Good day, ladies and gentlemen, and welcome to the Axcelis Technologies call to discuss the company's results for the Second Quarter of 2019. My name is Jimmy and I'll 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] 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, Jimmy. 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 last night, it is available on our website. Playback service will also be available on our website as described in our press release.

Please note that comments made today about our expectations for future revenues, profits and other results, are forward-looking statements, under the SEC Safe Harbor provision. These forward-looking statements are based on management's current expectations and are subject to the risks inherent in our business.

These risks are described in detail in our Form 10-K annual report and other SEC filings, which we urge you to review. Our actual results may differ materially from our current expectations. We do not assume any obligation to update these forward-looking statements. Revenue in the second quarter of $74.3 million was in line with our revised guidance.

Earnings per share of $0.02 was higher than expected due to lower operating expenses resulting from cost reduction actions and continued tight spending controls. Gross margins of 42.7% above guidance also contributed to our profitability.

During our last earnings call we talked about the second and third quarters forming the trough of this cycle for Axcelis. So, as expected, we continue to bounce along the bottom of this memory driven downturn.

During the second quarter, memory accounted for just 20% of our shipments with the majority of shipments 80% going to mature foundry/logic customers, particularly those manufacturing power devices and image sensors. We believe that our full year systems mix will also be heavily weighted toward the mature foundry/logic segment.

Geographic mix of our systems shipments in the second quarter was more balanced than usual. China 35%; Korea 31%; The U.S. and Europe 23%; and Taiwan 11%. This regional breakout, which includes Korea, is also reflective of a strong mature foundry/logic mix.

For the third quarter, we are forecasting revenues between $65 million and $75 million and gross margins of approximately 41%. We expect the operating profit to range between a loss of $1.2 million to a profit of $2 million and EPS in the range of breakeven plus or minus $0.05.

During the second quarter, we saw a significant increase in quote activity both for systems in the mature foundry/logic segment and for CS&I upgrades. Although, this should have a positive impact on our business beginning in the fourth quarter we do not anticipate a memory recovery until the first half of 2020.

As a result, we now estimate 2019 revenues could be down between 20% to 25% compared to 2018, implying an increase in revenue in the fourth quarter. While we can't influence market conditions we will continue to focus on what we can control, maintaining profitability and preparing for the next upturn.

Our goal throughout this extended downturn has been to continue our investment in new product development efforts, while aggressively managing our costs. As a result, we are working closely with our customers to develop new segment-focused products.

Our development efforts are focused on Purion product extensions for advanced image sensor products and on the power device market in silicon carbide as well as silicon.

Additionally, we will be investing in Purion H product extension specifically targeting the productivity needs of the mature process technology market and the advanced technology requirements of leading-edge logic customers.

In new Purion products, our designed to create a sustainable competitive differentiation to support our customers' technology and manufacturing needs for critical implant steps.

With four evaluation systems in the field and additional eval systems expected to ship during the second half of the year, we continue to plant seeds that will fuel growth when the market recovers. Now, I'd like to turn it over to Kevin to discuss our financials..

Thank you, Mary. I'm very pleased with our second quarter gross margin performance and continued profitability during this extended downturn. Purion product extensions, margin improvement initiatives and mix are all fueling solid gross margin performance.

At this point, we now expect full year average gross margin to be 40% to 41.5%, up from our prior guidance of 40% to 41%. With regards to our operating expenses and continuing to tightly controlled spending.

We have implemented additional actions to lower our costs, which include voluntary executive pay cuts, further reductions in headcount and variable compensation and continued across the board tightening.

While we reduced our expected expenditures, we've not delayed key product development efforts critical to resuming strong growth as we exit this downturn. We're also continuing to fund gross margin improvement initiatives, required to achieve our long-term business model.

We remain focused on managing through this extended downturn for profitability, while sacrificing our future growth. Currently, we see Q2 and Q3 at the bottom of the cycle for the recovery in shipments beginning in Q4. Our balance sheet is strong.

And during the quarter, we repurchased $14 million of stock as part of our $35 million share repurchase program. We plan to continue to be opportunistic with share repurchases. We still have $21 million of spending authorized under the program. Now turning to the second quarter financial results.

