Mary Puma – President and Chief Executive Officer Kevin Brewer – Executive Vice President and Chief Financial Officer Doug Lawson – Executive Vice President of Corporate Marketing and Strategy.

Peter Peng – B. Riley Arthur Su – Needham & Company Christian Schwab – Craig-Hallum Capital Brian Chin – Stifel David Duley – Steelhead Securities.

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies call to discuss the company’s Results for the Third Quarter of 2017. My name is Brian, 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.

[Operator Instructions] 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 Axcelis Technologies. Please proceed, ma’am..

continuing to grow our recipe count and footprint at existing customers, including increasing our share in new memory customers in both DRAM, 3D NAND and nonvolatile memory; successfully placing multiple Purion products in new Chinese memory projects; reentering the Japanese market; and penetrating leading-edge foundry/logic.

Before Kevin reviews the details of our third quarter financials, I would like to once again reiterate our four key objectives for 2017, which have been critical to our success this year. First, we are focusing 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. During Q3, we added six new Purion fabs, three of these were new customers. Axcelis has now penetrated 28 new customer fabs with Purion products since the first quarter of 2016.

Second, we are also driving to grow our share of business at existing customers as they increase their capacity in 2017. We’ve been successful in expanding the number of recipes on existing tools as well as selling additional Purion products to existing customers. We now have 12 customers with multiple types of Purion systems.

Third, we are focusing our marketing and engineering resources on enhancing Purion and on developing additional product extensions. This quarter, we recognized significant revenue from the Purion VXE in the image sensor market. And fourth, we are executing against detailed gross margin improvement programs.

Our systems margins have improved 15.1 percentage points since Q1 2015 on a rolling 4-quarter average. Now I’d like to turn it over to Kevin to discuss our financials..

a Purion H for DRAM and a Purion VXE for image sensors. Quarterly gross margins will continue to be influenced by the number of eval tools closed out, the mix of systems revenue versus CS&I revenue and the mix within our system shipments.

Margin improvement remains a top priority in the business, and we are continuing to make solid progress on supply chain, engineering, manufacturing cost-out initiatives. Since the full launch of the Purion product line in Q1 of 2015, we have increased systems standard margins 1,510 basis points on a rolling 4-quarter average.

I will now review the third quarter financial results. Q3 revenue finished above guidance at $104.5 million compared to $102.8 million in Q2. Q3 system sales were $69.2 million compared to $62.4 million in Q2. Q3 CS&I revenue finished at $35.3 million compared to $40.4 million in Q2.

Q3 sales to our top 10 customers accounted for about 80% of our total sales compared to 86% in Q2, with two of these customers at 10% or above. Q3 system bookings were $83.2 million compared to $45.3 million in Q2. Our Q3 book-to-bill ratio is 1.18 versus 0.7 in Q2. Backlog in Q3 finished at $42.1 million compared to $29.1 million in Q2.

Q3 combined SG&A and R&D spending was $25.9 million and in line with guidance, compared to $26.5 million in Q2. SG&A in the quarter was $14.9 million, with R&D at $11 million.

In the fourth quarter, we expect SG&A and R&D spending to be approximately $26.5 million as we continue to invest in updating core business systems and adding infrastructure to support both existing customers and new fab penetrations. Variable compensation has also been adjusted to support our higher full year revenue forecast.

Q3 gross margin finished at 38%, flat to Q2. In Q4, we are projecting gross margins to be approximately 37% and 38%, impacted by the number of Purion H shipments, which are forecasted to be 50% higher than in any other quarter this year.

We have a number of planned margin improvement initiatives that are expected to increase Purion H margins to more closely align with the Purion XE over time. Operating profit in Q3 was $13.8 million compared to $12.5 million in Q2.

Net income in Q3 was $11.8 million or $0.35 per diluted share, compared to net income in Q2 of $13.9 million or $0.42 per diluted share. These results reflect the impact of ASU 2016-09, which requires us to report tax credits or tax expense depending on the options exercised in the quarter.

In the second quarter, this standard increased our GAAP net income and EPS. But in the third quarter, it lowered our net income by $0.8 million, reducing our earnings per diluted share by $0.03.

