Q2 2019 Earnings Call
My name is Jamie and I'll be your coordinator for today.
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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 Jimmy with me today is Kevin Brewer Executive Vice President and CFO , and Doug Lawson Executive Vice President of corporate marketing strategy.
If you have not seen a copy of our press release issued last night. 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 FCC 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 S. T 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.
Revenue in the second quarter of $74.3 million was inline with our revised guidance earnings per share of two cents was higher than expected due to lower operating expenses, resulting from cost reduction actions and continued tight spending controls.
Gross margins of 42.7% above died and also contributed to our profitability.
During our last earnings call, we talked about the second and third quarters, forming the trough of this cycle for Axcelis.
So as expected we continue to bounce along the bottom of this memory driven downturn.
During the second quarter memory accounted for just 20% of our shipments with the majority of shipments to 80% going to mature foundry logic customers, particularly those manufacturing power devices and image sensors, we believe that our full year systems mix will also be heavily weighted toward the mature foundry logic segment.
The geographic mix of our systems shipments in the second quarter was more balanced than usual.
China, 35% Korea, 31%, the U.S., and you're up 23% and Taiwan, 11%.
This regional breakout which includes Korea is also reflective of the strong mature foundry logic mix.
For the third quarter, we are forecasting revenues between 65 and $75 million and gross margins of approximately 41%.
We expect the operating profit to range between a loss of $1.2 million to a profit of $2 million and EPS in the range of breakeven plus or minus five cents.
During the second quarter, we saw a significant increase in quote activity both for systems in the mature foundry logic segment and for C. S and <unk> upgrade.
Although this should have a positive impact on our business beginning in the fourth quarter, we do not anticipate a memory recovery until the first half of 2020.
As a result, we now estimate 2019 revenues could be down between 20% to 25% compared to 2018, implying an increase in revenue in the fourth quarter.
Well, we can't influence market conditions, we will continue to focus on what we can control.
Maintaining profitability and preparing for the next upturn.
Our goal throughout this extended downturn has been to continue our investment in new product development efforts, while aggressively managing our costs.
As a result, we are working closely with our customers to develop new segment focus products. Our development efforts are focused on purion product extensions for advanced image sensor products and on the power device market and silicon carbide as well as silicon.
Additionally, we will be investing in Purion H product extension, specifically targeting the productivity needs of the mature process technology market and the advanced technology requirements of leading edge logic customers.
These new Purion products are designed to create a sustainable competitive differentiation to support our customers technology and manufacturing needs for critical implant stuff.
Before evaluation systems in the field and additional email systems expected to ship during the second half of the year. We continue to plant seeds that will fuel growth when the market recovers.
Now I'd like to turn it over to Kevin to discuss our financials. Thank you Mary.
I'm very pleased with our second quarter gross margin performance.
Continued profitability during this extended downturn.
Gary and product extensions.
Margin improvement initiatives and mix are all feeling solid gross margin performance.
At this point, we now expect full year average gross margin the 40% to 41.5%.
Up from our prior guidance of 40% to 41%.
With regards to our operating expenses.
Continuing to tightly control spending.
We have implemented additional actions to lower costs, which includes voluntary executive pay cuts.
Further reductions and had no.
Well compensation.
Continued across the board felt tightly.
Well, we've reduced our expected expenditures did not too late key product development efforts critical to resuming strong growth as we exit this downturn.
We're also continuing to fund gross margin improvement initiatives required to achieve our long term business model.
We remain focused on managing through this extended downturn for profitability.
Oh sacrificing our future growth.
Currently we see Q2 and Q3 is a bottomless cycle.
The recovery in shipments beginning in Q4.
Our balance sheet is strong during the quarter, we repurchased $14 million or stock as part of a $35 million share repurchase program.
We plan to continue to be opportunistic with share repurchases.
I still have $21 million of spending authorized under the program.
Turning to the second quarter financial results.
