Mary Puma - President and CEO Kevin Brewer - EVP and CFO Doug Lawson - EVP-Corporate Marketing and Strategy.

Craig Ellis - B. Riley FBR Alex Kim - Needham Christian Schwab - Craig-Hallum Capital Patrick Ho - Stifel Mark Miller - Benchmark.

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies call to discuss the company's results for the Second Quarter of 2018. My name is Glenda, and I will be your coordinator for today.

Operator Instructions] 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..

Thank you, Glenda. With me today is Kevin Brewer, Executive Vice President and CFO; and Doug Lawson, Executive Vice President of Corporate Marketing and Strategy. If you have not seen a copy of our press release, issued earlier today, 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'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 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. Q2 was another strong quarter for Axcelis, with revenue of $119.3 million, gross margins of 41.1%, operating income of $19.3 million or 16.1% of revenue, and earnings per share of $0.43. These results were well above guidance and consensus estimates.

Guidance for the third quarter includes revenue of between $95 million and $100 million, gross margin of approximately 40%, operating income of $8 million to $10 million, and EPS of $0.15 to $0.20. We are still targeting our $450 million business model in 2018, a goal that we set back in January. Two key factors are driving this.

First, the highly diverse customer base of the Purion product family, provide some stability to our revenues when one segment like NAND experiences weakness. This quarter we shipped Purion to five new customers, bringing the total number of new Purion customers to 40, since Q1 2016.

The second factor is the strong market conditions in the mature process technology segment. This is a segment in which Axcelis has had a large install base and continues to maintain a high market share. Our systems shipment mix in the second quarter was split evenly, with 49% mature foundry/logic and 51% memory.

29% of total shipments were for DRAM and 23% for FLASH. With NAND investment expected to slow in the second half, we anticipate a much higher percentage of mature foundry/logic revenues for the remainder of the year. The mature segment accounted for 67% of our Q2 systems bookings.

The geographic mix of our systems shipments were, China, 49%; Korea, 33%; the U.S. and Europe, 13%; and the rest of world, 5%. China continues to be an active geography. During the quarter we shipped our first orders for Purion to new domestic Chinese memory manufacturers.

The industry remains in a strong sustained cycle that continues to be fueled by IoT and the mature foundry/logic market, data storage and the 3D NAND market, and data analytics in the DRAM and advanced logic segments.

We are currently experiencing near-term softness in the NAND segment, but we are seeing continued spending in DRAM and very active investment in the mature foundry/logic market. With multiple fab construction projects underway, we expect 2019 to be another solid year for equipment CapEx.

Customers' fabs across all segments are running at very high utilization rate, which suggests that this will be a short pause. This high utilization combined with the number of Purion systems exiting the warranty phase, is driving an increase in spares and consumable and positively contributing to our CS&I business.

CS&I revenue for the second quarter was $45.4 million. I want to emphasize that despite near-term softness in the NAND market, which translates into slightly lower second half revenues compared to the first half, we will continue to make investments required to achieve the $550 million target business model.

The bulk of the investments are focused on Purion product development, and supporting resources to address key growth opportunities. We will monitor the spending closely, but it is critical we invest to maintain Purion momentum. This investment will be focused in four key areas.

Number one, successfully closing the Purion H evaluation, and gaining share in the advanced foundry/ logic market segment, by leveraging the architectural advantages of the Purion design.

Number two, reentering the Japanese market by effectively utilizing our relationship with SCREEN semiconductor and the technological advantages Purion offers Japanese customers. These two market opportunities combined, represent approximately $300 million or about one-third of the ion implant market, that had not been accessible to Axcelis.

Number three, continued product development focused on target market segments, such as power devices and image sensors, where Purion provides our customers with significant advantages. This investment in R&D will expand the Purion product line beyond the current Purion power series and Purion VXE and EXE products.

And number four, building the required infrastructure to support our growing Chinese business. Now I'd like to turn it over to Kevin, to discuss our financials..

Thank you, Mary. I'm very pleased with our Q2 financial performance and overall execution during the quarter. Gross margin in the quarter of 41.1% was significantly above our guidance with operating profit and earnings per share also well above guidance. Margin improvement continues to be an area of focus across the business.

And we are targeting initiatives on the things we can control, like strategically investing in CS&I and projects targeted at higher revenue margin expansion, aggressively pursuing cost out through value engineering and lean manufacturing initiatives, leveraging volume across the supply chain using long-term agreements, buying more products from our global partners as Purion matures, and capturing aftermarket sales as Purion's come out of the warranty period.