Excluding the effect of this standard, net income for the third quarter would have been $12.7 million or $0.38 per share, in comparison to 11.3 – $11.1 million or $0.33 per diluted share in the second quarter. Q3 inventory ended at $123.4 million compared to $122.6 million in Q2.

Inventory turns, excluding evaluations, finished at 2.2 compared to 2.3 in Q2. Accounts payable were $33.6 million in Q3 compared to $27.6 million in Q2 due to the timing of receipts. Q3 receivables were $69.8 million compared to $48.6 million in Q2 due to the timing of shipments.

Q3 total cash finished at $120.7 million compared to $115.4 million in Q2. In the quarter, we generated $8.9 million of cash from operations and an additional $1.8 million of cash from option exercises. We expect Q4 total cash to finish at approximately $130 million. I am very pleased with our financial performance in Q3.

Solid execution across the business and a strong balance sheet are allowing us to invest in the business, resulting in top and bottom line growth. Our Purion footprint continues to expand, as evidenced by the number of new fab and customer penetrations, and is key to us achieving our higher revenue targets.

I will now turn the call back to Mary for her closing comments..

Thank you, Kevin. This is a good time to be in the semiconductor industry. It is rare to have a prolonged cycle with steady growth like this. The last comparable period was in the late 90s. There are major similarities between these two time periods.

In the late 90s, millions of people were adding connectivity with the advent of the web browser and the introduction of the search engine. This drove a surge in PC upgrades as well as storage and communication requirements. Now we are witnessing billions, if not trillions, of devices being connected.

Data is being accumulated in proportions never before seen, along with the development of advanced analytics and AI. We believe that we continue to be in a sustained growth cycle that is now expected to extend into next year and potentially beyond.

In order to capitalize on these favorable market conditions, our focus is on driving revenue growth, profitability and market share gains. The Purion product family is highly competitive and provides Axcelis the opportunity to offer customers a strong alternative in ion implantation that will result in market share leadership.

We are now closing in on the financial and market share goals we laid out several years ago and have been steadily executing against. With robust end markets and strong execution, our path to achieving our target business model is clear and within reach.

Before closing, I would like to take the opportunity to thank our employees who tirelessly work to satisfy our customers and continually improve our products. This great year would not be possible without their hard work and dedication. With that, I’d like to open it up for questions.

Brian?.

[Operator Instructions] Your first question comes from the line of Craig Ellis from B. Riley. Sir, your line is now open..

Hi, this is actually Peter Peng calling in for Craig Ellis.

First off, just I may have missed this, but what is the system mix breakdown for Q3?.

The shipments in terms of the regions or customers....

Just between memory and mature foundry..

Memory was 36% and mature process technologies was 64%..

Great. And then just looking at your market share, it seems like you’re tracking towards the 30% range for the year.

Could you just kind of provide some color on where the share gain is coming from?.

So the share gain is actually coming from a number of places. If you take a look, we’ve had 14 new penetrations this – we’ve had 28 penetrations since the first quarter of 2016. It’s about an even split between new customers and existing customers and new fabs.

This year alone, we’ve had 14 new Purion placements, and again, it’s about an even split between the new customers and the existing customers but putting a tool into a new fab. It’s a mix in terms of exactly where the penetrations have come.

If you take a look at where we’ve penetrated, about 3/4 of those penetrations have come from mature process technology, the other 1/4 from memory. And I would say the majority this year of new penetrations have come from high energy, with the remainder coming from a split between high current and medium current..

Great. And one last question before I hop back into the queue. Some of your peers are talking about industry growth of mid-single digit to high single digit for calendar 2018 and then with a profile that’s half-on-half growth. So first half growth over second half 2017.

Is there any reason that Axcelis won’t be in line with that?.

No, there’s no reason we wouldn’t be in line with it. But again, remember, our story is very much predicated not only on strong markets, but it’s on gaining market share. So this year, we expect to be between 27% and 28%, up from about 17% last year.

If you take a look at our target business models that are in our investor presentation, they represent 32% market share and then 40% market share. So 32% at the 450 model, 40% at the 550 model.

