Axcelis Technologies, Inc.

Good day, ladies and gentlemen, and welcome to the Exalis Technologies call to discuss the company's results for the second quarter 2021. My name is Mary, and I will 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 bar followed by zero and a coordinator will be happy to assist you. As a reminder, I would now like to turn the presentation over to your host for today's call, Mary Fumas, President and CEO of Axelis Technologies. Please proceed, ma'am.

Thank you, Mary. With me today is Kevin Brewer, Executive Vice President and CFO, and Doug Lawson, Executive Vice President of Corporate Marketing and Strategies. 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 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. Excellus posted another strong quarter. This resulted from overall strength in the semiconductor industry, as well as growing momentum in the Purion product line, notably from the Purion Power Series. Revenue for the second quarter was $147.3 million, with earnings per share of 55 cents, driven by strong gross margins of 43.5%. Quarterly system sales surpassed $100 million for the first time since 2004. CS&I, our aftermarket business, continued to provide a significant contribution to our top line and gross margin with Q2 revenue of $47.1 million. In the second quarter, 70% of shipments went to mature Foundry Logic customers and 30% to memory customers. with an even split between DRAM and NAND. We believe the mature process technology segment will account for greater than 70% of system revenue for the full year 2021. The geographic mix of our system shipments in the second quarter was China, 58%, Korea, 18%, Europe, 12%, Taiwan, 3%, and the rest of the world, 9%. Turning to third quarter guidance, we expect revenue of approximately $170 million, gross margins of approximately 42.5%, operating profit of approximately $32 million, and earnings per share of approximately 70 cents. We now expect Q4 revenue to be above Q3 guidance, allowing us to exceed $625 million in revenue for the full year 2021. This is driven by the rapid growth of the mature process technology segment and the early stages of a memory capacity build. We expect both markets to remain strong well into 2022, and we are currently booking systems into Q2 of next year. Overall demand for capital equipment in the semiconductor industry is being driven by several factors, including supply chain shortages, high fab utilization across all segments causing significant new fab investment, government incentive programs creating geographical expansion opportunities for our customers, and the fundamental underlying drivers that started this growth cycle of 5G, data analytics, and AI. As a result, we believe that the implant TAM has increased significantly. In addition, the rapid acceleration of the electrification of the automotive industry is driving substantial demand for power devices and image sensors. This is not related to the shortage of general purpose mature devices like MPUs for automotive. It is driven by the 10 to 15 year strategic roadmaps of all automotive manufacturers and their suppliers. These markets are generating sustainable growth with period product extensions in high current, medium current, and high energy designed to serve the power device and image sensor market. We have invested significantly in both of these markets over the last several years. As a result, we expect power to make up approximately 30% of our system's revenue in 2021, with continued growth driven by the Purion product extension specifically developed for this market. Our growth in this area is clear and sustainable, And most importantly, it is tied to a long-term trend beyond any increases driven by supply chain shortages. Looking at the memory market, we maintain a strong and growing position. We expect 2022 to be a good year for capacity additions in this segment and are already seeing bookings for shipments later this year and into next year. We continue to see a high degree of activity in both advanced logic, where we have a period on age evaluation underway, and in the Japanese market, especially related to power device manufacturing. The market in China continues to be one of our strongest. This market includes a large number of both domestic and international customers in both the mature and memory markets. We currently have licenses for all planned SMI shipments in Q3 and continue to receive licenses for future shipments. Evaluations are key to developing new customers, increasing footprint at existing customers, and penetrating new segments. We currently have six Purion evaluation tools in the field focused on supporting future growth. These include a Purion Dragon, a Purion H200, two Purion Hs, and two Purion Xe Maxes, which are positioned across key target segments, including advanced logic, NAND, DRAM, image sensor, and power devices. We expect four of these systems to close this year. We are also planning to ship one to two additional evaluations in 2021. Given that our current guidance is at the quarterly run rate for the $650 million revenue model, much sooner than previously anticipated, we are developing an implant-driven revenue model beyond $650 million that we will publish by the end of this year. As we mentioned last quarter, we are also putting in place offshore manufacturing capacity to support this growth. Kevin will provide additional details on this project as part of his financial review of the quarter. Kevin?

