Axcelis Technologies, Inc.

Good day, ladies and gentlemen, and welcome to the Excellus Technologies call to discuss the company's results for the second quarter of 2026. My name is Grace, and I will be your coordinator for today. I would now like to turn the presentation over to your host for today's call, David Ryzhik, Senior Vice President and Interim Chief Financial Officer. Please proceed.

Thank you, Operator. This is David Ryzhik, Senior Vice President and Interim Chief Financial Officer, and with me today is Russell Low, President and CEO. If you have not seen a copy of our press release issued earlier today, it is available on our website. In addition, we have prepared slides accompanying today's call, and you can find those on our website as well. 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 annual report on Form 10-K 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. Given the pending merger with VECO, we will not be addressing questions related to the transaction. During this call, we will be discussing various non-GAAP financial measures. Unless otherwise noted, all income statement related financial measures will be non-GAAP other than revenue and other income. Please refer to our press release and accompanying materials for information regarding our non-GAAP financial results and a reconciliation to our GAAP measures. Now, I'll turn the call over to President and CEO, Russell Low.

Thank you, David. Good morning, everyone, and thank you for joining us in our second quarter 2026 earnings call. In the second quarter, we delivered revenue of $215 million in earnings per diluted share of $1.06, both above our expectations. Our results reflect strong operational execution as we capitalise on favourable demand trends in several of our key markets. In the quarter, sequential growth in systems revenue was driven by an improvement in our power and general mature markets, partially offset by the expected moderation in memory due to timing of available fab space. Importantly, customer investment plans in memory remain robust and we continue to make progress executing our strategy to expand our position within this market. TS&I delivered a strong quarter and continues to be an important driver of our overall performance. Revenue growth in the business has been supported by a growing install base, increased customer utilization, and a continued expansion of our aftermarket products and service offerings. As we shared, CS&I has been a deliberate multi-year strategic focus for us to drive growth and stability through market cycles. We are pleased to see these efforts gain traction and we look forward to continuing to build this momentum. Bookings in the quarter grew slightly, driven by general mature and power, and Book to Build has neared one over the past three quarters, suggesting greater stability in the end markets we serve. Turn to slide five. Sales to mature node applications accounted for approximately 84% of system shipments, with memory and advanced logic making up the balance of our sales. Now, on slide 6, let me review our trends by end market. Within our power market, revenue for silicon carbide applications declined sequentially, consistent with our expectations as quarterly revenue can fluctuate based on shipment timings. However, Bookings improved on a sequential basis and through the first half of the year exceeded the average levels we experienced over the past two years. In addition, we continue to expand our customer base, securing orders for two new customers in China during the quarter. We are also seeing next generation technology development create opportunities for our high energy implant capabilities. During the quarter, we secured orders from multiple customers for high-energy channeling applications using advanced superjunction architectures, further validating the value of our differentiated implant technology. From an end-market perspective, long-term demand fundamentals for silicon carbide remain highly attractive. We continue to expect increasing penetration in electric vehicles, broader adoption in AI data center power infrastructure, and expanding use across a wide range of commercial industrial applications that require greater power efficiency, particularly at higher voltages. In our other power market, second quarter sales grew sequentially and we continue to view silicon power as a foundational part of the broader power semiconductor market, serving applications across automotive, industrial, commercial and data center end markets. During the quarter, we completed a successful evaluation of our Pure Xe Max at a leading foundry for use in power management IC production. The evaluation demonstrated the system's ability to address increasing customer requirements for high-energy implant applications, leveraging its dual LINAC architecture and patented Boost technology to deliver implant engines up to 15 MeV with industry-leading beam purity. In general, mature, sales improved sequentially during the quarter. While we have not yet seen a pickup in order rates, we are encouraged by improving end market trends. Following a period of capacity digestion that began in 2024, customers in China continue to add capacity, and we are beginning to see signs of improving activity outside of China as well, supporting higher tool utilization rates. Our customers are benefiting from demand for AI-related data center applications manufactured on 28 nanometers and above process technologies, including optical connectivity, microcontrollers, and analog ICs. General Mature remains an important market for Xelis, given its high implant intensity and our broad portfolio spanning high-energy, high-current, and medium-current systems. We're also seeing growing customer interest in our recently introduced Pure H6 high current platform across general mature applications. Turning to advanced logic on slide seven, as we noted on our last call, we shipped a system early in the second quarter for materials modification applications supporting two nanometer production, and we also shipped a follow-on system in the third quarter for this application. We continue to work closely with this customer in support of its next-generation technology roadmap. In memory, despite the anticipated sequential decline from a strong first quarter, customer engagement remains robust. As a reminder, memory sales can be lumpy from quarter to quarter depending on customer FAB space availability. We continue to anticipate strong year-over-year growth in 2026 with momentum extending into 2027. as customers accelerate clean room investments to support growing demand for DRAM and high bandwidth memory applications driven by AI. We're also seeing a memory customer portfolio expand, highlighted by a recent order for multiple high current systems in the current quarter, reinforcing the strength and competitiveness of our offerings. Reflecting this momentum, we continue to make progress with the leading North American memory manufacturer we referenced last quarter. Following the successful completion of our system evaluation last quarter, we received additional orders during the period to support new fab investments. On slide eight, let me wrap up my thoughts and provide our perspective on the second half of 2026. I am pleased with the momentum we are seeing so far in 2026, Our team has executed well, delivering solid results while capitalizing on the attractive secular growth opportunities across our end markets. In addition to a strong memory outlook for 2026, we are seeing improved demand in our power market. We're also encouraged by improving customer engagement and utilization trends in our general mature market, while our CS&I revenue continues to build a growing base of revenue and profitability. As a result, we now expect second half 2026 revenue to be stronger than our initial expectations and expect to deliver year-over-year revenue growth in 2026 compared to our prior outlook for revenue to be relatively flat with 2025. Looking ahead, we believe the favorable demand trends we are seeing today are likely to continue into 2027, with memory investments expected to remain strong as customers expand FAP capacity, continued improvement in our silicon carbide market and encouraging underlying trends across general mature applications. We anticipate another year of revenue growth in 2027. Before I turn the call over to David, I'd like to provide a brief update on the pending merger with VECO. We continue to make progress on the remaining requirements for the VECO merger, including with the state administration for market regulation in China. We continue to expect the transaction to close in the second half of 2026. We remain very excited about the pending combination and the opportunity to build on a momentum and create a stronger company with enhanced capabilities, broader growth opportunities, and meaningful long-term value creation potential. I want to thank our customers, employees, partners, and shareholders for their continued support in Excelis. With that, Let me turn the call over to David for a closer look at our results and outlook.