And our goal is to continue to grow our revenues and gain market share and likely, when we get to the February quarter, we’ll – or in February when we report on the full year, we’ll also give some insight into what we believe will happen in 2018 from a market share perspective and the growth we expect to get..

Great, thank you. And congratulation on the strong execution..

Thank you..

Thanks..

Our next question comes from the line of Edwin Mok from Needham & Company. Sir, your line is now open..

This is actually Arthur on for Edwin. Thanks for taking our questions and also congrats on the great quarter. Hey, so the first question is just on the guidance for the second half 2017. I just want to understand what drove the upside versus your prior guidance.

And I know you don’t want to provide any quantitative targets for 2018, but how has that shaped your initial views for 2018 from a qualitative perspective?.

So I think it’s actually strengthened in both of the markets that we’ve talked about all year, the mature process technology area as well as memory, both 3D NAND and DRAM. And the real kicker has come from the share gains that we’re seeing.

I mean, if you think back to what we’ve been talking about throughout the year, we talked about our market share. Well, I guess, at about midyear, we were at 26% to 28%. And now exiting the year, we’re taking a look at 27% to 28%, so we’ve been getting share gains actually in both of those segments..

Got it, okay. And so, Mary, you talked about how systems mix in 2017 was mostly weighted for mature foundry/logic.

How do you think that mix might shift as you go into 2018?.

I don’t think we expect to see any shift because most of – both of the markets are expected to remain strong. From interactions with our customers and projects that we’re seeing that they’re planning for at least the first half of 2018, we think that both of those segments will have strength.

And we will continue to gain market share as well as part of that..

Arthur, the weighting – this particular quarter in Q3, it was more heavily weighted. But in general for the year, it’s going to be weighted towards mature, but it’s not too far off the center point likely, so – which is what we’ve been seeing over the last couple of years..

Got it, okay. And Kevin, I guess my last question is just on gross margins. I know that – I think you just mentioned that on the call, that you expect fourth quarter gross margin of between 37% and 38%, and it’s partially impacted by strong Purion H shipments.

Can you just kind of talk about some of the gross margin improvement initiatives you have on Purion H, and to what scale would we need to be, to be at a point where the Purion H is mature enough to have – to be corporate gross margin accretive?.

the XE, the M and the H. If you look at what’s really changed in the fourth quarter and what’s changed since this year started, system revenues are up significantly more than we had originally predicted when we were talking about higher year-end exits on gross margin. And systems mix is a much bigger portion now versus CS&I, which are very accretive.

So that’s putting some of the pressure on the Q4 as well as we’ve got this big uptick in Purion H. Obviously, one thing that does help – I mean, volume is a good thing, and the volume is certainly helping.

But probably the thing that’s not coming any faster from this uptick is we have several engineering cost-out projects underway and projects really on warranty and install improvements. And those are more time-based than they are volume-related.

So while we are getting the benefit of additional volume, which is great, some of these other things just need to work their way through. So we’re kind of – the year is a little bit ahead of itself.

The year-end mix is certainly different than where we thought we’d be when we started the year, and it’s much more heavily weighted towards systems than it is service. To your particular question on the H, it’s – there’s still a lot of work on supply chain.

We’re getting the volume, but we’re still moving parts into our low-cost supply chain as the product becomes more mature. The H is our newest in terms if you look at the release of the Purion product. And in the investor pitch, we’ve had that slide in there.

I think it’s around Slide 19 or somewhere in that vicinity that kind of showed that the H has been lagging the XE and the M a little bit. But that’s – we understand we need to stay focused there and get that more to parity with the VXE.

So I think as these projects work their way through, that are more not volume-related but time-related, you’ll see that – those two margins come closer together, between the XE, which are much, at this point, higher than the H..

Got it. Thanks so much and congrats on the great quarter again, guys..

Yes, thank you..

Our next question comes from the line of Christian Schwab from Craig-Hallum Capital. Sir, your line is now open..

Hey, congratulations on another great quarter.

What is your guys’ current outlook for China in 2018 and 2019?.

So we see a number of projects beginning to ramp up now for – to be prepared to take equipment in 2018. We are planning for that. We have added FSEs, field service people, opened some new offices. We’re making the investments that Kevin alluded to earlier in his script to be able to support that business.