Thank you, Mary, and good morning. Xcel has delivered solid Q2 financial results driven by strong gross margin performance and continued revenue growth. Based on our third quarter guidance, In current view of the fourth quarter, we now expect to exceed $625 million in revenue for 2021. At the current run rates, we are seeing significant leverage in our business model and expect full-year operating expenses to be around 24 percent of revenue, with gross margin expected to finish slightly above 42 percent. Ongoing gross margin improvement will continue to be driven by the timing of cost-out initiatives and mixed assumptions that include a higher number of pure end product line extensions. Full year gross margin assumptions include higher pandemic and supply chain related costs and the impact of our investment in additional manufacturing capacity. Based on the strength of the market and demand for our pure end products, we're developing new financial models that we plan to share later in the year that should take us well beyond our current $650 million model. On our last call, I mentioned plans to add manufacturing capability closer to customers with a goal of increasing customer satisfaction and capacity. We are well underway with those plans and expect to have a new Excellus manufacturing facility in South Korea by the end of this year. We currently have sufficient capacity in place to support our near-term demands and expect the Korea factory to play an important role in supporting future manufacturing requirements. Now I'll turn to our second quarter financial results. Q2 revenue finished at $147.3 million compared to $132.8 million in Q1. Q2 system sales were $100.1 million compared to $81 million in Q1. This is the first time since 2004 that we exceeded $100 million in quarterly system sales. Q2 CS&I revenue finished at $47.1 million compared to $51.8 million in Q1. CS&I revenue remains strong driven by high fabulization, the growing period on installed base, system upgrades, and customers purchasing safety stock. We expect Q3 CS&I revenue of approximately $47 million. Q2 sales to our top 10 customers accounted for 75.1% of our total sales compared to 79.8% in Q1. Two customers were at or above 10% in Q2 compared to one in Q1. Q2 system bookings were $172.1 million compared to $148.4 million in Q1. With a Q2 book-to-bill ratio of 1.71, versus 1.92 in Q1. We are currently plucking into the second quarter of next year. Backlog in Q2, including deferred revenue, finished at $271.2 million, a new record for Excellus compared to our prior record of $186.5 million in Q1. Q2 combined SG&A and R&D spending was $40 million, or 27.2 percent of revenue, compared to $36.1 million, or 27.2% in Q1. SG&A in a quarter was $23.4 million, with R&D at $16.6 million. We expect Q3 combined SG&A and R&D spending to be approximately $40 million, or 23% of revenue, highlighting the significant leverage in our business model. Q2 gross margin was 43.5 percent and well above guidance, driven by strength in CS&I, increased period on power series shipments, and continued cost-out activity. We're guiding Q3 gross margin to be approximately 42.5 percent, driven by product mix and the expected closure of one evaluation system. We expect full-year gross margin will be slightly above 42 percent including the closure of four additional evaluation tools. Operating profit in Q2 finished at $24 million compared to $20.3 million in Q1, regarding Q3 operating profit of approximately $32 million. Q2 net income was $18.9 million, or $0.55 per share, compared to $16.5 million, or $0.48 per share, in Q1. regarding Q3 earnings per share of approximately 70 cents. Q2 cash finished at $220.5 million compared to $207.5 million in Q1. In the quarter, we generated $30.8 million in cash from operations and settled share repurchases of $13.4 million. Q2 receivables were $79.5 million compared to $75.9 million in Q1. Q2 inventory ended at $192.3 million, compared to $174.4 million in Q1. Q2 inventory terms, excluding shipped evaluation tools, finished at 2.0, the same as in Q1. Q2 accounts payable were $40.7 million, compared to $40.5 million in Q1. I would like to thank all of our employees and suppliers for their continuing efforts and outstanding execution supporting our steep business ramp during the ongoing pandemic. It is an exciting time for Excellus with unprecedented growth in the industry and solid customer demand for our products. Our balance sheet is strong, and we have the financial strength to invest in products, infrastructure, and our employees. We've also returned over $50 million of capital to shareholders since the start of our share repurchase programs, and had $75 million of remaining authorization under the current program at the end of Q2. Thank you, and I now turn the call back to Mary for closing comments.