We're also continuing to invest in profit extensions like the Purion power series that provide customers with significant advantages and allow Axcelis to capture value.

With regards to operating expenses, I am closely monitoring our spender levels and aligning incremental investment with initiatives that will enable us to achieve our revenue growth objectives. As discussed last quarter, we opened the door to $300 million in potential new revenue for Axcelis, an advanced foundry/logic in the Japanese market.

Over the next couple of years, we'll allocate additional capital and resources to setup our applications lab at spring, and increase R&D to support advanced foundry/logic in Purion product extensions. Now I'll review the second quarter of 2018 financial results. Q2 revenue finished at $119.3 million compared to $122.2 million in Q1.

Q2 systems sales was $73.9 million compared to $85.5 million in Q1. Q2 CS&I revenues finished at $45.4 million compared to $36.7 million in Q1. Q2 sales for our top 10 customers accounted for approximately 70% of total sales compared to 87% in Q1. There was only one customer at 10% and above.

Q2 system bookings were $61.8 million compared to $90.3 million in Q1. While the Q2 book-to-bill ratio of 0.84 versus 1.02 in Q1. Backlog in Q2, including deferred revenue, finished at $74.1 million compared to $89.4 million in Q1.

Q2 combined SG&A and R&D spending was $29.7 million or 24.9% of our revenue and in line with guidance compared to $28.7 million or 23.5% in Q1, SG&A in the quarter of $17.2 million, of R&D at $12.6 million. In Q3 we expect SG&A and R&D spending dollars to be flat to Q2, which will be approximately 30% of forecasted revenue.

As revenue levels recover, OpEx should more closely align with our $450 million business model at approximately 26% of revenues. Q2 gross margin was 41.1% compared to 38.6% in Q1. Q2 gross margin was positively impacted by higher CS&I revenue, product mix and previously discussed margin improvement initiatives.

Q3 gross margin is expected to be approximately 40%. We are now targeting a full year average gross margins of 40%, up 100 basis points from our prior target. Our $450 million model has been updated to reflect this. In addition, our $550 million model was recently increased to 40% to 42% gross margin.

Operating profit in Q2 was $19.3 million compared to $18.5 million in Q1. Q2 net income was $14.7 million or $0.43 per share compared to $13.9 million or $0.41 per share in Q1. Regarding Q3 earnings per share of $0.15 to $0.20. Q2 inventory ended at $129.6 million compared to $135 million in Q1.

Q2 inventory returns excluding evaluation tools finished at 2.3 compared to 2.4 Q1. Q2 accounts payable were $32.6 million compared to $43.4 million in Q1. Q2 receivables' were $74.4 million compared to $75.6 million in Q1. Q2 cash finished at $154.9 million compared to $148.5 million in Q1. We expect Q3 cash to finish at approximately $160 million.

Q2 was a solid quarter for Axcelis. We delivered quarter-over-quarter improvements in gross margin, operating profit, and cash.

In 2018, we're focused on driving higher revenues through share gain, improving gross margins through cost out initiatives and product extensions and solid cash generation of use from investments expected to drive future growth. Thank you. I'll now turn the call back to Mary, for closing comments..

Thank you, Kevin. It has been a solid first half with strong revenue and earnings growth, accelerated cost out programs, and high value add product extensions have driven gross margins above 40%.

Initial entry into two new markets, advanced foundry/logic in Japan have opened $300 million worth of revenue opportunity for Axcelis and we've seen strong growth in CS&I, as more Purion systems exit the warranty period and fab utilizations rise.

Based on our large diverse Purion customer base, we continue to target our $450 million business model in 2018. Looking forward, we are now focused on achieving our $550 million target business model in the next one to two years. We have planted the seeds and have a clear line of sight on the actions we must take to accomplish this.

Additionally, we have begun efforts to identify both organic and inorganic growth to take Axcelis revenues beyond $550 million. We remain committed and confident that we can continue to deliver the growth and profitability that our shareholders seek. With that, I'd like to open it up for questions..

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

Congratulations on the strength and the results in the quarter. Mary, just following up with the comments on targeting $450 million this year, I think that would imply a rebound in the fourth quarter to about $110 million.