Thank you, Russell, and good morning, everyone. I'll first start with the financial details of the second quarter before turning to our outlook for the third quarter. Starting on slide nine, second quarter revenue was $215 million, consisting of system revenue of $132 million and CS&I revenue of $83 million. Both exceeded our forecast. By geography, revenue in China increased sequentially to 46%, up from 40% in the prior quarter. Korea was our second largest revenue-generating region and 26% of our total revenues. In our other regions, Europe was 11%, the United States 6%, Taiwan was 2%, and Japan was 1%. The remaining 8% of revenue came from the rest of the world. Bookings were $131 million, slightly higher sequentially, continuing the trend of improving order activity with a book-to-bill ratio of approximately one times. We exited the quarter with total backlog of $452 million. Turning to slide 10, I'd like to share some additional detail on our results. Gross margin was 42.7%, slightly below our outlook of 43%, primarily due to a mix within our CS&I business, as well as higher than anticipated services costs, which can fluctuate from period to period. Second quarter operating expenses were $60 million, slightly above our outlook of $59 million, primarily due to higher variable compensation associated with stronger performance and to a lesser extent, higher fringe costs. Tying it all together, our operating margin was 14.7%. Second quarter adjusted EBITDA was $36 million, and adjusted EBITDA margin was 16.7%. Other income was $5 million higher on a sequential basis due primarily to foreign exchange gains. Our tax rate was 11% below our forecast of 15% due to the windfall benefit associated with our equity compensation. And finally, second quarter earnings for the share was $1.06. During slide 11, free cash flow for the second quarter was $15 million. This includes approximately $6 million of cash transaction expenses associated with the pending FICO merger. We exited the second quarter with a strong balance sheet consisting of $577 million of cash, cash equivalents, and marketable securities on hand. This includes $175 million of long-term securities. With that, let me discuss our third quarter outlook on slide 12. We expect revenue of approximately $230 million. Revenue is expected to benefit from a higher contribution from power and memory, partially offset by lower revenue from the general mature market. We expect gross margins of approximately 43%. We expect operating expenses of approximately $62 million. Adjusted EBITDA. is expected to be approximately $41 million. We anticipate a tax rate of approximately 15%. And finally, we estimate net earnings per diluted share of approximately $1.11. Looking beyond the third quarter, we currently expect revenue to increase sequentially in the fourth quarter, supported by the business trends we're seeing across our markets that Russell touched on earlier. As a result, we now anticipate full year We also anticipate group's margin to improve slightly in the fourth quarter relative to third quarter levels. At the same time, we remain committed to investing in the business, particularly in technology innovation and other long-term growth initiatives. As a result, we expect fourth quarter operating expenses to be slightly higher than third quarter levels. In summary, we're executing our strategy and remain focused on disciplined cost management while continuing to make targeted investments to capture attractive growth opportunities. We're encouraged by the trends we're seeing across the business and remain focused on delivering strong results and value creation for our shareholders. With that, operator, we're ready to take your questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. We ask participants to ask one question and one follow-up question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Craig Ellis with Riley Securities. Your line is live.