Q2 revenues finished at $74.3 million.
In line with our revised guidance of approximately 75 million.
Third and 91.5 million in Q1.
Two two system sales were at $37.2 million compared to 57.1 million in Q1.
She to see us and I revenue finished at $37.1 million compared to 34.4 million in Q1.
We expect to see US my revenues to begin to recover in Q4.
Q2 sales to our top 10 customers accounted for approximately 79% of our total sales.
Or the 83% in Q1.
As for customers at 10% or above.
Compared to three customers in Q1.
Q2 system bookings were $25.1 million.
Turning to 46.8 million in Q1.
The Q2 book to Bill ratio 0.7.
Versus <unk> 0.83 in Q1.
Backlog in Q2, including deferred revenue.
Finished at $36 million.
The 53.1 million in Q1.
As Mary previously mentioned, we've seen a significant increase in quoting activity.
But should lead to a rebound starting in Q4.
Q2, combined SGN, <unk>, and R&D spending was $29.7 million or 40% of revenue.
Compared to 30.4 million or 33.2% in Q1.
Q2, total operating expenses finished point $7 million lower than our guidance.
Including an incremental expense of $6 million.
Count reductions.
It's gene I in the quarter was $16 million.
R&D up 13.7.
In Q3, we expect SGN a in R&D spending.
The flat with Q2.
Stay at that level for the remainder of the year.
Q2, gross margin was 42.7% compared to 41% in Q1.
Q2, gross margin was driven by pure and product extensions and cost out as well as mix.
Since the introduction of the folks here and product line that improves system standard margin nearly 1900 basis points on a rolling four quarter average.
Regarding Q3 gross margin of approximately 41%.
This includes the recognition of two lower margin evaluation tools.
For the full year 2019, we now expect gross margin to be approximately 41% to 41%.
Operating profit in Q2 finished at $2 million compared to 7.1 million in Q1.
June two net income was $1.6 million or two cents per share and above our revised guidance of an expected loss.
Compared to 6.1 million or 18 cents per share in Q1.
Regarding Q3 earnings per share of breakeven plus or minus five cents.
Due to inventory ended at $135.1 million.
Fair to 134.1 million.
Q1.
Driven by an increase in the email tool inventory.
Q2 inventory turns excluding evaluation tools finished at 1.4 compared to 1.8 in Q1.
Q2 accounts payable were $21.8 million compared to 29.6 million in Q1.
Q2 receivables were $62.3 million.
Compared to 70.9 million in Q1.
Q2 cash finished at $143.2 million compared to 170.
In Q1.
In the quarter, when it's faster than capital equipment business for pure and customer demos.
Sure and additional evaluation tool inventory.
For new Purion products.
We also purchased $14 million this talk.
Under our share repurchase program.
As this industry downturn continues we are maintaining tight cost control.
While we invest in initiatives critical to achieving our $550 million business model.
Our $550 million model, which reflects gross margin of 42% to 43%.
Operating profit of 17% to 18%.
Free cash flow greater than 15% can be found in our investor presentation on the company website.
I will now turn the call back in May for closing comments. Thank you Kevin.
This has been a long deep downturn for the industry to date Axcelis has maintained profitability without sacrificing critical product development investments and our goal is to extend our track record into Q3.
Our success is a result of the strength of the Purion products that are either process tool of record at or currently being evaluated by our large and diverse customer base.
I am confident that with our continued focus on customer need the technology development to support those needs and the dedication of our employees Axcelis will continue to grow and achieve market share leadership in ion implantation with that I'd like to open it up for questions.
Ladies and gentlemen, if you wish to ask a question. Please press star followed by one on your Touchtone telephone.
If your question has been answered or you wish to withdraw your question press the pound key.
Please press star one to begin.
Our first question comes from Christian Schwab with Craig Hallum. Your line is now open.
Hey, great. Thanks for taking my question.