And furthermore, some customers are actually even starting to talk about projects in 2019. So we expect at least 2018 and into 2019 to be strong, and we expect to get our fair share of those projects..

And what is the mix of that, whether it’s memory or nonleading-edge or leading-edge? Can you give us an idea of what you’re working on?.

Yes, we’re working on projects in both of those areas. It’s a mix of memory and mature process..

Yes, right now, Christian, it’s more weighted towards mature process technologies. As we get into 2018, we’ll really start to see the memory stuff start to come on. And as far as 2019 goes, it’s too far out to really judge what the mix will be..

Okay.

Can you give us the number of aggregate new fab projects in China that you’re – that you believe you have an opportunity to sell into, on an aggregate number?.

No. I mean, we’re working on all of them right now. So I’m not going to conjecture on exactly what the number will be..

Okay, perfect. All right. I’ve no questions. Thanks..

Thanks, Christian..

Our next question comes from the line of Patrick Ho from Stifel. Sir, your line is now open..

Hi, good afternoon. This is Brian Chin calling in for Patrick. Thanks for letting me after couple of questions. First congratulations on the results in the quarter.

I am kind of curious though, it does appear that system mix in Q3 and second half is somewhat flipped relative to what was previously expected, with a much stronger tilt towards the mature products.

Can you discuss what’s transpiring here? How much of this is the upside from things like image sensor or power versus any maybe delay or kick out in memory activity perhaps into next year?.

No, Brian, actually, the mix is similar to what we were expecting. Memory continues to be very strong. There has been additional activity, more activity in the mature process technologies. There’s been a lot of activity in image sensor.

We specifically highlighted increased activities, especially with the VXE, which is one of the product extensions on high energy in Korea where there’s some large image sensor manufacturers in Korea. Most of the time, people think of it just as a country that makes memory.

And so there’s been a lot of activity there, and the Chinese market has also been – continued to be strong. We’ve said all along this year that it would be somewhere between 25% and 35 – 30% of our revenue, and it continues to be right in that range..

Okay. And just to make sure I heard correctly, it sounds like the mix is, in Q3 and similar in Q4, is sort of 36% memory, 64% mature.

Was that right?.

I think we said it was going to shift more towards mature in Q4. It was more of a 70-30....

Okay. And maybe – I thought it was more of an expectation that memory would be stronger in the mix. Another question on gross margin – I’m sorry, go ahead..

Yes, the fourth quarter is going to be closer to 70-30 mature. For the year, it’s going to be weighted towards mature, but they’re not too far off from pretty equal. So it’s very similar to what we’ve seen the last few years.

Quarter-to-quarter, it varies quite a bit, but when you look at it over the year-over-year, it’s been split relatively close down the middle..

Yes, and I think the key takeaway is that everybody continues to think, or many people continue to think, that Axcelis is just a memory company, and it’s very important when you take a look at these statistics to understand that we have expanded our footprint significantly, not only to get more recipes at our existing memory customers and add some new memory customers.

But we’ve really added a lot of footprint in the mature process technology area to the point where, as Doug said, it’s equivalent to a slightly higher percentage of our business overall for the year..

Sure. Yes, that is impressive. A quick question on – just a question on gross margins, not really on the product side, more on the service side. We have noticed that year-to-date and in Q3, the service gross margin’s tracking pretty far below what they were last year. This is clearly less than 10% of your overall sales.

But it is a little bit of a drag on the overall gross margin. So I’m kind of curious if you could explain sort of what that dynamic is this year and if that is something that can normalize or change next year..

Yes, I mean, the only thing we really talk about is CS&I, which is the service, the spare parts, consumables, used tools upgrades, and that part of our business continues to be very accretive. The pure service part, which is the labor, which we – gets broke out, and that’s what you’re picking up in the financials, that does fluctuate back and forth.

It is down a little bit this year, but it’s just kind of more around where the mix of stuff is happening right now. But overall, that impact really isn’t creating a drag on the overall CS&I business.

And we are – we do talk a lot about what we’re doing on the system side, obviously, because that is where a lot of the lion’s share of the growth is coming from. But we also have made an investment in the service side of business this year in terms of developing and driving new upgrades to the field.

