful changes we've made to our business to drive revenue growth and improved profitability.
I would like to open this call by thanking our employees for all their hard work dedication and ingenuity that has made this possible.
Revenue in the third quarter of $69.5 million was in line with guidance.
Earnings per share of two cents was above the midpoint of guidance and well above consensus.
Gross margins of 44% were above guidance driven by significant mix of Purion product extensions.
Strong gross margins combined with continued tight spending controls allowed us to maintain profitability for the quarter.
During the third quarter memory accounted for just 14% of our shipments, but the majority of shipments 86% going to mature foundry logic customers, particularly those manufacturing powered devices and image sensors.
The geographic mix of our system shipments in the third quarter was Korea, 50%, China, 31% in Europe in the U.S., 19%. This breakout is reflective of the strong mature foundry logic mix in all of these regions, including Korea.
For the fourth quarter, we are forecasting revenues to increase by 33% to 44% ranging from $92 million to $100 million.
We're also forecasting gross margins of approximately 38% driven by systems mix that includes more based Purion H systems.
Operating profit to range between six and $9 million an S between 14 and 20 cents.
We expect revenues in Q4 to rebound due to increasing activity in China and continued investment by mature foundry logic customers, particularly those with an emphasis on image sensors and power devices.
Although we still expect the memory recovery to begin during the first half of 2020, we are seeing early signs of this pickup with approximately 40% of our Q4 revenue expected from the memory market evenly split between NAND and DRAM.
Quote activity during the third quarter remain strong and bookings increased significantly for systems, especially in the mature foundry logic segment.
At our Investor Day in September we introduced several new product extensions to the Purion family as well as in new $650 million target business model, which Kevin will discuss.
All of the new Purion products focused on our customers most challenging ion implant processes and were developed in close collaboration with customers.
The new products were built on the common purion platform using our concurrent product development methodology.
This approach enables new products to come to market with higher quality and lower initial cost.
New products, all target high value implant challenges for customers and as a result have higher A.S. piece in our base Purion products.
She was a new products are high energy Implanters high energy market has been increasing as a result of demand for multiple high energy implant steps in image sensor and power device applications.
This segment now accounts for 30% of the implant Tam.
First of these two new products is the Purion XE silicon carbide, which addresses emerging high energy implant requirements in the silicon carbide power device market.
Tool marries our Purion XE beam line to the common period and station and utilizes the silicon carbide option originally developed for Purion M Silicon carbide product.
Second high energy product targets. The most advanced image sensors, the Purion M. A C. Max incorporates our new proprietary technology to deliver energy in excess of 12, and maybe as well as the industry's lowest metal contamination.
The next two products address critical areas in the high current market high current represents approximately 50% to 55% of the overall ion implant market and is the product segment, we are targeting for significant growth.
The Purion H 200 addresses productivity issues customers face for high dose implants, requiring higher energies.
Silicon power devices as well as many mature foundry logic applications, well see significant productivity and cost of ownership benefits from this new tool.
The Purion H 200, as a direct descendants <unk> of the original Purion H no called the Purion H 60. It uses a modified purion spot beam architecture design to achieve higher energy level combined with the commentary on and station.
The last product is the Purion Dragon also built on the common Purion platform. The Purion Dragon uses a new beam line designed to deliver high levels of process control with significant productivity gains.
The Purion Dragon is targeted at advanced memory, an advanced logic customers and was developed jointly with a leading memory customer is currently under evaluation in this customers have and is expected to successfully closed in early 2020 .
These new Purion products are designed to create sustainable competitive differentiation to support our customers technology and manufacturing needs for critical implant steps.
The Purion Dragon and the Purion XE Silicon carbide are at customer sites in the first Purion H 200, and Purion XE Mac systems are expected to ship over the next six months.
Now I'd like to turn it over to Kevin to discuss our financials. Thank you Mary.
Our third quarter financial performance marked our twentyth and second quarter profitability.
Our view that Q4 at the beginning of a gradual industry recovery.
This represents the first time as a public company or a profitable through an industry cycle.
A goal when a downturn again was to remain profitable well, making the necessary investments in the business required to drive future growth.
We're disciplined spending a significant progress on gross margin improvement initiatives.
We will accomplish this.
Q3, gross margin of 44% was well above our guidance driven by a more favorable mix of systems and see us and I.
