Mary Puma - CEO Kevin Brewer - CFO Doug Lawson - EVP of Corporate Marketing & Strategy.

Peter Peng - B. Riley & Co., LLC Arthur Su - Needham & Company Brian Chin - Stifel, Nicolaus & Company David Duley - Steelhead.

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies call to discuss the company's results for the Second Quarter of 2017. My name is Michelle, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We'll be facilitating a question-and-answer session towards the end of the conference.

[Operator Instructions] I would like to turn the presentation over to your host for today's call, Mary Puma, President and CEO of Axcelis Technologies. Please proceed, ma'am..

a strong foundation built on two areas; continued strength in the mature process technology segment and our services business; a robust memory cycle, driven by sustained NAND activity, cyclical strength in the DRAM market and growth in nonvolatile memory; wins from new regions and market segments, including the Chinese memory market, penetrations into leading-edge logic and reentry into Japan.

Before Kevin reviews the details of our second quarter financials, I would like to reiterate our four key objectives for 2017. First, we will focus on new customer penetrations with Purion. The expanding number of customers investing in IoT, 3D NAND and China has broadened the CapEx opportunity, providing new prospects for Axcelis.

And in fact, Axcelis has penetrated 22 new customer fabs with Purion products since the first quarter of last year. Second, we will also drive to grow our share of business at existing customers, as they increase their capacity in 2017.

We have been successful in gaining additional customer recipes on existing tools as well as getting customers to bring in multiple types of Purion implant systems. Third, we will focus our marketing and engineering resources on enhancing Purion and on developing additional product extensions to drive revenue.

Offering higher energy ranges on our Purion XE and the ability to implant silicon carbide on our Purion M are excellent examples of successfully implementing this strategy. And fourth, we will execute against detailed gross margin improvement program.

Our systems gross margins have shown significant improvement since we began shipping the full Purion product line in 2015. Now I'd like to turn it over to Kevin to discuss our financials..

Thank you, Mary. In Q2, we delivered solid financial results with quarterly revenues, operating profit and total cash finishing at the highest levels in 10 years. Gross margins were in line with expectations, driven by product and segment mix and a closure of another Purion H evaluation system, which has already generated follow-on orders.

This year's strong diversified market is providing Axcelis with an opportunity to firmly establish Purion across a broader customer base. We have captured new fab penetrations, and have planned to ship and close on additional Purion evaluation tools during the remainder of 2017.

As previously mentioned, we're also investing updating core business systems and adding headcount and infrastructure to support new fab penetrations. Variable compensation has also been adjusted to support our higher full year revenue forecast.

At this point, I believe, current spending levels are adequately aligned to support strategic initiatives and planned revenue growth. Quarterly gross margins will continue to be influenced by product and segment mix.

For 2017, revenue are now forecasted around $380 million as segment mix is much more heavily weighted toward systems, which carries lower gross margins than our CS&I business. Based on this change of segment mix, we expect to exit the year with gross margins in the 38% to 39% range.

Full year average gross margins will be in a similar range in our highest level in 11 years, driven by Purion platform commonality and good progress on labor and material cost-out programs. Now I'll review the second quarter financial results. Q2 revenue finished above guidance at $102.8 million compared to $86.9 million in Q1.

Q2 system sales were $62.4 million compared to $55.3 million in Q1. Q2 CS&I revenue finished at $44.4 million compared to $31.6 million in Q1. This higher-than-typical CS&I revenue was driven by a one time customer upgrade project.

Q2 sales of our top-10 customers accounted for about 86% of our total sales compared to 85% in Q1, with four of these customers at 10% or above. Q2 system bookings were $45.3 million compared to $97.2 million in Q1. Our Q2 book-to-bill ratio was 0.7 versus 1.71 in Q1. Backlog in Q2 finished at $29.1 million compared to $48.2 million in Q1.

The gap between bookings and backlog reflects the fact that we often book and ship tools in the same quarter, especially when we see strong activity in the Korean market. Q2 combined SG&A and R&D spending was $26.5 million and in line with guidance compared to $24 million in Q1. SG&A in the quarter was $15.2 million with R&D at $11.3 million.

In the third quarter, we expect SG&A and R&D spending to be approximately $26 million, which includes previously discussed investments and variable compensation expenses. Gross margin in Q2 finished at 38% compared to 40% in Q1.