And the upgrades are the things that really drive the margin higher on that side of the business. So we’re doing things over here to not only gain some additional revenue but certainly prop up the margins even higher around that CS&I side which includes the service space..

Sure. At least, it does seem like it’s up a good amount this year. And maybe lastly, doubling back on – I think there was a question on China earlier in the queue. But just looking at the various initiatives that you have going on, Axcelis-specific as well as sort of the industry tailwinds.

Throwing China in there, but also including the market share gains at potential new memory customers, penetration of advanced logic/foundry customers, maybe discontinuation of the trends and strong execution on the mature products.

Looking at all those various initiatives, what do you think will be the biggest incremental growth driver for the company next year?.

Well, don’t forget reentering the Japanese market, that’s really the fourth big piece of our growth strategy to achieve our target business model. I think next year, we’re going to see ourselves continue to grow footprint and add some additional share at existing customers. But probably the biggest driver that is new to the mix would be China.

There is a lot of activity in China right now. And as I said, we expect to win our fair share of that. So I think for 2018, that’s probably going to be the biggest driver..

Okay. Thanks, Mary. Appreciate it..

[Operator Instructions] Our next question comes from the line of David Duley from Steelhead Securities. Sir, your line is now open..

Thanks for taking my question..

Hey, Dave..

I was wondering if you might take a stab at what you think the overall size of the implant market is going to be next year..

It’s going to be around $1 billion. So – I mean this market’s been $1 billion plus or minus $100 million for a long time, and we continue to see it that way. And we’ll continue to gain share of that $1 billion. That’s where our focus is..

Okay. And the – you talked about your market share ending up, I guess, 27% or 28% of the overall market.

What do you think you’ve been able to achieve in the big segment of the market in the part that the H addresses?.

What do we expect our market share to be for Purion H?.

Well, yes, the large part of the market, right, the part that you’re trying to penetrate. What do you think your market share is now? Or maybe give us a baseline of what it was last year..

We haven’t really broken out the H at this point. To be honest with you, Dave, this year really has been more focused on new customer penetrations than pure market share. It’s really setting up significant share gain next year. So honestly, we haven’t really looked at the exact number.

And so we’re really looking at the full market with all the products at this point..

Okay. And I guess kind of as a follow-on there, you keep mentioning you’re focused on penetrating new customers and getting new recipes of current customers. And it would seem like you had a very significant number both in 2016 and 2017 as far as new customers go and new recipes that you’ve outlined.

So is there any reason to think that the trajectory of your market share gain changes based on all these new customer wins?.

No, we – if you look at the plans within the long-term model at 32% and 40%, the trajectory is there. So we said in the script that the next two years or two years, we have a plan to achieve the model. We’ve got that on the share gain graph and so....

I guess, say, you kind of have the customers in hand now as they ramp up to achieve those goals, I guess is what I’m ultimately digging at..

We have a lot of the customers to achieve those goals. There’s still more customers to be had. So Japan is open. There’s a lot of new customers coming online in China, and we’ve got leading-edge logic to crack. So we’ve still got a lot of doors to open, but we’re in a lot of places at this point with 28 fabs and 14 customers just in the last two years..

But we still – we’ll continue to have evals outstanding and right into next year because, as Doug says, we have more to go after, and we’ve got those evals planned..

Okay, final question from me is, as far as further penetration in Japan, I guess, to me that was significant progress that would be penetrating the memory customer there.

When is there – do you have plans or targets as to when we should see progress on that front?.

Well, we continue to engage with a number of customers in Japan. And we feel like we’re making progress. We have run demos. We continue to get results and run additional wafers here in Beverly. So our target would be to show some progress in 2018..

Okay, thank you..

And this concludes the Q&A portion of the call. I will now turn the call back to Mary Puma, who will make a few closing remarks..

Thank you, Brian. We’re pleased with our third quarter performance and prospects 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.

We will be attending the 8th Annual Craig-Hallum Alpha Select Conference in New York City on November 16, and we will be back in New York for the New York City Summit on December 6 and the Needham Growth Conference on January 2017 and 2018. Thank you..

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