Yeah and product extensions shifts during the quarter.
Significant role and boosting our margins.
That's did a higher mix of upgrade cells.
Still projecting full year gross margin or do you want the 41%.
That's right. After this upturn I plan to continue to tightly controlled spending.
Makena required investments expected to drive revenue growth.
Right Investor Day on September 24th.
We updated our $550 million target business model by increasing gross margin to 42% to 43%.
We also added a new 650 million dollar model gross margin of 44% to 45%.
Operating profit of 20% to 21%.
Free cash flow greater than 17%.
During the event, we highlighted expected positive impact on gross margin on the newly released products and our plan what cash increased to approximately $200 million support the 650 million dollar amount.
Our balance sheet remains strong and in the quarter, we generated $20 million a cash from operations.
We have $21 million reader remaining under our share repurchase program did not purchased any shares during the quarter.
Now turning to third quarter financial results.
Q3 revenue finished $69.5 million at the midpoint of our guidance compared to 74.3 million in Q2.
Three assessed themselves or $36.8 million.
As a 37.2 million in Q2.
Three see astronaut revenues finished at $32.6 million.
Compared to 37.1 million in Q2.
Driven by lower used tool shipments.
Q3 sales dropped top 10 customers accounted for 81.5% of our total sales.
And the 76% in Q2.
The two customers at 10% or Bob compared to four customers in Q2.
Q3 system bookings for $80.2 million.
Got a 25.
So.
The Q3 book to Bill ratio 2.22 versus 0.7 in Q2.
Mary previously noted this is reflective of the early signs of recovery.
I flocking to three including deferred revenue finished at $93.4 million compared to 36 million in Q2.
Q3, combined SG nine R&D spending was $27 million for 41% of revenue compared to 29.7 million or 40% Q2.
She in any quarter was $15.8 million R&D at 12.9 million.
In Q4, we expect SGN, a and R&D spending the approximate 29.5 million.
You can see gross margin was 44% at a 42.7 beside Q2.
Three gross margin was driven by strong mix apparent product extensions.
Yes, and I upgrade sales and continued cost out activity.
Regarding Q4 gross margin of approximately 30%.
Phil less favorable mix.
As we mentioned before.
Gross margins are a function of several factors such as the mix of products and the portion that are accretive to see us and <unk> businesses I'm talking about no.
And products also carry different margin profiles as highlighted in our investor presentation.
Evaluation tools close one on a quarter and also pressure margins.
The results of these factors expect to see variability quarter to quarter.
But remains key is we continue to have solid execution on our gross margin improvement initiatives.
That's the introduction of the full parent product line that improves systems and our margin nearly 2100 basis points on a rolling four quarter average.
Well the full year 2019.
Gross margin to be approximately 41 to 41 half the size previously noted.
Operating profit in Q3 finished at $1.9 million, that's a tough and never guidance compared to 2 million issue too.
Regarding Q4 operating profit of $6 million to $9 million.
Q3, net income was quite $7 million.02 per share.
And above the midpoint of guidance compared to <unk> point Sixmillion also two cents per share in Q2.
Regarding Q4 earnings per share for 10 to 20 cents.
Q3 inventory ended at $134 million compared to 135.1 million in Q2.
I'm, sorry in the quarter increase to support a recovering new system shipments.
Andy evaluation tools.
Q3 inventory turns excluding evaluation tools.
At 1.2 compared to 1.4 in Q2.
Q3 accounts payable at $21.3 million compared to 21.8 million issue too.
Q3, receivables or $49 million compared to 62.3 million in Q2.
Q3 cash finished at $162.2 million.
Got a 143.2 million in Q2.
The next quarter, we generated $20 million a cash from operations.
In Q3, we continue to make progress on a gross margin improvement roadmap.
The introduction of for new products combined with continued work on across other initiatives.
Back to the fuel additional gross margin improvement.
We're continuing to invest in areas of the business that can drive top and bottom line growth as reflected in our 550 million dollar and $650 million target business most.
These models along with additional materials on gross margin improvement initiatives and new products can be found in our investor presentation on the company website.
Thank you and I'll turn the call back in America for closing comments.
Thank you Kevin.
Well this is uniquely positions with the capability DNA and unwavering focus to solve customers high value high impact ion implantation challenges.