Yeah, thank you for the question and congratulations on the nice execution team. Russell, I wanted to start off with a question on memory, understanding how the tenor of interaction with your more established customers and your newer customers has changed over the last three months and as we look at near-term dynamics, which I think were indicated with memory up in the third quarter. Are we at a point where we should expect memory system sales to grow sequentially, or are we still in a period where there can be two steps forward and one step back?

Hey, Craig. Thanks for the question. So I think we're going to see memory being slightly lumpy this year. Again, until the new cleanroom space comes online, I think the customers are mostly focused on solving bottleneck issues in their existing fabs. So it's a little bit lumpy. One thing I would say, though, is 26 is a significant improvement over 2025. Although it's a low baseline, we are seeing significant DRAM memory revenue this year. And then, like we said, once those clean rooms start to come online, we expect to see the momentum continue into 2027.

Yeah, Greg, if you think about, Greg, just to add, you know, if you think about the second half from memory, probably, you know, at this point, probably looks similar to the first half. and then for the full year basis, obviously strong growth and then growth rate into 27. Probably at a lower growth rate than the one in 26 because we're coming off a very low base, but we definitely see that momentum in memory.

Yeah, and next year we get NAM capacity health, not just DRAM. Thanks for that. And then the follow-up question is on on the CS&I business. So congratulations on the real nice quarter there. My question is really what drove the magnitude of sequential strength? Is it really just in this environment customers are looking at CS&I as one of the quickest paths to incremental capacity where they need it? Is it really just the efficacy of better attach rates on Purian tools that are out there in the install base? Just help us understand what drove the upside and what it might mean for the back half of the year. Thanks, guys.

So it's a couple of things, Craig. So clearly we are seeing a pickup in utilization rates. So we're seeing memory has really high utilization rates. We're seeing silicon carbide and silicon power picking up in utilization rates. and we're starting to see the embers of a recovery in general mature and all those things. Before you start getting orders, typically you start to see spares and consumables going up. So you definitely get a component of utilization driving. The second thing is we continue to add installed base as well. But I think the really big part is that as companies are looking to ramp, they're looking to use what they have So we've developed a lot of really valuable upgrades and a lot of those upgrades are now selling and they're helping customers who in some cases are four wall constrained or it gives them a little bit more capacity such that they can continue to ramp their business. Very helpful. Thanks, guys.

Thanks, Greg.

One moment for our next question. Our next question comes from the line of Charles Hsu with Needham and Company. Your line is live.