Q2 revenue finished at $74.3 million and in line with our revised guidance of approximately $75 million, compared to $91.5 million in Q1. Q2 system sales were $37.2 million compared to $57.1 million in Q1. Q2 CS&I revenue finished at $37.1 million, compared to $34.4 million in Q1. We expect our CS&I revenues to begin to recover in Q4.

Q2 sales to our top 10 customers accounted for approximately 79% of our total sales, compared to 83% in Q1 with four customers at 10% or above compared to three customers in Q1. Q2 system bookings were $25.1 million, compared to $46.8 million in Q1, with a Q2 book-to-bill ratio of 0.7 versus 0.83 in Q1.

Backlog in Q2 including deferred revenue finished at $36 million compared to $53.1 million in Q1. As Mary previously mentioned, we've seen a significant increase in quoting activity which should lead to a rebound starting in Q4. Q2 combined SG&A and R&D spending was $29.7 million or 40% of revenue compared to $30.4 million or 33.2% in Q1.

Q2 total operating expenses finished $0.7 million lower than our guidance including an incremental expense of $0.6 million of headcount reductions. SG&A in the quarter was $16 million with R&D at $13.7 million. In Q3, we expect SG&A and R&D spending to be flat with Q2 and stay at that level for the remainder of the year.

Q2 gross margin was 42.7% compared to 41% in Q1. Q2 gross margin was driven by Purion product extensions and cost-out as well as mix. Since the introduction of the full Purion product line, we've improved system standard margin nearly 1,900 basis points on a rolling four-quarter average.

We're guiding Q3 gross margin of approximately 41% which includes a recognition of two lower margin evaluation tools. For the full year 2019, we now expect gross margin to be approximately 41% to 41.5%. Operating profit in Q2 finished at $2 million compared to $7.1 million in Q1.

Q2 net income was $0.6 million or $0.02 per share and above our revised guidance of an expected loss compared to $6.1 million or $0.18 per share in Q1. We're guiding Q3 earnings per share of breakeven plus or minus $0.05. Q2 inventory ended at $135.1 million compared to $134.1 million in Q1, driven by an increase in eval tool inventory.

Q2 inventory turns excluding evaluation tools finished at 1.4 compared to 1.8 in Q1. Q2 accounts payable were $21.8 million compared to $29.6 million in Q1. Q2 receivables were $62.3 million compared to $70.9 million in Q1. Q2 cash finished at $143.2 million compared to $170 million in Q1.

In the quarter, we invested in capital equipment to support Purion customer demos and procure additional evaluation tool inventory for new Purion products. We also purchased $14 million of stock under our share repurchase program.

As this industry downturn continues we are maintaining tight cost control, while investment initiatives critical to achieving our $550 million business model.

A $550 million model which reflects gross margin of 42% to 43%, operating profit of 17% to 18%, and free cash flow greater than 15% can be found in our investor presentation on the company website. I will now turn the call back to Mary for closing comments..

Thank you, Kevin. This has been a long deep downturn for the industry. To date, Axcelis has maintained profitability without sacrificing critical product development investment and our goal is to extend our track record into Q3.

Our success is a result of the strength of the Purion products that are either process tool of record at, or currently being evaluated by, our large and diverse customer base.

I am confident that with our continued focus on customer needs the technology development to support those needs and the dedication of our employees, Axcelis will continue to grow and achieve market share leadership in ion implantation. With that, I'd like to open it up for questions..

[Operator Instructions] Our first question comes from Christian Schwab with Craig-Hallum. Your line is now open..

Hey, guys. Thanks for taking my question. On the memory recovery that's expected in the first half of 2019 -- I mean, first half of 2020.

Would you expect that to be a gradual recovery or a ladder step recovery at some point during the year? And would you expect that to be driven by increased spending on DRAM or NAND, or both? What is your current thoughts on that?.

So it's not exactly clear to us how -- what the trajectory of the recovery will be. I mean, as you know, in most recoveries it sort of upon us by the time we realize we're in a recovery. But we do expect it will be in the first half of the year. And we expect that NAND will recover before DRAM does..

Okay, great.