The men recovery that's expected in the first half of about 18, we would I mean first half a twinning what would you expect that to be a gradual recovery or a ladder step recovery at some point during the year and would you expect that to be driven by increased spending that DRAM or NAND or both what is your current thoughts on that.
So it's not exactly clear to us how it what the trajectory of the recovery will be I mean, as you know in most recoveries it sort of upon us by the time, we realize we're in a in a recovery, but we do expect it will be in the first half of the year and we expect that NAND will recover before DRAM does.
Okay, Great and then.
The assumption for 550 million can you walk us through either what type of recovery and in memory, you know capital spending we would need from current levels or does it have to get back to that type of intensity. We saw it in 17 for that to happen or is that a combination of of steady healthy spending in memory and foundry logic as well as some potential gains overtime in Japan can you just walk us through the pass it that you guys have in your mind to get to 550.
Sure. So our you know our assumptions and expectations about 550 haven't really changed despite the fact that perhaps the timing has been pushed out a little bit now because of the downturn. We still expect that we can achieve the 550 model out over the next two to three years and it's really based on the latter the second a scenario that you laid out we expect a healthy memory spending to contribute you know to our shared that we get our fair share that we get in memory and the mature process technology will remain relatively stable and strong and then I think the third point you made which is right on is the gaining market share in several of the areas, where we're working right now to make some new penetrations in the area of advanced foundry logic and also in Japan. So yes, all of those things will contribute to the 550 model.
Again, the next couple of years several years.
Great. Thank you no other questions.
Thanks Christian.
Thank you and our next question comes from Craig Ellis with B. Riley FBR. Your line is now open.
Hey, guys. This is actually Peter Pan calling in for Craig Ellis and thanks for taking our question.
Just on the.
Q3 outlook that the $70 million seems like it's about a one person to step down just wondering you know directionally is this coming from a memory or is this more mature foundry.
The I mean, we talked about how 80% of our shipments war to mature foundry logic, and only 20% to memory and I can also tell you that we talked about a pretty seeing a pretty large uptick in bookings.
In the second quarter, particularly at the end of the quarter and I can tell you that our bookings for the quarter were over 80% mature process technology, and obviously under 20% for memory. So it really is the mature foundry logic at this point in time that is continuing to carry us we've talked about how the fact that we have a large diverse customer base.
So that's really where we're seeing the improvement, which again leads us to say that we don't believe that the memory recovery will happen until sometime in the first half of next year.
Great and then just on the in place it for Q It seems like the implicit.
Based on this COVID-19 view is somewhere around $107 million and if it's mostly foundry and logic.
Then then that's a pretty.
Big number potentially doubling from from Threeq levels I'm wondering how diverse is that.
Customer base, there on that ramp.
Well, it's pretty it's pretty diverse I mean, we talked about how we actually had more of a balanced this quarter and we talked about how that mature foundry logic go heavier weighting would continue on through the remainder of the year and likely as average out that way for the year again, if I take a look at our bookings I'm I would say that our bookings are pretty reflective of a similar type of geography split and I already mentioned the split on the mature process technology versus memory. So, it's it's pretty well wait it occur around the world, but I would also say that China. At this point in time is coming on are quite strong. While you know we have and continue to see delays in some projects that are a function of a them getting their funding and some construction delays in general we see that's a activity in China picking up pretty strongly as part of that.
You know increased quoting activity that we've been seeing Peter I'd point out that if you look at our percent of revenue coming from the top tempers, our top 10 customers.
Number went down this quarter was suggests we have more people participating so it's spreading out even beyond the top and and also within customers that had 10% or more we increase from three to four so again, that's all at all demonstrates that the footprint spreading out a little bit.
And one more question if I may just on the gross margin great job on the gross margin. It seems like 75 basis points improvement from from prior review can you I just I guess I'm just talk about providing color on where that upside is coming from is it just one or two things are.
I wanted to just to get more definition on the fee gross margin upside yes.
