Axcelis Technologies, Inc.

Good day, ladies and gentlemen, and welcome to the Excellus Technologies call to discuss the company's results for the third quarter of 2022. My name is Allie Blatter and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session toward 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 Excellus Technologies. Please proceed, ma'am.

Thank you, Ali. 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 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 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 Excellus 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 and gross margin of 45.1%. Cash, cash equivalents, and short-term investments were $342.1 million. Revenue from our aftermarket business, CS&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 Excellus, with 88% of third quarter system shipments going to mature FoundryLogic customers and 12% to memory customers, comprised of 5% NAND and 7% DRAM. The geographic mix of our system shipments in the third quarter was China 44%, Korea 18%, the US 15%, Europe 10%, Taiwan 5%, and the rest of the world 8%. For the fourth quarter, we expect revenue of $232 to $240 million gross margin of 40 to 41%, operating profit of $41 to $45 million, and earnings per share of $1 to $1.10. For the full year 2020, Excellus revenues are expected to exceed $885 million with a gross margin of greater than 43%. Our guidance reflects the impact of three geopolitical and global economic issues. First, continued supply chain costs that are negatively affecting our gross margins. Second, 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, Excellus expects to continue to experience strong sales of Purion products into these market segments and achieve 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 1.89 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. Excel has delivered strong third quarter financial results, beating company guidance and consensus estimates across the board. Solid execution and continuing demand for our products drove these positive results. In fact, we are guiding continuing strength in Q4 and now expect 2022 to be greater than $885 million in revenue. And we are forecasting additional growth in 2023 based on strong customer demand in our current backlog. In addition to focusing on the growth opportunities ahead of us, we are continuing to manage through headwinds impact in the entire industry. Supply chain disruption continued to provide significant challenges in Q3. Throughout the quarter, our sourcing and engineering teams worked closely with suppliers to implement both strategic and tactical measures to address these issues. Our manufacturing team addressed challenges created by material availability and performed at a very high level, while our sales and service teams worked closely with customers to support fab ramp plans and high utilization rate. As noted by others in the industry, these supply chain disruptions are resulting in higher costs. We remain focused on reducing these costs without impacting customer satisfaction. As I have mentioned on past calls, we should begin to see more sustainable improvements in the supply chain beginning in 2023. Moving to our third quarter financial results. Q3 revenue finished at $229.2 million and above our guidance compared to $221.2 million in Q2. Q3 systems revenue was $171.1 million compared to $165.4 million in Q2. Q3 CS&I revenue finished at $58.1 million compared to $55.8 million in Q2. CS&I posted very strong margins in the quarter due to mixed and lower costs. We expect Q4 CS&I revenue to be around $56 million. Q3 sales to our top 10 customers accounted for 62.8% of our total sales compared to 66.3% in Q2. One customer was at 10% or above in Q3 compared to two customers in Q2. Q3 system bookings were $337.1 million compared to $432.8 million in Q2, with a Q3 book-to-bill ratio of 1.89 versus 2.56 in Q2. Backlog in Q3, including deferred revenue, finished at a record $1.1 billion compared to $869.5 million in Q2. Multiple customers are planning new FABs and expansions for 2023 and 2024, which is driving bookings out beyond one year. Q3 combined SG&A and R&D spending was $50.1 million, or 21.9% of revenue, compared to 45 million, or 20.4% of revenue in Q2. SG&A in the quarter was $29.6 million, with R&D at 20.6. In Q4, we expect SG&A and R&D spending to be approximately 22% of revenue. Q3 gross margin was 45.1% and well above our guidance. Brown gross margin performance in a quarter was driven by a more favorable mix of systems, very accretive CS&I margins, the impact of foreign exchange and continuing cost-out activities. As expected, we are guiding Q4 gross margin lower at 40% to 41% due to a less favorable mix of systems and the timing of unfavorable supply chain costs. Full-year gross margin is now expected to exceed 43%, which is up from our prior guidance of 42.5%. resulting from very strong gross margin performance through the first three quarters of the year. Operating profit in Q3 finished at $53.2 million compared to $54.1 million in Q2. We're guiding Q4 operating profit of $41 to $45 million. Q3 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 guiding Q4 earnings per share of $1 to $1.10. Q4 guidance reflects the impact of higher supply chain costs, our current assessment of new restrictions on certain China customers, and the impact of foreign exchange rates. Q3 receivables were $173.9 million compared to 146.1 million in Q2, driven by the timing of shipments. Q3 inventory ended at $226.5 million, compared to 213.1 million in Q2. Q3 inventory turns, excluding evaluation tools, finished at 2.5, compared to 2.6 in Q2. Q3 accounts pay of over $54 million, compared to $49.4 million in Q2. Q3 cash, cash equivalents, and short-term investments finished at $342.1 million compared to $287.2 million in Q2. In the quarter, we generated $64 million of cash from operations and settled share repurchases of $12.5 million. We have returned over $120 million of cash to our shareholders since beginning our stock repurchase program. Excellus continues to execute at a very high level despite a challenging environment. And once again, I want to thank the entire team for their continuing outstanding performance. I also want to thank our supply chain partners for their hard work supporting Excellus and our customers. Thank you, and I now turn the call back to Mary for her closing comments.