And then, the assumption for $550 million, can you walk us through either what type of recovery in memory capital spending we would need from current levels, or does it have to get back to the type of intensity we saw in 2017 for that to happen, or is that a combination of steady -- healthy spending in memory and foundry/logic as well as some potential gains over time in Japan? Can you just walk us through the path that you guys have in your mind to get to $550 million?.

Sure. So our assumptions and expectations about $550 million haven't really changed despite the fact that perhaps the timing has been pushed out a little bit now, because of the downturn. We still expect that we can achieve the $550 million model over the next two to three years.

And it's really based on the latter, the second scenario that you laid out. We expect healthy memory spending to contribute to our share that we would get -- our fair share that we would get in memory. The mature process technology will remain relatively stable and strong.

And then, I think, the third point you made which is right on is the gaining market share in several of the areas where we're working right now to make some new penetrations in the area of advanced foundry/logic and also in Japan.

So, yes, all of those things will contribute to the $550 million model, again, in the next couple of years, several years..

Great. Thank you. No other questions..

Thanks, Christian..

Thank you. And our next question comes from Craig Ellis with B. Riley FBR. Your line is now open..

Hey, guys. This is actually Peter Peng calling in for Craig Ellis. And thanks for taking our question. Just on the Q3 outlook, the $70 million. It seems like it's about a 1.2 step down.

Just wondering, directionally, is this coming from memory or is this more mature foundry?.

I mean, we talked about how 80% of our shipments were to mature foundry/logic and only 20% to memory. And I can also tell you that, we talked about producing a pretty large uptick in bookings, in the second quarter particularly at the end of the quarter.

And I can tell you that our bookings for the quarter were over 80% mature process technology and obviously under 20% for memory. So it really is the mature foundry/logic at this point in time that is continuing to carry us. We've talked about how the fact that we have a large diverse customer base.

So that's really where we're seeing the improvement which again leads us to say that we don't believe that the memory recovery will happen until sometime in the first half of next year..

Great. And then just on the implicit 4Q. It seems like the implicit based on this calendar 2019 view is somewhere around $107 million. And if it's mostly foundry and logic then that's a pretty big number potentially doubling from 3Q levels.

I'm wondering how diverse is that customer base there on that ramp?.

Well, it's pretty diverse. I mean, we talked about how we actually had more of a balance this quarter and we talked about how that mature foundry/logic waiting would continue on through the remainder of the year and likely as average out that way for the year.

Again if I take a look at our bookings, I would say that our bookings are pretty reflective of a similar type of geography split and I already mentioned the split on the mature process technology versus memory. So it's pretty well rated around the world. But I would also say that China at this point in time is coming on quite strong.

Well we have and continue to see delays at some projects that are a function of them getting their funding and some construction delays in general. We see that activity in China picking up pretty strongly as part of that increased quoting activity that we've been seeing..

And Peter I'd point out that if you look at our percent of revenue coming from the top 10 customers the number one on this quarter would suggest we have more people participating. So it's spreading out even beyond the top 10.

And also within customers that had 10% or more we increased from 3 to 4, so, again, it's all -- it all demonstrates that the footprint is spreading out a little bit..

And one more question if I may. Just on the gross margin. Great job on the gross margin, it seems like 75 basis points improvement from prior view.

Can you I guess just talk about and provide some color on where that upside is coming from? Is it just one or two things, or I wanted to just to get more on the gross margin upside?.

Yes. So I mean the product extensions are adding to margin improvement. And those are the silicon carbide tools and some of the other high energy products, we have out there. We have continued to do very well even in an environment of low-volume with cost out through value engineering.

So although, we're not necessarily getting a lot of extra out of the supply chain at this point because of volumes are down, we're continuing through value engineering to make cost improvements that we're putting into the tools. And then the third component is the mix.

As always the mix of systems versus CS&I is always a mix within the systems of the products which Purion product going up. But what I can say is that, cost out continues to be part of our margin improvement roadmap as we move forward from here and going to the 42% to 43%.

And also those levels look a little bit more of a play out of volume when the revenues increase..

Okay. And then maybe a follow-up.