Hi. Thanks for taking my question. Congrats on the pretty steady execution and exceeding the guidance and good guidance for third quarter as well. So maybe the first question, the power, the pickup in power in general, The order rate you mentioned has been exceeding the average level you've seen over the last two years. Can you elaborate where the power strength really is from? Because historically, your power is closely tied to, let's say, and the automotive industry, but is there something different this time? Do you feel like there's more of a data center? I know that the capacity is probably agnostic for a lot of your customers, but are you able to tell what is driving the power order rate to pick up? Thank you.

Yeah. Hey, Charles. It's Russell. Thanks for the question. So when I think about where we are with power, so there's two components to it, silicon carbide and silicon. Both are actually doing better. So if you look at our power business, it was in digestion for a while, but now it's into recovery. And we're expecting the second half to be stronger than the first half for power. So that's the good stuff. We're seeing that through orders placed. So what's driving that? It was indigestion and now it's coming out the other side. I think it's fair to say electric vehicles are still the number one driver of silicon carbide. We've talked previously about there's more electric vehicles and there's greater penetration into electric vehicles of silicon carbide, particularly 800-volt systems. When you get 800-volt systems, you pretty much don't have a choice as to whether or not to use silicon carbide or not. and then there's all the onboard chargers we talked about and the other components and DC converters. Electric vehicles are still doing really well. There is actually a couple of other opportunities as well in growth and I think we've talked about data centers and as data centers start to move to 800 volt architectures as well, you're going to see silicon carbide being the material of choice and that's going to sit between the grid coming in at like kilovolts all the way down to the rack where it's becoming at 800 volts. So we're seeing that being, while it's still a small area, it is growing quickly. We shouldn't forget that as the cost of silicon carbide devices continues to come down, you see a bit more packaging of devices as well. So they have more value at the subsystem level. You're seeing, as this is occurring, it's opening up more and more applications. So we shouldn't forget all the industrial applications like Transformers and Motors and even, you know, solar. Solar takes up a lot of silicon carbon. So that's what's kind of driving this and those have always been secular drivers. So that's exciting. And I'd say it's more than just China as well. It's beyond China that people are adding capacity and power. Although in some regions, they still haven't kind of like gone for higher capacity. They're still working on what I consider next generation technology. So we have had customers ramping and customers learning. And I'd say that once those device technologies are up in volume and with yield, I think you'll start to see those customers start to ramp as well. And I'm talking about the transition from planar to trench and even to super junction. And as we said before, as these devices become more complex, the density of implant steps goes up and it also tilts towards high energy, which is another good

and Tailwind Forest. Thanks for the call, Russell. We understand the data center part is probably still very small, but faster growing. But based on what you see today, are you able to tell how much of your install base or the silicon carbide capacity in general is going into the data center application versus the electric vehicle. And we just want to get a sense on how to gauge the growth from here, especially from the data center side. Thank you.

Yeah. So we don't know necessarily what products our customers are creating with the tools. So obviously, that is their business. But I think you can see from many of our customers, so every one of the power companies is a customer. And when you see their press releases about having a portfolio that goes off the data centers, then that will give you an indication of how many devices are available and how compelling they are as a business.

Thank you. Thanks, Charles.

As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment for our next question. Our next question comes from the line of Jed Dorsheimer with William Blair. Your line is live.

Hey, thanks for taking my questions, guys, and congrats on a solid quarter. Russell, just more of a technical question for you and kind of a market one as well. Indium phosphide looks like implants being used for surface passivation, for etch repair, as well as electrical isolation. And so I'm just curious... If you might talk about that's a pretty exciting area with a significant undercapacity at the moment, what discussions you might be having, and that would be for continuous wave lasers used for optical and kind of electrical to optical in data center RECs.

Yeah, so thanks, Jed, for the question. So I think indium phosphide is a really interesting laser material. And I think the data centers talked about going into optical communications. I think for us, it's a relatively small amount. So while we will continue to monitor this market, I think the implant opportunities are relatively small. I think there's much bigger opportunities in other technologies, such as MOCBD.

Got it. Got it. That's it for me. Thank you.

Thanks, Jed. Thanks, Jed.

