Q3 2022 Axcelis Technologies Inc Earnings Call

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Okay.

Good day, ladies and gentlemen, and welcome to the <unk> technologies call to discuss the company's results for the third quarter of 2022. My name is Allie bladder and I will be your coordinator for today at.

At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of the 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 Mary Puma, President and CEO of <unk> technologies. Please proceed ma'am. Thank you Alley with me today is Kevin Brewer Executive Vice President and CFO , and Doug Lawson Executive Vice President of corporate marketing and strategy. We are all.

Participating in this call remotely so I would like to apologize in advance for any technical difficulties if.

If you've not seen a copy of our press release issued yesterday. It is available on our website.

Playback service will also be available on our website as described in our press release.

Please note that comments made today about our expectations for future revenues profits and other results are forward looking statements under the SEC's Safe Harbor provision.

These forward looking statements are based on management's current expectations and are subject to the risks inherent in our business.

These risks are described in detail in our Form 10-K annual report and other SEC filings, which we urge you to review our actual results may differ materially from our current expectations, we do not assume any obligation to update these forward looking statements.

Good morning, and thank you for joining us for our third quarter earnings call. As a result of robust demand for the Purion product family and continued strong execution by the <unk> team. We are pleased that our third quarter financial performance was above our guidance.

Revenue for the quarter was $229 $2 million with earnings per share of $1 21.

Gross margin of 45, 1%.

Cash cash equivalents and short term investments were $342 $1 million.

Revenue from our aftermarket business see F&I was $58 $1 million and contributed significantly to our high gross margin. The mature process technology market continues to be an area of strength for <unk> with 88% of third quarter system shipments going to mature foundry logic customer.

And 12% to memory customers comprised of 5% and 7% DRAM.

The geographic mix of our system shipments in the third quarter was China, 44% Korea, 18% the U S, 15%, Europe , 10%, Taiwan, 5% and the rest of the world 8%.

For the fourth quarter, we expect revenue of $232 million to $240 million gross margin of 40% to 41% operating profit of $41 million to $45 million and earnings per share of $1 to $1 10 for the full year 2020.

<unk> revenues are expected to exceed $885 million with a gross margin of greater than 43% or.

Our guidance reflects the impact of three geopolitical and global economic issues first continued supply chain cost that are negatively affecting our gross margins.

Our assessment of recently imposed U S government restrictions on certain customers in China, which we believe will have minimal effect on our financials and third the adverse consequences of foreign exchange rates, resulting from a strong U S dollar.

The industry expects total wafer fab equipment to decline significantly in 2023. This is a result of a reduction in memory spending slowing consumer electronics demand deteriorating economic conditions and newly imposed restrictions on certain customers in China.

The ion implant Tam, which has doubled over the last few years to approximately $2.25 billion is not expected to suffer the same decline primarily driven by growth in the implant intensive power device market.

As a result, <unk> expects to continue to experience strong sales of Purion products into these market segments and achieved a fourth consecutive year of revenue growth in 2023.

Strong system bookings a record backlog of over $1 billion and a healthy book to Bill of 189 in the third quarter support this projected growth.

Now I'd like to turn it over to Kevin to discuss our financials and provide an operational update Kevin.

Thank you Mary and good morning.

<unk> delivered strong third quarter financial results, beating company guidance and consensus estimates across the board.

Solid execution and continuing demand for our products.

These positive results.

In fact, we are guiding continuing strength in Q4, and now expect 2022 to be greater than $885 million in revenue.

We are forecasting additional growth in 2023 based on strong customer demand and our current backlog.

In addition.

To focus in on the growth opportunities ahead of us.

We are continuing to manage through headwinds impacting the entire industry.

Supply chain disruption continued to provide significant challenges in Q3.

Throughout the quarter, our sourcing and engineering teams work closely with suppliers.

And implement both strategic and tactical measures to address these issues.

Compared to $165.4 million in Q2.

Two three C. As in our revenue finished at $58.1 million compared to $55.8 million in Q2.

And I posted very strong margins in the quarter due to myths and lower costs.

We expect you for psittacinite revenue to be around $56 million.

Two three sales are top 10 customers the counter for 62.8% of our total sales.

<unk> is 66.3% in Q2.

One customer that 10% or above in Q3.

<unk> two customers and Q2.

Two three system, Boston for $337.1 million compared to $432.8 million in Q2.

But the Q3 <unk> ratio of 1.89 versus 2.56 and Q2.

Backlog in Q3, including deferred revenue finished a record $1.1 billion compared to 869.5 million. Thank you too.

Multiple customers are planning, new Fazon expansions for 2023 and 2024.

