Axcelis Technologies, Inc.

Good day, ladies and gentlemen, and welcome to the Excelis Technologies call to discuss the company's results for the third quarter 2020. My name is Catherine, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, please press star followed by the zero, and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today's call, Mary Puma, President and CEO of Exelis Technologies. Please go ahead, ma'am.

Mary Puma Thank you, Catherine. 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 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 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. 2020 has certainly proven to be an unusual year. Despite this, Excellus has maintained a focus on driving Purion growth in key markets while addressing the many twists and turns the year has brought. Let's start with our top priority, which is the health of our employees operating in the COVID-19 environment. Through the implementation of recommended safety protocols, we continue to run our Beverly facility at full manufacturing and lab capacity with all other employees working from home. Our field teams around the world are operating according to their local guidelines and are working closely with our customers to ensure that we are able to satisfy their requirements in a safe manner. I would like to personally thank our extraordinary employees around the world who are working diligently to meet our customer commitments. I also want to thank our suppliers and customers for their support as we strive to meet the continuing high level of customer interest in our Purion products. Our third quarter financial performance met or exceeded guidance and consensus. Revenue for the third quarter was $110.4 million with earnings per share of 32 cents, gross margins of 43.6% and a cash balance of $212.7 million at quarter end. Our aftermarket business, or what we refer to as CS&I, once again contributed significantly to our revenue and gross margin. The mature process technology markets continue to be an area of strength for Exelis, which has been critical during this longer-than-expected memory slowdown. This is especially highlighted in the third quarter, where 100% of our systems shipments went to mature FoundryLogic customers. China has also been a strong market for Excelis this year, with this strength continuing through the third quarter. The geographic mix of our systems shipments in the third quarter was China 66%, Korea 20%, Japan 8%, and Europe 6%. This mix highlights the strength of the mature foundry logic market in both China and Korea. We expect there will be some memory shipments in Q4, although the quarter will be heavily weighted toward mature foundry logic. China will also continue to account for a significant percentage of our fourth quarter shipments. During the third quarter, the U.S. government imposed new restrictions on sales of certain semiconductor equipment and materials to the Chinese foundry customer SMIC. SMIC is an important Xelis customer, especially in the mature process technology market. We have thoroughly assessed the new restrictions. Tools and parts that are affected will require a license to ship in the future. After careful examination of our systems and the mature applications they are used for, we currently expect that we will receive licenses as needed for SMIC shipments. Now turning to guidance. For the fourth quarter, we expect revenue of approximately $110 million Gross margins of approximately 41%, operating profit of approximately $10 million, and earnings per share of approximately 21 cents. Using Q4 guidance, Excellus revenues will be up 35% year over year. This is strong performance given that memory is expected to account for less than 35% of total revenues in 2020. When memory spending does strengthen, Excelis will be well positioned to achieve our $550 and $650 million target models over the next several years. Continued growth of Purion products is the key to achieving our long-term business models. During the third quarter, we shipped three new Purion high-current product evaluations. We shipped the first Purion 200 to a leading power device company. The power device market is a critical market for Excelis. and the Purion H200 is expected to play a key role in increasing our customer base and market share in this segment. The other two evaluations are for Purion H systems. The first shipped to a leading advanced logic customer. The advanced logic market segment is a key focus for our $650 million model. The second Purion H shipped to a NAND customer that currently uses the Purion XE. Expanding our Purion footprint at existing customers is a critical element of our long-term strategies for both the 550 and $650 million models. At the end of Q3, we had six evaluation systems in the field. These evaluations represent the acceptance of our new products, penetration into new market segments, and expansion of our product footprint within an existing customer. This includes a Purion VXE and Purion XE Max, both focused on image sensors, a Purion H200 for power devices, a Purion Dragon for DRAM applications, a Purion H for advanced logic, and a second Purion H for a NAND application. We expect to ship additional evaluation units over the next year as we continue to work closely with customers on further Purion adoption. Before Kevin reviews the financials, I would like to summarize four key takeaways. First, the mature process technology market is very strong and growing, and Excellus is the ion implant market leader in this segment. Second, China will continue to be an important market for Excellus, and we currently expect that we will receive licenses as needed for SMIC shipments. Memory is expected to recover in 2021 and will be additive to our strong, mature process technology and Chinese business. And fourth, the Purion product family is extremely well positioned to support this future growth. Now I'd like to turn it over to Kevin to discuss our financials and some operational details. Kevin?