Thank you, Kevin. Excellus is well positioned to grow during the anticipated 2023 industry slowdown. Two long-term trends continue to drive our business. First, Purion Power Series products continue to gain strength, driven by electrification of the automotive industry. Excellus maintains a technology advantage and leading share in this market. We expect to maintain this leadership position and do not see this market flowing. And second, the growth of IoT benefits the implant-intensive mature process technology segment. Greater than 80% of our system revenue comes from the mature segment, which includes image sensors and power devices and other mature devices. Everyone in the industry is facing challenges, and many are planning for a slowdown in 2023. At Excellus, we are focused on continued growth and believe we are extremely well positioned for the future. With that, I'd love to open it up for questions.

Ladies and gentlemen, if you wish to ask a question, please press star followed by 11 on your touchtone telephone. Please press star 11 to begin. Our first question. This comes from Craig Ellis at the Riley. Your line is now open.

Hi, it's Craig Ellis. I wasn't sure if that was to me. The operator kind of broke up. I'll just plow ahead. So, team, congratulations on the very strong execution in the quarter and the outlook. I was hoping to follow up on the points that you had mentioned in your prepared remarks, Mary. and see if you or Kevin could quantify the three items identified. One, the degree to which supply chain costs are impacting gross margins. I think in the past it's been around 175 basis points. Two, can you quantify what the BIS China shipment allowance is in the quarter, and then just any color quantitatively on the Forex issue to start? Thank you.

Yeah, Craig, let me grab the first two. So on the headwinds from supply chain, what we've been saying this year is that there's about 250 basis points of headwinds from both our suppliers and from logistics. So if you combine the two, it's about 250 basis points. 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 through better pricing on material. There's a lot of things we're doing with value engineering still. We are starting to see some improvement in freight. So that is a bright spot. So again, it's about 250 basis points in total and, you know, anticipating getting about half of that back starting next year. So the other piece of things that's impacting the earnings, we did mention FX a couple times. In the quarter, if I look at all the puts and takes across the P&L, there's about $0.15 of negative EPS on the FX side of things. The final question, I missed it because either you were breaking up or I was breaking up, but I think you had three or four points you made, Craig.

Yeah, the final one was the BIS impact, Kevin.

Oh, okay. Yeah, so, you know, right now we think there's minimal impact. And in 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, at this point, we believe it to be minimal impact.

Great. And then the follow-up question before I get back in the queue. Mary, very helpful to get the indications on calendar 23 being a year of growth for the company and stellar performance industry, by the way, on that. The question is, can you provide any color on how the linearity of the year might play out. Not looking for specific guidance in any particular quarter. No, that wouldn't be appropriate at this early juncture, but any broader color on the arc of things would be helpful if you could.

Yeah, 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 are very focused on achieving our $1 billion model. And right now, we're saying that's a couple of years out. So, again, that's something that's hanging out there. And it really will be a function of market conditions. But at this point, there isn't anything. We'll give you more as we get into 2023.

Got it. And with calendar 22 being within 11.5% of that, it seems like you're well on your way. I'll hop back in the queue. Thanks for the help on those two items, Kevin and Mark. Thank you, Craig.

Thank you. Thank you. One moment while for the next question. Our next question comes from Christian Swath at Craig Hallam. Your line is now open.

Hey, thanks for taking my questions. Can you remind us, or as you guys look at silicon carbide, how many customers that you're shipping to now in production and what that may look like in a year or two as far as a potential number of customers?

Christian, we haven't given the specifics in terms of the number of silicon carbide customers. It continues to grow as more companies get into silicon carbide, but Excellus is definitely the leader in terms of silicon carbide frying implant, driven primarily by technical advantages of the Purion line and the ability to have the full product family, the medium current, high current, and high energy family. And so that combined with us having started work on this you know, over six years ago has given us a good advantage. So, so we expect the number of customers to continue to grow through 2023 as, as folks get into it and then we'll, we'll see where it goes from there.

And, and, and the Doug, any more confidence or increased confidence? I know you guys, you know, laid out some way for start expectations and I think a doubling of them every few years. Do you have greater confidence in that or, or Could it even be – growth rate even be faster than that now?

Well, we have confidence in that when we put that up there. We're going to probably provide some additional insight at the beginning of the year. We're going through our strategic plan right now, and we'll give more insight in terms of what we see 2023 looking like for silicon carbide. But we do see 2023 as a growth year for silicon carbide. as I think is generally accepted by the industry at this point as well.