Our new Purion products were developed to solve these difficult customer issues. We are excited to bring them to market at the perfect time beginning of a recovery.
Partnerships with customers and collaborations with peers continue to strengthen ensuring that axcelis can offer a continuous stream of purion products that will allow us to grow prosper in the chief market share leadership in ion implantation.
That I'd like to open it up for questions.
Gee.
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Your first question comes from Patrick Ho from Stifel. Your line is now open.
Thank you very much a and congrats on the nice quarter I'm married maybe first off in terms of the market in bars, you talked about memory.
Coming back gradually and it's going to be a higher percentage of your overall revenues in the December quarter. Do you believe this recovery is a broader base or is it concentrated.
Primarily at one customer.
No I think it definitely broader based we do see the beginnings of it as I mentioned given that 40%, we expect 40% of our revenues in Q4 to be from the memory sector and I think I mentioned that it's evenly split that said, we do believe that NAND will recover before.
He ran well, but we do expect said it will continue through 2020 and again it will be gradual versus very steep we had a large memory customer here at Axcelis earlier, this week and that person shared with us that they also believed that Nancy will recover first.
And said that he said that his company is going to be reviewing plans at the end of this year or two likely see spending began I'm at a more of a pick up in Q2 next year and again. He also suggested that there would be a grab a gradual recovery.
So we have data points from multiple customers at this point in time that you know give us confidence to say that it is starting but it's it's going to take some time to pick up some steam.
Great that's helpful and maybe as my follow up question for Kevin.
You don't you recently announced several new products in the extensions that you mentioned.
For the specific application.
Tools, how are you maintaining the cost structure for these new products, giving that typically you products tend to have higher costs lower margins.
Stuff like the higher warranty costs things of that nature are these designs set up where they'll end up with higher margins.
At the beginning of these you product cycle versus previous product.
Reduction how do you or how do these products reps potentially impact your recent trend of posting 40% plus gross margin.
Okay. So firstly I'd say Patrick is that all the new product extensions.
We've introduced.
As well as the new drag on product are based on the common platform are very so the good news there is that through using the commonality. We can take advantage of the cost productivity we've already.
No received from the existing products. The second thing is the design phase for use in a concurrent product development.
And we're getting more input across the business upfront with the CPD initiative. So a lot of supply chain work of the lean activity when manufacturing is being considered right up front, which also helps keep the cost structure down so that we're not chasing this I'm like we typically do and I think that's where you're probably alone.
Into that.
We've spent a lot of value engineering over two years, how do we get that you know into products right up front. So we're definitely anymore cost upfront.
The third thing really is the.
The pricing on the product extensions also as more favorable than on our pace products and one of the things that Mary mentioned in her.
Remarks was that in Q4, we're seeing a very high mix of our base parent h. products.
Those are not the the extensions that we've talked about at the Investor days based products.
And so I think those things are.
Going to help US release, these new products and not have the difficult margin drag that we would have Oh, you know received was.
First introduced peer and I guess, the best way to sale.
Great. Thank you very much.
Okay. Thank you thanks Patrick.
Thank you. Our next question is from Craig Ellis from B. Riley FBR. Your line is now fan.
Yeah. Thanks for taking the question and team congratulations on the real significant improvement in truck cycle profitability major accomplishment there Mary very helpful to get some of your visibility on what you see coming with memory as we move more into a recovery I'm wondering if you can focus on the mature foundry business.
And provide some similar color in terms of what you're saying in the order book is this backlog improved significantly quarter anymore.
Well, we're obviously still seeing additional gross in that segment since it is a significant contributor to the increase in revenues in Q4, and even beyond that we have a little bit of visibility into what's going to happen early in 2020, a lot of that is actually being driven.
Hi, three things first is China, there's some significant spending growth a in that region of the world and although it since our revenues typically are around 30% in the past. We've said those revenues mainly come from the global semiconductor players, but we are seeing a significant.
The increase in those revenues now coming from some of the domestic Chinese customers.
The other areas that are driving growth in mature process technology, our image sensors and also power devices does segments for us remain very strong as customers come on line with additional capacity.
That's very helpful. Then then a follow up for Kevin just on the prior question, but but taking a different direction. So tremendous gross margin in the third quarter, Kevin So congratulations on the progress there.