Just driving Perkins out beyond one year.

Two three combined SG&A and R&D spending was $51 million or 21.9% of revenue.

Compared to $45 million or 24% of revenue and Q2.

S J and a and a quarter was $29.6 million with R&D at 26.

And two four we expect SG&A and R&D spending to be approximately 22% of revenue.

Two three gross margin was 45.1% and well above our guidance.

Brian gross margin performance and a quarter was driven by a more favorable mixer systems.

Very creative see us on high margins.

The impact of foreign exchange and continuing cost out activities.

As expected we are guiding queue for gross margin lower 40% to 41% due to a less favorable mixer systems and the timing of unfavorable supply chain costs.

Full year gross margin is not expected to exceed 43%.

Which is up from our prior guidance of 42.5%.

Resulting from very strong gross margin performance.

For three quarters of the year.

Operating profit in Q3 finished at $53.2 million compared to $54.1 million in Q2.

Regarding queue for operating profit of $40 million to $45 million $41 million to $45 million.

History, net income was $40.3 million or $1.21 per share.

Compared to $44.2 million or $1.32 per share in Q2.

We are guide in queue for earnings per share of one dollar to $1.10.

Before guidance reflects the impact of higher supply chain costs occur.

Our current assessment of new restrictions uncertain, China customers and.

And the impact of foreign exchange rates.

Two three receivables for $173.9 million compared to $146 $1 million in Q2.

Driven by the timing of shipments.

Two three inventory ended at $226.5 million.

Prior to $213.1 million and Q2.

Two three inventory turns excluding evaluation tools finished at 2.5 compared to 2.6 and Q2.

Two three accounts payable over $54 million.

$49.4 million and give it to.

Two three cash cash equivalents, you short term investments finished at $342.1 million.

Compared to $286 $287.2 million in Q2.

And a quarter, we generated $64 million of cash from operations.

And subtle share repurchases of $12.5 million.

We have returned over $120 million of cash to our shareholders since the beginning our stock repurchase program.

<unk> continues to execute at a very high level, despite a challenging environment.

Once again I want to thank the entire team for the continuing outstanding performance.

I also want to thank our supply chain partners for their hard work.

<unk> and our customers.

Thank you and I'll now turn the call back and ready for our closing comments.

Thank you.

Excel us as well positioned crowd during the anticipated 2023 industry slowdown.

<unk> long term trends continue to drive.

First Purion powers series products continue to gain strength driven by electrification of the automotive industry.

<unk> maintains a technology advantage and leading share in this market.

<unk> 19 this leadership.

Do not see this morning, it's swelling instead.

Second the growth of I O T benefits the implant intense as mature process technology segment.

And 80% of our system revenue comes from.

Mature statement, which includes image sensor.

Devices and other mature devices.

Everyone in the industry Chan.

Challenges and many are planning for a slowdown in 2023 at.

<unk>.

<unk> and believe we are extremely well positioned for the future with that I'd lost.

For questions.

My nieces one moment.

If you wish to answer your question.

<unk> followed by one on your touch.

<unk> 10 telephone please.

Please.

One one to begin.

Alright first question.

Uhm quake.

The thyroid your line is now okay.

Hi, It's Craig all upset wasn't sure if that was to me the operator kind of broke up.

I'll just plow ahead.

Our team congratulations on the very strong execution in the quarter.

The outlook I was hoping to follow up on the points that you had mentioned in your prepared remarks, Mary and see if.

You are Kevin could quantify the three items identified one the degree to which supply chain costs are impacting gross margin. So I think in the past it's been around 175 basis points. One to can you quantify what the B I S. China.

And allowances in the quarter and and then just any color quantitatively on the four extra shoe to start thank you.

Yeah, Craig let me grab the first two so on the.

The headwinds from supply chain, what we've been.

Saying this year is that there is about 250 basis points of headwind from both our suppliers and from logistics.

If you combine enthuse about 250 basis points.

So that's.

Yeah. So that's still about the impact we're seeing and one of the things I have mentioned is that I would expect in 2023 that we could get back at least half of that uhm through better pricing on material does a lot of things we're doing with value engineering still we are.

Starting to see some improvement afraid so that is that is a bright bright spot.

So again, it's about 250 50 basis points in total and you know anticipating getting about half of that back you know starting next year.

So the other the other piece of things is impacting the.

The earnings we did mentioned F X a couple of times.

And a quarter if I look at all the puts and takes across the P&L, there's about 15 cents.

Negative E P S on the tech side of things.

And then the final question I Miss that because either you were breaking up or I was breaking up I think your head three or four points you might correct.