So I mean, the product extensions are adding up the margin improvement and those are the silicon carbide tools and some of the other high energy products, we have out there.
We have continued to do very well even in an environment of low volume with cost out through value engineering. So.
Although we're not necessarily getting a lot of extra out of the supply chain at this point because the volumes are down.
We're continuing to run through value engineering to make cost improvements that were.
Putting into the tools.
And then the third component is the mix is always a mix of systems versus just an idea is always a mix of but then the systems of the products, which carry on product going out but.
What I can say is that.
You know cost, though continues to be part of our margin improvement roadmap as we move forward from here going.
42% to 43%.
And also those levels you know it looks a little bit a little bit more of a play out of volume on the revenues increase.
Okay, and then maybe a follow up just in light of this could be 42% to 43% in your 550 model being more of a more I guess, a base case now or more even more conservative just given.
The improvement.
Well I mean, we're certainly ahead of where we thought it would be this year a little bit right now based on the revised guidance.
Again, because the mix is such a big piece of that.
Depending on you know what your parents were selling more than 515 model.
That can impact that but for now we're saying 42 to 43 I'm not I'm not going to tell you that when we.
You know I'll take the model the next revision that.
Know things can potentially change I don't expect them to change going down. So if anything we could finally, maybe find a little bit more in there but for now you know we're going to we're staying on as Fortys before its rate until we do a prescribed.
Great. Thank you guys.
Thank you and our next question comes from David do away with steelhead.
It is now open.
Thank you for taking my question.
In the memory market, although we're not seeing it expansion of capacity I think both in NAND and DRAM their marching down the shrink curve or going up the blender curved depending upon which market you're in.
How could those changes in.
Layer counts or in process technology in DRAM impact the demand for Implementers.
Hey, Dave This is Doug.
So on NAND when they add layers, we we don't necessarily see additional implants.
So that's NAND is a little bit more wafer count wafer start basis.
DRAM when they do shrinks they do tend to.
Finesse, the implant, which create some new implant opportunity.
But in addition, we're spending a lot of time with especially the Purion H.
And the high current family with the memory manufacturers, adding new recipes.
Two.
The new technologies as they come onboard so on associated with the layer counts or the shrink we are expecting to gain some share.
I'm over this next to.
Next move to technology, just based on additional recipes.
Okay.
And could you give us an update just about.
Your progress that you might have made or where where we're at with the high end foundry logic business.
Yes, so we successfully completed the evaluation and we demonstrated a significant throughput advantages over our competitors going into the evaluation and then actually exceeded the these performance levels throughout the evaluation.
So as a result, we were qualified.
For a heated implant steps at several advanced nodes.
Unfortunately, the productivity improvements, we provided significantly reduce the number of new tools at the customer required and it was down to a quite a small number I think it was two tools.
So given that the customer only needed a very small number of tools they decided to stay with the current supplier in the near term I'm given some of the risk benefit trade offs associated with making a supplier change at this point. So we are P. TLR you know for those nodes, but at this point in time were not seeing any volume from it.
Okay and the final question is I guess, you mentioned, what your revenue could be down for the year and that certainly implies a nice pop in the fourth quarter.
Could you give us or just give us your views on what you think the overall in pump market will do what would be down as the 20% to 25% that you're projecting or will it be down more or less or what roughly do you expect.
Well Davis.
As you know.
You sort of normalize the implant market is at a billion plus or minus 10% overall looking over the last 10 years or so and so our expectations. This year is it will be on the lower side of that.
It's pretty difficult to exactly size it given the amount of reuse and so forth what goes on in the <unk> and in this particular part of the market. So so we would say would be on the lower side of our normalized estimate.
Thanks, that's it for me.
Thank you as a reminder, ladies and gentlemen, if you'd like to queue up to ask a question. Please press Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. You may do so by press the pound key.
Our next question comes from Patrick Ho with Stifel. Your line is now open.