So if that's so, can you talk about what would - what would help lead to that recovery, is it debt to mature, foundry business would get even stronger or do envision that there would be a rebound back in the memory side of the business in the fourth quarter?.

Okay, well, Craig, we've not given guidance for Q4, but we are continuing to target our $450 million business model in 2018. So that does provide some insight for you.

As I said in the script, market dynamics remain in place to signal the continuation of sustained cycle that we've experienced and we just believe that the overall demand in the mature foundry logic customers are going to - it’s going to remain strong.

And then we also believe that memory will in some of the areas that have been a little bit weak will pick up and that will continue - that will start to pick up back in Q4 and then continue on into 2019.

So we’ve been sort of firing on all cylinders across the mature foundry logic segment and memory and we expect to get back to that starting in Q4 and then continue with that into 2019..

And then just following up on the NAND comment.

You mentioned that there were softness in that part of the business, is that a single customer or is that multiple customers not looking for you to name names but just really the breadth of what you're seeing there?.

It's mostly attributable to one customer..

And then lastly this question I think is more for Kevin. Kevin we’re at a point where more Purion tools are going to roll off maintenance. And so that sets up the opportunity for an acceleration in services revenue.

As we look at the impact of that dynamic to our models relative to the just reported 45 million, what's the potential for there to be sustained growth from that dynamic as we look out over the next two to four quarters or really take longer than that before you get into the sweet spot of all the product placements of the past few years? Thanks very much guys..

So I'll answer that with a couple of points Craig. We are continuing to invest in that part of the business. We’re driving more upgrades which are high-margin events. As you pointed out we talked about more Purion tools and a warranty period which is also adding to the revenue.

Q2 was very strong sometimes you know when tools first come out of warranty customers may buy some excess spare so you can tend to see a small spike on tools first come out of warranty. I think what you're trying to get at and I can answer it more directly is the revenue is definitely increasing quarter-over-quarter.

And we've always been kind of saying this our 30 million to 35 million range, but I think at this point modeling at 40 million is probably the right place to be..

And your next question comes from the line of Edwin Mok from Needham. Your line is open..

This is Alex Kim filling in for Edwin Mok. Congrats on a great quarter. I just had a few questions to ask.

Just wanted to ask about can you provide an update on the tool at the meeting at foundry edge customer?.

So that evaluation is going very well. Things are on track and we have full confidence that we’ll yield the result of the additional market share growth and revenue growth that we expect that will likely happen in 2019..

So has the tool already started running or producing wafers already?.

Well it’s an evaluation tool, it’s a 12 month evaluation it will shift in the first quarter. So it’s still under evaluation right now, I can’t comment in any more detail other than that..

And have you seen any changes in pricing at your major competitor?.

So Alex let me grab that. So we've factored current pricing assumptions into our margin targets and based on where we see pricing right now and where our cost efforts are which we've been aggressively working on. We’re comfortable at this point to have raised our target model the $450 million model to 40% gross margins which is up 100 basis points.

And back at Semicon we had raised the 550 model with a 42% range. So I’m going to say at this point I think the worse is behind us. And what I have been telling everybody as we continue to focus on our cost out and the things we can control.

So we’re investing in CS&I, we’re driving a lot of engineering projects and yes, and we’re going to keep focusing on things we can control..

Have you seen like stable pricing at your competitor or like what kind of changes have you seen?.

At the beginning of the year - so we're seeing a lot of pricing pressure, our margins went down, our margins have come back now. So I think it's safe to assume that pricing has at least stabilized because we’re not going backwards or we’re going forward. And again to the cut cost out efforts underway..

And just wanted to ask on - regarding trailing-edge demand do you see any one or two main segments driving that?.

I am, sorry Alex, what driving what?.

Regarding trailing edge demand do you see any one or two main segments driving that?.

It's pretty broad across the whole market. In general the automotive and industrial robotics and all those markets continue to be very strong. And so it's - we've seen very high utilization at all of those the customers in that space, power devices and image sensor markets continue to be extremely strong..

And one more last one, just wanted to ask about the product mix between memory logic you see in 3Q 2018 or 4Q?.

Well we don't usually guide out but we did say that we expect the mature foundry logic, the mature process technology segment to be stronger in the second half because the NAND segment is slightly weaker than it was in the second half - it will be slightly in the second half of the year than it was in the first half of the year.

So that will skew a little bit more towards the mature process technology..

And your next question comes from the line of Christian Schwab from Craig-Hallum Capital. Your line is now open..