Thank you, Mary, and good morning. Excel has delivered solid third quarter performance Thanks to the continuing outstanding work of our employees and supply chain partners. Strong gross margin performance with inline revenue drove earnings per share well above company guidance and consensus estimates. During this ongoing pandemic, the health and well-being of our employees remained a top priority, resuming our best to create a safe work environment for everyone at Excellus. For employees required to work in our factory, we are enforcing daily screening, Physical distancing and required use of face masks. Everyone who can work from home is working from home and will continue to do so for now. Field-based teams are continuing to support our customers while following customer and country-specific protocols. Tool installations are being successfully completed by Accel's employees, third-party support, and creative virtual solutions. We remain focused on our $550 and $650 million revenue models and are continuing to invest in products and sales channels required to achieve these target models. Additionally, we have been investing in manufacturing capability with new technologies and capital expenditures aimed at improving productivity and capacity. I will now turn to the third quarter results. Q3 revenue finished at $110.4 million compared to $123 million in Q2 Q3 system sales was $70.2 million compared to $76.8 million in Q2 Q3 CS&I revenue finished at $40.2 million compared to $46.2 million in Q2 Shipments of spare parts and consumables remained strong in the quarter driven by a fabulization and customers likely maintaining a higher level of spares than enjoy. Q3 sales for our top 10 customers accounted for 76% of total sales compared to 83.6% in Q2. Three customers were at 10% or above. Q3 system bookings were $26.4 million compared to $56.2 million in Q2. For the Q3 book-to-bill ratio of 0.37%, versus 0.73 in Q2. Backlog in Q3, including deferred revenue, finished at $45.1 million compared to $102.6 million in Q2. Bookings and backlog can fluctuate quite a bit quarter to quarter due to specific ordering practices with some customers booking and billing within the same quarter. Q4 bookings to date already exceeded the entire third quarter. Q3 combined SG&A and R&D spending was $34.3 million for 31% of revenue compared to $35.5 million for 28.9% in Q2. SG&A in the quarter was $19.4 million, with R&D at $14.9 million. We expect Q4 operating expenses to be approximately $36 million to support numerous evaluation systems and some additional costs associated with the pandemic. Q3 gross margin is 43.6% compared to 42.2% in Q2. Q3 gross margin was driven by strong CS&I contribution, product mix and ongoing cost-out efforts. Q4 gross margin is expected to be approximately 41%, with full-year gross margin also around 41%. Gross margins can fluctuate quarter to quarter based on a level of CS&I contribution, customer and product mix, and the closure of the evaluation units. Through ongoing cost-out efforts and planned higher sales at our peer and product extensions, we expect gross margin to improve over time, as highlighted in our $550 and $650 million target models. Operating profit in Q3 finished at $13.9 million compared to $16.4 million in Q2. Q3 net income was $10.8 million at $0.32 per share and well above consensus compared to $13.3 million at $0.39 per share in Q2. We are forecasting pandemic-related expenses of approximately $1.8 million in Q4 spread across the P&L. Inventory ended at $159.7 million compared to $149.2 million in Q2 due to the timing of shipments and additional inventory to support evaluation tools. Q3 inventory turns excluding eval tools finished at 1.8 compared to 2.1 in Q2. Q3 accounts payable were $24.3 million compared to $30.3 million in Q2. Q3 receivables of $45.2 million compared to $64.9 million in Q2 Q3 cash finished at $217.7 million compared to $197 million in Q2 Cash from operations in the quarter was $19.1 million Our stock repurchase program remains on hold as we continue to maintain a conservative cash strategy We will be revisiting this with the Excelers Board in Q4 and expect to develop plans to return capital to our investors moving forward. We are finishing 2020 with strong momentum and are excited about the prospects of the 2021 recovery in the memory and automotive market. We are continuing to make the necessary investments in our products and infrastructure needed for our $550 and $650 million target model.