With regard to what we should expect with gross margin variability quarter to quarter or should we move into the rubbery like given that there maybe some quarters, where we have a real high quotient of Purion product extensions like Threeq you some quarters not should we expect there to be more Uh huh.
More meaningful swings in gross margin quarter to quarter like we're seeing from Threeq to Fourq you or is the magnitude of change that we're seeing more unusual in our our quarter to quarter gross margin moves more likely to be something smaller than what looks like 350 basis points quarter to quarter here in the back up here.
Yeah. So.
I guess the best way to say is that I would expect on a full year basis that we continue to make progress on our gross margins and so that's kind of than what we've been doing if you go back and look over the past few years.
So you know going forward there will be variability there will be quarters, whether as you know we could be lopsided would evaluate tools. We do have a number of vivo tools. Currently you know how to customers that we plan to ship more.
But I think Craig the way to think about is on a full year basis. The goal is to continue to.
March these gross margins higher we do in the 550 model have 42% to 43%, which I still think are realistic.
You know I know, we just demonstrator, we hit our success in modeled this quarter, but.
Q4 was a bit of a perfect storm and a good way.
We had a lot of product extensions.
And those really boosted boosted the revenue level, we had with some pretty good margins, but you know I think important thing again as I mentioned is that we're continuing into.
No really focus on gross margin improvement, we have a number of proven initiatives in place.
Also know where are these new products, Dan because weve I think we've done a really good job design and cost upfront. So again whatever's expect is kind of gradual improvement from year to year as we March to 550 mile.
That's helpful. Good luck team.
Thank you that's next Reg.
Thank you, ladies and gentlemen, if you wish to ask a question. Please press star followed by one well your Touchtone telephone.
Your next question comes from Christian Schwab from Craig Hallum. Your line is now fan.
Hey.
Call. It a solid guidance can you give us a wearisome expectations about what you expect for market share gains over the next couple of years or if there's anything in particular, we should be paid attention to in the memory sector, either on DRAM or NAND.
Well I think the best way to to put our expectations into perspective or to look at the two business models that we have out there. We have the 550 million dollar model I'm, which we said you know it's about two years out and then we've got the 650 million.
Business model dollar business model, which is four to five years out and you know roughly speaking the 550 model is pegged to about a 40% market share in the 650 model is take to a 45% marketshare again, using a relatively flat Tam of $1 billion, which we've we've talked about many times.
Before.
In terms of growth in memory, there are some additional areas at various customers that we.
I would like to penetrate and we're working very hard on doing that so and it's really a function of understanding where customers are going and then.
Understanding how we're going to penetrate with our purion product into those specific applications. We've talked about how we think it's a very realistic expectation to have a 50% or more at any one of those given memory customers and I think Christian the other thing to remember is.
The Purion Dragon.
It's one of the new products and it's really been targeted ads that advanced memory.
Market. So we would expect to see growth there both from high Res Hey, as piece on the tool as well as.
You know strong adoption of that for the the or the increasingly difficult implant challenges on those nodes.
Great no other questions. Thanks.
Thank you.
Thank you Sir your next question comes from David delay from Steelhead Securities. Your line is now fan.
Yeah. Thanks for taking my question I guess, a couple of things could you talk about the timing of revenue for this host of new products that you've introduced I think you talked about wouldn't shipments were if you could just elaborate a little bit more repeat whatever information you did give on that front.
And also you mentioned one of these products was between I guess, the one for high in memory was joint developed with the customer.
That come with sort of exclusivity with that particular customer or will you be able to sell that product everybody else.
Okay. So we talked about how we have to lose the products out in the field we've actually.
Revenue for the first Purion EXE he silicon carbide tool. The Purion Dragon is at that customer, you're referencing and I'll talk about that in a minute, where we did the joint.
Development program under evaluation, and we expect evaluation to successfully closed in early 2020, and then for the other two tools.
The Purion H, a 200 and the Purion XE Max we have customers lined up for for shipments within the next six months.
So those tools are going to start rolling out we've got more than one customer interested in all of those tools. So we expect to get revenue well. It's Kevin said there are some additional evaluations were going to put out which is very normal with.
The rollout and launch of new tool, but we also will get some revenue from some of those tools in in 2020.
In terms of the joint development program with that customer. It was it was extremely successful. It's a model that we definitely want to replicate as we move forward and bring more product line extensions for the period family to market.