And then just on the exposure to China, I know there's sometimes a lot of investor confusion about that, given that there's fabs not by Chinese nationalistic people who have restrictions on buying equipment and other people who have licenses. Can you just walk through exactly that? you know, who you're selling to, if you can give us some additional color in your Chinese exposure.

So 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 obviously selling to, we've talked about this SMIC, and we do continue to get export licenses where appropriate for those. In terms of the other customers that were recently put on the list, I think everybody knows that the four multinational customers who were added actually now have approval from the U.S. government so that equipment suppliers can ship to them at least over the next year. So that just leaves some domestic customers that are really focused at this point. For Logic, it would be less than 14 nanometer. And then there were some advanced parameters put out there for both DRAM and for NAND. 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, you know, stop shipments of parts, systems, provide technical support, service. And we did that. But at this point in time, You know, as Kevin said, we really have seen a minimal impact. You know, if you look at the mix of our customers in China, many of the domestic customers that we are working with are customers who are focused more on the general mature process technology or the mature process technology area. And we have many, many power customers. 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 we feel very good about what's going on right now and that at this point, 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 DA Davidson. Your line is now open.

Thank you. This is Linda on behalf of Hans Chang. Thank you for letting us ask questions. So, I guess my first question, what was your breakdown of the order book specifically with mature segment? How much is in power versus image sensor in general mature?

So, Linda, we really at this point in time only in terms of shipments are only splitting out the mature process technology segment and the memory segment. For the quarter, it was 88% mature process technology and 12% memory. We did split out memory into 7% DRAM and 5% NAND, but we don't break out the mature process technology any finer. It's possible that when we get to the end of the year and we get to our call in February, we'll put out more color around that. But for right now, we're not providing that information.

Yeah, Linda, this is Doug. One of the reasons we don't do that on a quarterly basis is when you break it down too fine, it moves around quite a bit based on customer projects and so forth. So we tend to provide that breakdown once a year based on the full year.

Okay, that's helpful. Thank you. And with the expectation of another growth year in 23, What are the trends that you're seeing in different applications that is in memory, mature, power, and image sensor? Any call would be helpful.

Okay. So in terms of what we're seeing right now, we're seeing the demand is strong in the mature markets, 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 system shipments. So this slowdown is not having a measurable impact on our business. The mature process technology markets, on the other hand, remain robust. And Linda, as we've said, we expect mature process technology to account for more than 80% of our system shipments in 2022. If you take a look and break down the segments within these markets, Image sensor and the general mature foundry business remains strong, although there is some flowing in some consumer related parts of this market. But for us, the real story is empowered devices. Demand there is extremely strong and growing due to the long term commitment to the electrification of the automotive market. And as you know, we have leadership in this market with our Perion Power Series, and that's really created a sustainable growth opportunity for Excellus. On top of that, as Kevin mentioned, customers are actually ordering initial tools now for projects to go into 2023. and 2024. So all of these factors are really what's driving our expectation that we're going to see revenue growth into 2023. It's really just more of the same in terms of, you know, what we've been seeing in 2022. We're going to use that as a foundation and then build upon that. Great. Thank you.

One moment. Our next question comes from David Dooley at Steelhead Securities. Your line is open.

Congratulations on nice results and a nice outlook. And thanks for taking my question. Kevin, just out of curiosity, I noticed that obviously the cash flow was a very strong number this quarter. Typically, when you have increases in receivables and inventories, you don't generate a ton of cash. But I noticed there's a huge increase in deferred revenue. Could you just talk about why that was? Yeah.

So, David, that's really centered around the number of prepayments we've had this quarter. I think, you know, one of the things we have mentioned over the various quarters is that we're receiving prepayments from some certain customers. And in this quarter, we had a pretty big increase in prepayments for tools. That's basically what's driving it. And as you pointed out, the offset is on deferred revenue. So there's really not much more beyond that except for the rest of it, as you know, is we had a pretty good quarter in terms of net income, which rolled into the cash.

Basically, net income equaled cash, even though receivables and inventories went up big, and so the offset was the increase in deferred revenue.

As you point out, our AR did go up this quarter, so normally when our AR goes up, you're going to be talking about cash is down, but like I said, we had a pretty significant increase of prepays.

As far as the prepayments go, do they put down a deposit? Is it a full payment? Maybe just talk about some of the terms there of the prepayments.

Yeah. I mean, typically it's enough of a 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 our material costs on these prepays. Because we're going to go out and, you know, as we've talked about, we've got orders going way out into 2024. We want to make sure that on some of these orders, if we feel that there's any risk, we want to make sure that we're not exposed for material. Okay.