Yeah. The the final one was <unk> Kevin Okay. Yeah. So you know right now we think there's a minimal impact in N Q3, I can tell you there wasn't any impact to us.

So you know we've gone through our due diligence looking at the new restrictions looking at who our customers are and you know we we at this point, we believe it to be minimal impact.

Right and then the follow up question before I get back in the queue.

Very very helpful to get the indications on calendar 323, being a year growth for the company than stellar up performance industry by the way on that the question is can you provide any color on how the the linearity of the year might play out not looking for a specific guidance in any particular.

<unk> no that wouldn't be appropriate at this early juncture boats any broader color on the Ark kept things would be helpful. If you could.

Yeah, we don't we don't really have any details on that at this point in time, Craig I guess, the one thing I will put out there is that we're very focused on achieving a 1 billion dollar model.

And right now, we're saying that's a couple of years out. So again, that's something that hanging out there and it really will be a function of.

Market conditions, but at this point is there isn't anything we will give you more as we get into 2023.

God I can with calendar twenty-two being within 11.5% of that it seems like you're well on your way you'll hop back in the queue. Thanks for the help on those two right and just kept anymore.

Thank you. Thank you.

Thank you one moment, while while.

For the next question.

Alright, Thank you question Uhm.

Uhm Christian slot at Craig Hallum.

Your line is now open.

Hey, Thanks for taking my questions can you remind us or you can look at silicon carbide, how many customers that that your shipping to know production and what that may look like in a year or two as far as a potential customers.

Mmm Christian.

We haven't given.

Given the specifics in terms of the the number of silicon carbide cope with our customers. It continues to grow as more companies get into silicon carbide, but <unk> is definitely the leader in terms of silicon carbide Fry, an implant driven primarily by technical advantages.

Period in line and the ability to have the full product sandwich medium current high curtain and high energy family.

So that combined with US having started work on this over six years ago has given us a good advantage. So so we expect the number of customers to continue to grow through 2023 is his folks could into it and symbols, we'll see where it goes from there.

And any Doug any more confidence or increased confidence I know you guys. You know laid out some way for certain expectations of a Sega W of them. Every few years do you have greater confidence in that or or you know it could it could even be girls radio <unk>.

Faster than that now.

Well, we have we have confidence in that when we when we put that up there we're gonna probably provide some additional insight at the beginning of the year, we're going through our strategic plan right now and we'll get we'll get more and more insight in terms of what we see 2023 looking like for <unk>.

Can carbide, but we do see 2023 is growth year for silicon carbide as I think is generally accepted by the industry at this point as well.

And then just have the exposure to China I know, there's you know sometimes a lot of investor confusion about that given that.

There's fabs not by you know Chinese nationalistic people, who have restrictions are buying equipment and other people who have licences can you just walk through exactly you know who you're selling to if you could give us some additional color in your Chinese exposure.

So I I can't give you a lot of names Craig, but I'm, sorry, I can't give you a lot of names, but at this point you know we are we are obviously selling too we've talked about this SMIC and we aren't we just continue to get export license is uhm where appropriate for those.

In terms of the other customers that were recently put on the list I think everybody knows that the foreign multinational customers who are added actually now have approval.

The <unk> the U S government they have to send that equipment supplies can shift to them at least over the next year. So that just leave some domestic customers that are really focused at this point it for logic it would be less than 14 nanometer and then there was some advanced parameters.

Parameters put out there for both DRAM.

And for me and and those tended to focus mainly again on domestic customers and those are the customers that have been impacted and where we had to take immediate action to stop shipments apart systems provide technical support service and we did that but at this point.

Time.

Kevin said, we really haven't seen a minimal impact if you look at the mix of our customers.

In China many of the domestic customers that we are working with our customers to focus more on the the general mature process technology or the mature process technology area and we have many many power.

Customers and so those customers have not or were not impacted by the ruling that came out on October 7th and that's why if you take a look at the mix of our customers in China. The impact was in fact minimal we've done what we've needed to do but you know.

We feel very good about what's going on right now and that at this point, we we don't see any future issues.

Great. Thanks for that clarity no other questions. Thank you. Thank you.

One moment please.

Our next question comes from Han Chung at T. N. Davidson Your line is now okay.

Thank you. This is Linda on behalf of <unk>. Thank you for letting us all my questions. So.

So I guess my first question what was your protector of the audit book, specifically with mature segment, how much is in power persistent Med center and check on my chair.

So glinda, we we really at this point in time only in terms of shipments are only splitting Nana they'll make sure process technology segment, and the memory segment and for the quarter. It was 88% mature process technology and 12 per cent memory, we get we get to spell it out memory into.