There is no exclusivity with that customer obviously, they have a the first system and they will likely get the first repeat orders, but no. We're free to sell that tool to other customers and are actively marketing it around the world.
Okay.
As far as 2019, if you hit the midpoint of your guidance in Q4, where do you think your market share in plant will be.
Well, we're going to need to.
See how good how the year ends really project that that based on the you know the billion dollar market and.
And then the fact that memories been very low this year, we would expect lower share this year.
Given that much of this spend has been in advanced logic and then for US it's been very highly.
Put in the mature logic market so.
Again, you know what we what we've been trying to do is refocus on on the revenue growth because it's just it is very hard to estimate the Tam. So I do I'd like to kind of refocus you on the 550 model in the 650 model and you know based on what's going on in the market in which customers are buying and you know all the factors that.
That roll into that you know, we may have some ups and downs, but we're still very much on track with 550 in two years and 60 and four to five years.
Okay, just final ones for me.
Just repeat what you expect operating expense to be in the fourth quarter and.
Up down 29 as far as $20.
Go ahead.
29.5 million.
And that compares to what again.
28.7, I think it was.
Okay.
And then as far as the.
Mix in China going forward trying there was a big chunk of revenue in the current quarter I imagine, it's going to continue to be a robust levels.
Are you seeing China domestic Chinese memory spending and that total yet or would that be something that happens next year.
No. We are we are seeing that.
Currently and our expectation is that that will increase.
Okay. Thank you.
Okay. Thanks.
Thank you. Your next question comes from Quinn Bolton from Needham and company. Your line is now fan.
Hi, guys nice job on the results and outlook just one follow up on that last question about the indigenous China as you look into the December quarter with 40% of the business shifting back to memory is that largely driven by the indigenous Chinese memory guys are you seeing that broader based in a follow on question you as you as you talk.
To the memory customers, especially on the NAND side and you see demand for gradual recovery does that kind of driven first by pilot line activity, where you're seeing the orders now.
And then expectations that those pilot lines turned into full volume ramps at some point in 2020.
Okay. So the memory that we're seeing in Q4 at this point in time is not being driven mainly by China, it's being driven by other memory customers.
As I said before we are we believed that the memory increases going to be very much broad base and that's what is currently reflected in our mix and you know what we can see out you know a quarter or so.
And as far as he indigenous Chinese.
Companies there's.
Actually for grew hogs number of them.
They've called there's no one's popping up every day that so that's primarily mature with the exception of one large memory company over there and so and then we do see continued activity from the large Chinese foundry.
That's what we consider more of a global player.
Okay, Great and then just the that the demand from the global memory folks today's that more pilot line activity or do you think that this is the start of sort of capacity buys and then my last question you've talked about the Dragon being co developed in any event what that lead customer wondering if if there's any sort of.
<unk> points or feedback you might be able to share from that customer or you're going through that that you felt process. Thank you.
Yes, so as far as dragging goes.
That email process is going extremely well and the tool is performing no as we as we expect and we think it's going to be very good product sale customers very pleased with it to today.
As far as the memory market goes I think it's a mix Quinn.
You know typically implant is brought in early in a in a ramp and so in this particular case, it's actually a across several customers and so.
As we see lot of high energy goes in early and you know the initial high current needs you know to begin the ramp of the next node or the you know the next generation of memory and in this particular case, we've seen the business that we're expecting in Q4 split pretty evenly between DRAM and NAND. So.
No.
It's probably.
A combination of of ramping for some capacity, but also preparing to ramp for the next no. The next generation.
Thank you.
Okay.
Thank you.
Thank you Ma'am you have no questions at this time again to ask a question. Please press star one.
This concludes the Q and a portion of the call I'll now turn the call back over to Mary Puma, well make a few closing remarks.
Thank you DG.
We will be in New York City several times during the next few months first at the benchmark discovery one on one conference on December four next at the eighth annual New York City Summit on December 17th and finally at the Needham 22nd annual gross conference in mid January We hope you can join US in New York for one of these events and.
Also take some time to enjoy the holiday season in the city.
Also be hosting the Citi Research Boston Seventies bus tour at our headquarters in Beverly, Massachusetts on December 12, Thank you for your support.
This concludes the presentation. Thank you for your participation in today's conference you May now disconnect good day.