Now, just another question on the gross margin. When I look back over almost the last 10 quarters, your product gross margins have been remarkably consistent between 44% and 46%. and I realize you're guiding gross margins down sequentially. Could you just talk about the magnitude, the two or three things that you listed, and kind of the magnitude between Q3 and Q4? And then as a follow-up, you know, I think a big chunk of this might have been currency, or what could we expect in Q1 gross margins if the currencies are essentially flat where they are now?

Yeah, so... It's a good point. I mean, we are guiding margins down quite a bit in Q4, and people are probably wondering why I say as expected. And I say as expected because we've been given our full year number for the last couple of calls. And I think on the last call, when I said we could expect to see 42.5% full year, I got asked that question. Well, that implies you're going to go below 40% in the fourth quarter. And I think my answer was, don't put anything less than a four in front of it. So we knew this was coming. And it really is mixed. As you know, in the investor presentation, we've got a chart in there that shows the mix of our products and the standard margins on them. And there's no mystery or surprise that high current is much lower than high energy and even a little bit lower than medium current. So I don't have to mix words here. We have a big shift to high current in the fourth quarter. We knew it was coming. The other piece of it, which was a little bit of anomaly, 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 to repeat. So that's also putting additional pressure. And again, that's not a surprise. I knew it was coming at us. But I think the positive news is, David, I think back in the beginning of the year, we said we expected full year to be greater than 42%. And then we ratcheted up to 42 and a half percent. And today we're saying it's going to be greater than 43%. So we're, you know, despite all the stuff that's going on out there with headwinds, we're still doing a really good job, you know, keeping these margins propped up. And, you know, next year on a full year basis, you know, we expect to continue to improve on where we are this year. You know, I'm hopeful that we're going to get back at least half of that Supply chain costs, you know, it's going to take in some cases, it's going to take new suppliers and stuff to get there. Because, you know, I think early on a lot of supply chain costs are more because of disruption. But, you know, some of this increases are going to be hard to get rid of because now everybody's got higher labor costs and lots of other things that's pressuring. So, you know, we're just doing what we do all the time. We're looking at value engineering. We're looking at low cost sourcing. and, you know, getting additional product extensions out there to boost margins and, you know, whether this is going to 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. I don't want to talk about Q1 because I honestly, the honest answer is I don't know exactly what Q1 looks like. And, you know, so I think, you know, when we do our call in February, you kind of set the stage for next year. We can, we can talk about a little bit more at that point.

Okay. Thanks. That was actually really good color. I appreciate it. Just, just one final one from me and then I'll pass it on to somebody else. Do you have an, I guess an idea what the size of the TAM is for the non-leading edge foundry and logic business? And the, and the reason I ask is, you know, if I just take the percentages of revenue you've been giving us over the last few years and apply it to total revenue. And I realized that's, not the exact math that you would do because we're including CS&I in that. But, you know, if I just look at the 80% of total revenue essentially going into non-leading edge founding logic, it's a big number now, you know, greater than like 700 million in 2022. And that's, you know, more than double in the last two years. So I'm just kind of wondering what you think the size of the TAM is. And, you know, obviously if you could give us a shot at what your market share is, it appears it's probably above 50%, but I don't want to put words in your mouth. Hey, David.

So the mature market accounts for greater than 60% of the implant TAM. So it's, you know, over 60% of that $2.25 billion. And in terms of market share, you know, we don't break it down. You can probably take that $2.25 billion and look at our systems revenue and get a relative idea as an average. What I will say is that we have much higher than average share in the mature markets and especially in the power market. And so in the high growth areas, Excellus has leading share. And overall, we continue to grow the total share.

I guess that would imply you probably do have greater than 50% share of this power market.

Yeah, we haven't given a specific number. I'll let you 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 at the Riley. Your line is now open.

Hi, it's Craig Ellis. I don't know if that question was directed to me again. The operator broke up, but I'm going to. Jump ahead. Significant increase in cash in the quarter. Congratulations on that execution. The question I had was really a strategic one. The companies talked about M&A in the past and with cash now at such robust levels. 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 provide it on either technology areas of interest or geographic area of interest as you potentially get ready to redeploy capital in that area. Thank you.

Yeah, Craig. So as you know, we hired a new VP of corporate development earlier this year, and his mission is to focus on our growth strategy and M&A to grow beyond implants. um he is in the process right now of doing extensive research and analysis on potential opportunities and in fact we'll be sharing some of his initial findings uh and thoughts with our board next week so we're still in what i would call the very early stages of this but it is moving forward and um you know there's really nothing at this point um to share, but as we get to the point where there is, we will certainly do that.

Got it. Thanks for that caller, Mary. I look forward to follow up down the road.

Thank you. This concludes the Q&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, Allie. So I want to thank everybody for joining us today. We're going to be on the road for multiple investor meetings in November, and we will also be participating in the New York City Summit 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.

All right. This concludes the presentation. Thank you for your participation in today's conference. You may now disconnect. Good day.