In Q3, we expect gross margins to again be approximately 38% based on product and segment mix and planned Purion evaluation tool closures. Operating profit in Q2 was $12.5 million compared to $10.7 million in Q1. Net income in Q2 was $13.9 million, or $0.42 per diluted share, compared to net income in Q1 of $9.5 million or $0.29 per diluted share.

In 2017, the company adopted Accounting Standard Update 2016-09, which addresses accounting for equity compensation expense and related tax effects. In the second quarter, this new standard had a $2.8 million positive impact on our net income and a $0.09 positive impact in earnings per share.

This accounting change has no impact on the company's operating profit or cash flow. Excluding the effect of ASU 2016-09, net income for the quarter would have been $11.1 million or $0.33 per diluted share. Q2 inventory ended at $122.6 million compared to $115.6 million in Q1.

Inventory turns, excluding evaluations, finished at 2.3 compared to 2.1 in Q1. Q2 accounts payable were $27.6 million compared to $26.4 million in Q1. Q2 receivables were $48.6 million compared to $67.1 million in Q1. Q2 total cash finished at $115.4 million compared to $76.2 million in Q1.

In the quarter, we generated $34.1 million of cash from operations and an additional $6.8 million of cash from stock option exercises. We expect Q3 total cash to finish at approximate $120 million. I'm very pleased with our financial performance in Q2.

Solid execution across the business and a strong balance sheet position us well to broaden our Purion footprint and achieve projected market share gains. I will now turn the call back to Mary for her closing comments..

First, by building a broader customer base in both the memory and mature process technology segment, penetrating the leading-edge logic segment and re-entering the Japanese market; and second, by improving our gross margins and controlling and aligning our costs with our revenue growth objectives.

Axcelis is providing customers with a strong alternative in ion implantation. Numerous discussions with customers reveal the reasons they are choosing Axcelis and Purion. Advanced Technology is the first factor.

The Purion product family provides them significant advantages in performance as measured by the angle dose and energy control derived from our scanned spot beam technology. The common Purion M station and ELS4 Source provide them with higher productivity and up-time, offering cost of ownership advantages.

Second, our strength in listening to our customers and providing them with implant solutions tailored for their needs differentiates us from the competition. The fact that we can offer our Purion technology at 150, 200 and 300 millimeter is a good example of the technology advantages and flexibility that we offer.

Finally, there is the innovation benefit, which by promoting competition, allows customers to gain significant technology advances and engineering expertise, resulting in improvement in productivity, yield and cost of ownership. Customers can maximize these advantages by splitting their business evenly between two strong implant suppliers.

Every customer that has brought in the Purion H for high current, an area where there has been little competition in the recent past, has realized significant benefit. This has generated strong customer pull for the Purion H and will allow Axcelis to continue to grow its footprint and market share.

We are closing in on the financial and market share goals we laid out several years ago and have been steadily working toward. With robust end markets and strong execution, our path to achieving our target business model is clear and within reach. With that, I'd like to open it up for questions..

[Operator Instructions] Our first question comes from Craig Ellis with B. Riley..

This is Peter Peng calling in for Craig Ellis. The first question I have is just on the ion implant TAM for 2018.

Just given the China fab build-out, the 3D NAND build-out and a sustained DRAM, why wouldn't that argue for a year-on-year growth?.

For 2018, Peter?.

Yes, that's right..

Right now, we're forecasting 2018 around $1 billion, relatively flat. It's still early to tell exactly how big the Chinese build will be and what that will exactly mean. But that's in line with where the industry analysts have it at this point..

Okay. And the -- and then the other question is just on market share. Just based on your 5-year trends, seems like you're making really good progress with 500 basis points per year.

And just given the number of placements for this year, is there any way that this is going to go above for 2018? Or is this -- are you expecting this kind of trajectory?.

Well, we expect -- I'm not exactly sure what you're asking. But I mean we are expecting significant market share gains this year. We've narrowed the range now to 26% to 28%, and we're growing significantly faster than the TAM for ion implantation, which we just discussed. It was about $850 million last year and up to approximately $1 billion this year.

We put our target business models out there for revenues at $450 million and $550 million, which represents market share in the 32% to 40% range. And again those are the targets that we are working toward over the next several years. So yes we expect to continue on an upward trajectory into 2018 and even beyond that..

Okay. And just comparing the TAM from your last market deck to this market deck, it seems like there's some changes in terms of the slope. If I recall correctly, the last investor deck, it has a 2019 growing.