7%, DRAM and five per cent nyan, but we don't break out to make sure process technology any fine. It's it's possible that when we get to the end of the year when we get to our college February we'll put out more color around that but for right. Now you know, we're not providing that information.

Linda This is Doug.

One of the reasons, we don't do that on a quarterly basis is is when you break it down to find it moves around quite a bit based on <unk>.

Customer projects and so forth. So we tend to provide that break down once a year based on the the whole year.

I think that's helpful. Thank you uhm and.

With the expectation of the <unk> what is the chance that you were seeing him different applications that is in memory <unk> <unk> and <unk>, Let me call it would be helpful.

Okay. So in terms of what we're seeing uhm right now we're seeing the demand is strong in a mature market, but we do see a slowdown in memory, but you know as you know memory currently accounts for only about 15% to 20% of our systems shipments. So this slow down.

Not having a <unk> a measure Olympics measurable impact on our business.

The mature process technology markets on the other hand remain robust and uhm Linda.

Dash is mature process technology to account for more than 80% of our system shipments in 2025th.

If you take a look and break down the segments Uhm within these market image sensor and the general mature foundry business remains strong. Although there is some swelling in terms of consumer related heart market, but for us. The real story Uhm is empowered devices demand there is extremely strong and <unk>.

<unk> due to the longterm commitment to the electrification of the automotive market and as you know we have leadership in this market with our Purion power theories and naturally created you know a sustainable growth opportunity for Dallas.

On top of that is Kevin mention you know customers.

Customers are actually ordering initial tooth now cause of projects for <unk> into 2023 and 2024.

So all of these factors are really what driving our expectation that we're gonna see revenue growth in into 2023, it's really just more of the same in terms of what we've been seeing in 2022, we're gonna use that as a foundation and then and then build upon that.

Okay. Thank you.

For a moment.

Our next question comes from David D. Leigh at Steelhead Security Your line is open.

Congratulations are nice results.

Nice outlook.

Thanks for taking my question.

Kevin.

Just out of curiosity.

Notice that obviously the cash flow was a very strong number this quarter typically when you have increases in receivables and inventory is you don't generate a ton of cash, but I noticed there was a huge increase in deferred revenue could you just talk about why that was yeah. So David that's that's really centered around.

The number of prepayments we've had this quarter.

<unk> one of the things we have mentioned over the various quarters is that we're receiving pre.

Prepayments from some certain customers and in this quarter, we had a pretty big increase in prepayments for two O. So that's basically what's driving it and as you pointed out the offset is deferred revenue.

Uhm so.

There's really not much more beyond that except for you know the rest of it is you know as we had we had a pretty good quarter in terms of.

Net income what's relevant to the gas.

Yeah.

Basically net income equaled cash, even though receivables inventories went up big and so.

Increasing deferred revenue.

As you point out Alright did go up this quarters of normal in our I R goes up you're gonna be talking about caches down, but like I said, we've got a pretty significant increase of <unk>.

And as far as the prepayments go could you is this do they put down a deposit or is it a full payment.

Maybe just talk about some of the terms there are the prepayments yeah, I mean typically it's enough.

Payment to cover our material costs in some cases, it may be a little bit more or a little bit more than you know other case, a little less but in general we're looking to cover on material costs on these prepays.

Cause we're gonna go out.

You know as you know as we've talked about we've got we've got order's going way out into 2024, and we wanted to make sure that.

On somebody's orders if we.

No.

There's any risk we wanted to make sure that we're not exposed for material.

Okay. Now just just another question on the gross margin you know when I look back like over like almost the last 10 quarter or your product gross margins have been remarkably consistent between like 44 and 46%.

And you're either realize your guide and gross margins down sequentially could you just talk about the magnitude of the two or three things that you listed.

The magnitude between Q3 and Q4.

Then there's a follow up.

I think a big chunk of this might've been currency or what could we expect in Q1 gross margins.

With currencies are essentially flat whether on now.

Yeah. So.

That's a good point I mean, we are guiding margins down quite a bit in queue for three or four.

Probably wondering why I say is expected I say is expected because we were given a full your number.

For the last couple of calls and I think on the last call.

And I said, we can expect to see 42.5% failure I Gotta ask that question, while that employees are gonna go below 40% in the fourth quarter and I think my answer was adult with anything less no foreign in front of it. So so we knew this was coming and it really is mix <unk>.

You as you know an investor presentation.

We've got a chart that shows the mix of our products and the standard margins on and there's no.

No mystery or a surprise a high current is much lower than high energy and even a little bit lower medium current so you know.

I don't have to I don't have the next words here, we have a big shift the high current in the fourth quarter, we knew it was coming.