This concludes our question and answer session. I would now like to turn the call over. Oh, hold on just one minute. We had two questions come through. One moment for our next question. Our next question comes from the line of Duxong Zheng of Bank of America Securities. Your line is live.

Hi, thank you for squeezing me in. One question on memory. If I'm not mistaken, I think you said second half memory is going to be similar to first half. So I think that indicates about 120 million of total annual run rate. As we look into the industry, obviously a lot of people are expecting more clean room space to come through really starting next year and into 28. So I'm just curious what kind of upside You just expect in this market, I assume it's going to be a strong acceleration as well. Thank you.

Yeah, Dougson. So a little too early to size memory next year, but our indications at this point is that next year would be another year of growth. Our assumption is that it would be a much lower growth rate percentage-wise and what we're seeing in 2026 because we're coming off a pretty low base in 2025. But engagement with customers is strong. They have ambitious capacity plans. And I'd also note that we're making progress expanding beyond our traditional, I'm going to say strong position, into other areas within the married market and other customers. And so that's another factor to consider. So it's a good market. Implant is a critical step there. And we're pretty excited about the opportunity.

Got it. And then are you seeing anything on the NAND side where I think the industry trends have clearly improved there? We might see some capacity additions there. And then as memory grows as a bigger percentage of your sales, I think it's been historically a little bit more dilutive to margins. So anything on the margin front would be helpful. Thank you.

So I'll take the NAND part of this. So when Dave was talking about the strength of Marine 2027 and clearance coming on, we really are specifically kind of talking about DRAM. NAND, there's a little bit of activity, but I wouldn't in any way call it a trend at this stage. I think anybody who has space is using it for the higher value DRAM. But I do see a need for more NAND coming. And, you know, as we've said in the past, When people do vertical scaling of NAND, that doesn't necessarily support us because it doesn't change the density of implants. But as people add more weight to start, that's when NAND has a value to our business for selling more implants. So I would say that as people start allocating space to expand Wafers out for NAND. That's when you'll start to see our NAND business start to go up. And historically, NAND has followed DRAM, so we are expecting that to come, but I'd say that there aren't many, you know, there's no trend yet.

Yeah, and Duxton, I would just add on the gross margins. As you pointed out, so typically our memory business comes at a lower than corporate average gross margin on the system side, But, you know, when we place those systems, that drives quite a bit of CS&I aftermarket, which is higher margin than corporate average. So over the life of the tool, long term, it's still a pretty attractive business for us. Got it.

Thank you so much.

One moment for our next question. Our next question comes from the line of Craig Ellis. with B. Reilly Securities. Your line is live.

Yeah, thanks for taking the follow-up, team. I wanted to start with a higher-level question, just understanding where the company's capacity positioning was. We're annualizing at about 920 million revenues, it looks like, here as we head into the back half of the year. I would expect, given where we've been over the last five years, our capacity would be at least 40% higher than that. But can you help calibrate that in? And secondly, related to memory, a number of years ago, the team did a great job qualifying the Purion Dragon at one memory customer. I would expect that would be part of the solution set that's going out the door. And can you just talk about the demand that you're seeing across different products and where Puri and Dragon fits into that mix? Thank you.

Hey, Craig, just on capacity, you're right. We do have capacity to meet higher revenue levels than we are today. And quite frankly, as we absorb a little more and our markets recover, we would expect a little bit of benefit to our gross margin as well as a result from the absorption. Now, clearly, mix is going to play an important role, but we do get a little bit of an absorption benefit there with higher volume. On the mix of systems, Russell can weigh in, but we're not going to get into specific systems that we're shipping to customers. But high current is an important part of the equation for memory. And so we have a really good and competitive technology there. As you know, we're strong in high energy, but high energy is a little bit, there's a little less content of high energy in memory. And then there's medium current as well. where we have a competitive solution. So, we feel like we're pretty well positioned for memory.

Did that answer your question, Craig? Yeah, thanks very much, Dave. Okay.

Thank you.

This concludes the question and answer session. I would now like to turn it back to David Ryzhik for closing remarks.

Thank you, operator. Thank you, everyone, for joining the call and your interest in Xellis. Operator, you can close the call.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.