So what's been the change?.

The other years, from 2019 -2020, and 2021, are data from Gartner. So they revise their forecast about every -- essentially every quarter..

Our next question comes from Edwin Mok of Needham & Company..

This is actually Arthur on for Edwin. Thanks for letting us to asking questions. The first one is just on the completion of the ongoing Purion H eval that you mentioned in the press release prior to SEMICON. I think you talked about initial follow-on orders.

When do -- in what quarter do you expect those follow-on orders to be recognized?.

We expect shipment in 2017..

Okay. Got it. And then Mary, I think in your prepared remarks, you talked about some long-term business drivers, the longer-term ones, including Chinese memory, penetration into leading-edge logic and reentry into Japan. Can you just provide a quick update on kind of those areas? I know the Chinese memory's obviously dependent upon the market.

But just an update on the efforts there.

And which ones do you think will have more material impact in the near term?.

to put offices in, make sure that we have appropriate field service support; we've got the right inventory. So all of that is essentially underway right now from a planning standpoint to get ready for that. From a Japanese market perspective, we've actually had some good engagement with some of the Japanese customers. We've had them in here.

We've done demos, and that is moving along at the pace that I think we expected. Having said that, we've also talked about that it takes a while to get into the Japanese market if you're a non-Japanese equipment supplier.

So that is something also that we expect will likely be a 2018, 2019 time frame activity, before we really are shipping units and seeing any revenue from it. And the last thing is leading-edge foundry/logic, and we are still working hard to place at least one Purion H evaluation unit at one of the large leading-edge foundry/logic customers.

And that's something that, as the year -- as we continue through the year when that happens, it would be something that we would likely put out a press release on. So you'll just have to watch for that. But again, not something that we're going to see any revenue from immediately, again, another 2018, 2019 kind of revenue activity..

Got it. Thank you so much for that color. If I can ask just on the 3Q systems mix. I know 60% -- you said 60% was coming from memory.

Is there a way we can think about the split of that between NAND and DRAM?.

Yes, if you look at it, it's almost a 50-50 split between DRAM and NAND, but slightly more heavily weighted towards NAND. That's in terms of the shipments that we had during the quarter..

Got it. And just one last question. The cash balance has increased substantially this quarter and surpassed that $100 million mark that you have outlined in 2Q.

As the cash balance continues to grow, what do you have planned in terms of your capital deployment strategy?.

Well, at this point, we're just reinvesting in the business. We've some pretty robust growth plans in place. We've got our $450 million to $550 million target models out there. And that's where we're going to place some money at this point..

Our next question comes from Patrick Ho of Stifel..

Hi, there. This is actually Brian Chin on for Patrick. Sorry another baton switches here in terms of analysts. Thanks for let me ask a couple of questions here though. Congratulations on the Purion win in the quarter. And revenue is clearly coming in higher for the year than expected.

I do want to probe the gross margins a little bit, and there are a couple of factors causing the range to be maybe about 100 basis points lower than expected.

Can you just kind of break down how much of this is attributed to the higher systems mix, how much to the higher memory customer mix, and maybe to the evaluation unit as well?.

Yes. So the majority of what we're seeing right now is we exit the year is coming from systems. Our original plans and if you remember original targets on, we had a much larger range of $320 million to $380 million. We were assuming a higher mix of CSI versus systems. But this growth is coming out of systems, which is putting us at the high end now.

And we always talk about CSI having accretive gross margins. The systems margins aren't as high as CS&I, but they're improving. And the chart in our investor pitch shows the progress we've made since we implemented and actually introduced the full Purion product line. So we're not -- it's not like we're losing ground.

We're continuing to lower the cost of these tools quarter-over-quarter. We're making really good improvements on gross margin, but we're just getting a big swing of systems versus CSI on year-end exit.

I think kind of the important thing is, though, if you look at our full year gross margins, we're right on plan on where we think the full year average gross margins are going to land in that 30% to 39% range. And we're clicking along right now at some of highest levels.

We've got our target models out there, which still are valid in terms of what we're saying, so 40% to 42%, $450 million; 42% to 44% to $550 million. And as we continue to raise revenue, get higher revenues, systems, well, the good thing is the volume will start kicking in more, too. So it's not like added systems is always a bad thing.

It does help the volume, and as we move farther into some of our projects, where we have engineering cost on things and get the volume, these system gross margins will certainly more closely align with the service side of the business.