The other piece of that.

Which was a little bit of anomaly. It was basically the way we have our supply chain costs coming back.

This quarter was a little bit heavier than prior quarters.

So I don't expect that Ah repeat so that's also putting additional pressure on again, that's not a surprise I knew that was coming out as well I think the positive news is David I think back in the beginning of the year, we so respected for your great great or 42%.

And then we have ratcheted up to 42.5% and today I, what I'm, saying, it's gonna be brave and 43% so.

Despite all the stuff that's going on out there with with Ah headwinds, we're still doing a really good job.

Keeping these margins propped up in you know next year and a full year basis. You know, we expect to continue to improve on where where this year you know I'm I'm hopeful that we're gonna get back at least half of that supply chain cause you know it's gonna take in some cases, it's gonna take new suppliers and stuff.

There.

Because you know I think early on a lot of supply chain costs are more because.

Disruption.

You know some of the some of the increases are going to be hard to get rid of it because now everybody's got higher labor costs and lots of other things that the pressure and so you.

You know we're just we're just doing what we do all the time, we're looking at value engineering or looking at low cost sourcing.

And you know getting additional product extensions out there a boost margins and this is gonna be kind of a rinse and repeat of what we're doing into next year I would expect next year to be better than this year.

Don't Wanna talk about Q1, because I honestly.

The answer is I don't know exactly what you want looks like and you know so.

I think you know.

When we do our.

Or call in February .

Set the stage for next year.

We can talk about a little bit more does that point. Okay. Thanks that was actually really good color I. Appreciate it just just one final one from being that'll pass it on to somebody else.

Haven't I guess, an idea of what the size of the taboos for the non leading edge foundry logic business.

The reason I ask is you know if I just take a percentage of revenue you've been giving us over the last two years and apply it to total revenue and I realize that's not the exact amount that you would do cause we're including see us an eye on that but you know if I just look at the 80 per cent of total revenue essentially going into non elite founding logic, it's a big number now.

Greater than like $700 million and 2022, and that's you know more than double in the last two years. So I'm just kind of wondering what you think besides the Pam is and you know obviously, if you could give us a shot at what your market share as it appears it's probably about 50 per cent, but I don't want to put words in your mouth [laughter].

[laughter] okay.

So the mature mature market accounts for greater than 60% of the implant him. So it's you know go over 60% of that two and a quarter billion dollars <unk>.

And.

And in terms of of market share you know, we don't break it down you can.

We take that two and a half two and a quarter billion and look at our systems revenue in and get a relative idea.

As an average <unk>.

That we have.

Much higher than than average share in mature markets and especially in the power market and so in high growth areas. Excel is has leading share and overall you know we can we continue to grow the total sure.

I felt that I guess that would apply you probably do have greater than 50 per cent sure of this power market.

Yeah, we haven't given a specific number so that's all.

Okay, let's draw your conclusion on that.

Thank you very much.

Thank you just as a reminder, if you would like to ask a question. Please press star one one on your telephone.

And our next question comes from Craig Ellis.

Alright your.

Your line is now okay.

Hi, Craig Ellis I don't know if that question was directed to me again, the operator broke up front I'm Gonna jump ahead, a significant increase in cash in the quarter congratulations on that execution the question.

I had was really a strategic one the company's talked about M&A in the past and and with cash now with such robust level. So I was hoping to get an update on how you're looking at that and some of the steps being taken internally.

To develop diligence capability and any color. If you can provided on either technology areas of interest rate geographic area of interest actually potentially I kept ready to redeploy capital in that area. Thank you.

Yeah, Craig So uhm as you know we hired a new VP corporate development earlier this year and his mission is to focus on our our growth strategy and emanated grow beyond implant. He is in the process right now of doing extensive research and analysis on potential.

<unk> and in fact, we'll be sharing some of his initial findings and sauce with our boy next week. So we're still in what I would call. The very early stages of this but it is moving forward and uhm, Yeah, There's really nothing at this point to.

Sure, but as we get to the point, where there is we will certainly do that.

Got it thanks for that call her Mary for the follow up on the road.

Thank you.

This concludes the Q and a portion of the call I will now turn the call back over to Mary <unk>, who will make a few closing remarks.

Thank you Alley, so I Wanna, Thank everybody for joining us today, we're gonna be on the road for multiple investor meetings in November and we will also be participating in the New York City stomach on December 13th and the Needham 25th growth Conference on January 11th both are in New York, We hope to see you at one of these events.

And we thank you for your continued support.

Alright. This concludes the presentation. Thank you for your participation in today's conference you may now disconnect. Okay.

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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