Thank you very much I'm married maybe if you could give a little bit of color. In this current churn typically chip makers actually do a lot more valuation work off versus buying capacity or you know given the current market conditions are you seeing that type of activity increase, particularly on the memory part where obviously, it's been but there are moves to the next generation technologies in both DRAM and NAND.
So the answer to that is yes, and I think Kevin even referenced the fact that we're making a large investment in evaluation inventory. We currently have four valuations out in the field and three of those are actually memory related evaluations, one mature process technology and moving forward.
We will have high.
What I think for US is a significant number of new evolves coming into play in the second half of 2019 and moving into 2020 and I think what the you know I'm going to assume you're going to come to our Investor day in September and some of this new activity is related to some of the new product announcements that we're going to make and you'll hear more about at that event.
Factored this add on in terms of the inventory piece we.
We've had a significant uptick in email inventory not just of tools that are in the field, but also tools that are currently in process. So there is quite a bit of activity right now.
Both in terms of whats field, and then anticipated additional tools gone out.
Great that's really helpful and Kevin maybe as my follow up question in terms of B.
The incremental are to gross margins on a going forward basis.
Got 42% to 43% a you mentioned is that primarily back in each or is that incremental increase coming from the cost out programs or are there other variables.
I don't bump it up from your previous 40 to 41 to 42 to 43.
Yeah. So I should have mentioned it when Peter asked the question too I mean, the product extensions.
Obviously, a piece of it.
As well as the cost out so the incremental to get that up 42 to 43.
This continued improvement on our margin improvement initiatives, we have detailed roadmaps in place.
And then this is product extensions of him in talking about.
And at our analyst day that we're having in September .
Well be sharing more detail with how.
You know product extensions as well as the cost out will move our gross margin. So that next level and you know I mean, obviously our goal is not to stop of 42 to 43.
We're shooting for a much higher but.
It's a journey to get there and we're making pretty good progress so far.
Great. Thank you very much.
Okay. Thanks, Patrick.
Thank you and our next question comes from Gus Richard with Northland.
Lets now open.
Yes, thanks for taking my question.
Can you talk you mentioned that your quote activity has stepped up quite a bit can you just give a little more color on.
Which part of the mature market or is it also memory.
Yes, So I think I've mentioned you know prior to this that there probably to the two major points on the quote activity is that it is significantly heavily weighted towards mature process technology, which is not surprising given where we are in the cycle and also heavily weighted towards China.
Which.
I explained before obviously, there's a lot going on there and it's China and its China mature process technology again, just to clarify that.
Yes.
Within that market.
There is a lot of activity on power devices.
And continued activity I image sensors. So so those two segments continued to really provide the strike force.
Okay. Thanks, that's helpful. And then looking into the first half you expect a memory does start to recover and I think you said man was going to be that first of all what you. What evidence off are you seeing that that recovery is going to occur or is it just the downturn. It's been so long and so steep that just got to get better.
Okay going to know I mean.
Obviously, we're triangulating on you know data points that are out there, but we're also staying pretty close to our customers and our you know our best take at this point in time based on discussions with them is that it will be sometime.
The first half of 2020 again, I can't put a lot more clarity around that.
At this point.
Okay. So it's a combination of conversations the smaller customers as well as its been pretty rough in the memory market at this point, it's certainly unlikely to go lower.
Mhm.
Yes, Okay, all right. Thanks, so much.
Thanks Scott.
Thank you.
And this concludes the <unk> Q and a portion of the call.
I will now turn the call back over to Mary Puma, who will make a few closing remarks.
Thank you Jimmy we will be attending the D.A. Davidson fast connections 18th annual Tech Conference on September 4th in New York City, and we also hope to see you at our Investor Day on September 24th also in New York City, where we will be introducing the next wave of Purion products. Thank you for your support.
This concludes the presentation. Thank you for your participation in today's conference you May now disconnect good day.