So two quick questions, the first one is what are the puts and takes to get to 550 million in one year versus two years?.

Well, we’ve talked about the fact that opening up the Japanese market through screen semiconductor distribution agreement is one big piece of it that’s about - opens about a $150 million of the TAM. Another $150 million of the TAM comes from successfully completing the evaluation at the advanced foundry logic customer.

So those were two big elements that we need to complete. But other things that we're doing are increasing our footprint at existing customers so that could mean getting more recipes run on specific Purion product. It could mean selling additional types of Purion products where we have one Purion product in place so there are number of ways to do that.

And then China is another element of that and as we said we shipped our first product into China actually they were two new fabs that we shipped into one was the memory fab and the other was actually in the mature process technology segment. So those are the major pieces that are going to add to the market share and the revenue growth to get to 550.

And a lot of that is dependent on how well we execute the, number one but a lot of it is also a function of investment and how quickly our investors - our customers are making those investments. So for example we’ve seen a little bit of slowdown at some of the China fab that could have an impact in terms of whether it’s a 19 or 20 kind of number.

But we remain very confident about the fact that we're going to reach that over the next one to two years. And as I said we know exactly what we need to do to get there..

As we think about your largest memory spender in the marketplace.

Is there any opportunities for market share gains for yourselves or any extra steps that may be needed as that customer moves to the one Y note?.

In DRAM every time they do, do a shrink it tends to add implants steps in order to get control all those transistors. So that does create opportunity for us much of the time that's in high current space. So that's a positive for Purion H..

So you’re hopeful that there may be increased capital intensity for opportunities for yourself when that leading memory customer stabilizes production and begins to accelerators as move to one Y is that fair?.

Yes that’s definitely fair..

And your next question comes from the line of Patrick Ho from Stifel. Your line is now open..

Maybe Mary or Doug first. Yes, given a lot of the noise coming out of China in the local semiconductor market over there, now I think you mentioned that there is a bit of slowdown. With that being said and I guess it just from your perspective in your conversation with those customers.

Do you believe this is tariff driven or are they just going to be some of their own timing and I guess yield learning is used and even some capacity digestion on their end?.

I think at this point it’s mostly fab construction based on what we've seen - clearly there are some technology challenges for some of the customers. But I think most of it has to do with just the reality of the building new fab some of them in very remote locations..

And Kevin really nice work on the gross margin front, so congrats there. The follow-up question I have on that front is, there is always a lot of moving pieces with gross margin as you mentioned product mix, even the business mix and things of that nature.

As you look going forward, as you try and maintain that 40% level what are going to be the biggest influences I guess maintaining that consistent 40% level?.

Yes, so we got to stay on track to our gross margin improvement roadmaps that we have out there because those assume various mix changes and when we put together our models, we assume those mix changes and the cost that we need to be at – as well as the pricing based on what we’re currently are right now we believe we’re going to be able see going forward.

So it’s the executional cost out Patrick that's really the key to what we’ve got right now and what we’re going to show..

And next question comes from the line of Mark Miller from Benchmark. Your line is now open..

Let me add my congratulations especially for the margins. Just wondering you talked about the eval tool at the leading-edge logic fab.

Any other color or other evaluations in what you’re doing there?.

We have a few evaluations out and expect to have a few out for quite a while that's the way we get the new larger customers.

So they're all going well and all focused on adding new recipes sometimes at current customers, new customers looking at multiple recipes and options and will use the evaluation process as we penetrate some of the new areas like the Japanese market..

Are these evals and logic or memory or what the other evals?.

They’re primarily in memory side of the advanced logic that we discussed..

You mentioned as the DRAM shrinks its more opportunities for you, what about as NAND goes from 64 to 96 layers and also as logic that goes from 7 and 5 nanometers.

Does that open up more process steps and opportunities for Axcelis?.

So with NAND we’re primarily driven by wafer starts currently. There is a lot of activity looking at material modification, implants that could potentially in the future add some opportunity that was layer dependent. But right now we’re wafer start dependent on NAND.

In the advanced logic the 7, 5, 3-nanometer those do tend to add more implants as they get smaller so both for electrical reasons and for material modification.

[Operator Instructions] And 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, Glenda. We hope to see you in the coming months on the road in Beverley or at the Credit Suisse Small Capital on one Conference on August 9th and the City Global Technology Conference on September 6th, both in New York City. Thank you for your support..

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