But -- so I think the short answer is, the majority of the back end is really the mix between CS&I and systems at this point..

Okay. Great. Thanks Kevin. And also Mary and Doug, in terms of the DRAM business that you're seeing, there's some nonvolatile memory, there's some DRAM.

But the DRAM side is in more -- are you seeing mainly migration -- node migration, lithography shrink-related shrink activity? Or are you starting to see some capacity as well? And is that maybe factored into your second half estimates at all?.

Well, it's a combination, Brian. The shrinks tend to lead to additional requirements for implant. So you get the shrink implants added. And as a result, that actually reduces the overall capacity in the fabs. And then the customers usually fill in and add additional capacity. So it's a combination. But it is largely driven by the shrinks..

Okay. And is it fair to say -- referencing the comments at -- in the past couple of weeks since SEMICON, your visibility has improved.

Is that largely maybe in the DRAM space specifically? Or is there a better way to characterize that?.

No, I think it's really across the board. It's in both of the major segment, memory segment across types, so all three types and then also the mature process technology..

I think Brian the other thing to keep in mind is for Axcelis, a lot of our growth is coming from new customers.

And so it's -- in this particular case, we're seeing growth in memory, both DRAM, traditional NAND and other nonvolatile areas; and then significant growth in image sensors, power devices and other mature technologies, I mean, both IDM and foundries..

Our next question comes from David Duley of Steelhead. Your line is open..

Thanks for taking my question. As far as your market share gains in 2017 are quite substantial versus the 2016 number.

Which product segment do you think contributed the most to those share gains, the Purion H, M or the XE?.

We've had very strong demand for the Purion XE, and not just the basic Purion XE, but also the additional product extensions that we've had, the EXE and VXE. So the high-energy market has been very good. But we've also seen a lot of additional penetration with the Purion H, and that's very good news for us.

Because as we know, that's 60% of the implant market, and that's the area where, with those penetrations, we're actually going to see the most growth..

Okay. And asking the same question a slightly different way.

When you look at the end markets, the IoT or NAND, or DRAM segments, same question, where do you think you picked up the most market share during calendar 2017?.

I think it's actually been across the board. We picked up probably more new customers because they are more customers in the mature process technology area. But in memory, we actually made significant progress at a third memory chip maker and had -- have already seen some follow-on business from that.

And that's something that will open up significant -- a significant opportunity for us as that customer continues to buy, moving into 2018 and beyond.

So I think maybe more customers on the mature process technology side, but with the memory, we continued to hold strong at the two customers, where we already had a foothold, and are really looking forward to the opportunity to work with that third customer. And by the way, we actually had a fourth memory chip device maker as well in 2017.

So we've got pretty good penetration across the majority of those major device makers..

Yes and David the other thing I think relative to the question on the product split there. In the IoT or mature markets, we've seen a lot of activity with Purion M in the power device market. We've seen a significant amount of opportunity and activity with Purion XE, EXE and VXE in image sensors.

And then in the general foundry market for mature logic, we've seen a lot of activity with new customers relative to Purion H..

Okay. Excellent.

Kevin, maybe help me understand with -- at least from what you can see now, how many evaluate systems kind of lower -- and I would call those lower margin evals, do you expect to place in the third or fourth quarter or recognize revenue on?.

Well, we still have four outstanding evals right now and the plans right now would be to close some of those evals out this year. We also have plans, David, for additional evals. So right now I'm thinking we're going to continue to have 3 to 4 evals out there.

We've been closing them typically in the 6 to 12 month period, with the exception of one that just closed, which everybody knows, was a very long one. So we're going to -- I think in terms of modeling, we're going to continue to see the impact of evals in each quarter, certainly into next year.

But all the targets that we put together, we've kind of assumed what we thought would be net for evals. So it's covered in terms that lead to our planning..

So I guess just thinking about that, if you continue to place them and the number stays constant, then you're probably going to close one per quarter is the goal..

It probably be a couple more this year. But we're not going to forecast the quarter..

I mean, it could add up maybe 2 go in a quarter. But they're going to be -- they're not all going out at the same time. So they -- in theory, they should be closing staggered. Yes, if you're trying to model, that's probably the best thing to do..

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..

We're pleased with our second quarter performance and the prospect for a strong year for both Axcelis and the industry. As always, I want to thank you for your continued support, and hope to see you in the coming months. Thank you..

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