Just in light of this could the 42% to 43% in your $550 million model be more of a -- more I guess a base case now, or more even more conservative just given the improvement?.

Well, I mean we're certainly ahead of where we thought would be this year a little bit right now based on the revised guidance. Again because the mix is such a big piece of it depending, on which Purion's we're selling more of in that 550 model that can impact it.

But for now we're saying 42% to 43% I'm not going to tell you that when we update the model the next revision that things could potentially change. I don't expect them to change going down. So if anything we could find maybe find a little bit more there. But for now Peter we're going to stand on the 42% to 43% until you do a risk growth..

Okay. Thank you, guys..

Thank you. And our next question comes from David Duley with Steelhead. Your line is now open..

Thanks for taking my question. In the memory market, although we're not seeing expansion of capacity, I think both in NAND and DRAM they're marching down the shrink curve or going up in the layer curve depending upon, which markets you're in.

How did those changes in layer counts or in process technology in DRAM impact the demand for implanters?.

Okay, Dave. This is Doug. So on NAND when they add layers, we don't necessarily see additional implants. So that's -- NAND is a little bit more wafer count, wafer start based. DRAM when they do shrinks, they do tend to finest the implants, which creates some new implant opportunity.

But in addition we're spending a lot of time with especially the Purion H and the high current family with memory manufacturers adding new recipes to the new technologies as they come on board.

So unassociated with the layer count or the shrink, we are expecting to gain some share over this next -- next move to technology just based on additional recipes..

Okay.

And could you give us an update just about your progress that you might have made or where we're at with the high-end foundry/logic business?.

Yeah. So we successfully completed the evaluation and we demonstrated significant throughput advantages over our competitor going into the evaluation and then actually exceeded these performance levels throughout the evaluation. So as a result we were qualified for heated implant steps at several advanced nodes.

Unfortunately the productivity improvements we provided significantly reduced the number of new tools that the customer required and it was down to quite a small number. I think it was two tools.

So given that the customer only needed a very small number of tools, they decided to stay with the current supplier in the near-term given some of the risk benefit trade-offs associated with making a supplier change at this point. So we are PTOR for those nodes. But at this point in time we're not seeing any volume from it.

Okay. And then final question is I guess you mentioned what your revenue could be down for the year and that certainly implies a nice pop in the fourth quarter.

Could you give us or just give us your views on what you think the overall implant market will do? Would be down as the 20% to 25% that you're projecting, or will it be down more or less or what roughly do you expect?.

Well, Dave, as you know, we sort of normalize the implant market at $1 billion plus or minus 10% overall looking over the last 10 years or so. And so our expectations this year is, it will be on the lower side of that. It's pretty difficult to exactly size it given the amount of reuse and so forth that goes on in this particular part of the market.

So, we would say, we'll be on the lower side of our normalized estimate..

Thanks. That’s it for me..

[Operator Instructions] Our next question comes from Patrick Ho with Stifel. Your line is now open..

Thank you very much. Mary, Andy, if you could give a little bit of color in this current churn.

Typically should makers actually do a lot more valuation work versus buying capacity given the current market conditions? Are you seeing that type of activity increase particularly on the memory point where obviously it's been -- but there are moves to the next-generation technologies in both DRAM and NAND?.

So the answer to that is yes. And I think Kevin even referenced the fact that we're making a large investment in evaluation inventory. We currently have four evaluations out in the field and three of those are actually memory-related evaluations, one mature process technology.

And moving forward, we will have, what I think for us is a significant number of new evals coming into play in the second half of 2019 and moving into 2020.

And I think I'm going to assume you're going to come to our Investor Day in September and some of this new activity is related to some of the new product announcements that we're going to make and you'll hear more about at that event..

Pat, just add-on, in terms of the inventory piece, we've had a significant uptick in eval inventory not just of tools that are in the field but also tools that are currently in process. So there is quite a bit of activity right now both in terms of what's field in anticipated additional tools going out.

Great. That's really helpful. And Kevin maybe as my follow-up question. In terms of the incremental upside to gross margins on a going-forward basis that 42% to 43% you're making.

Is that primarily that increase or that incremental increase coming from the cost-out programs, or are there other variables that will bump it up from your previous 40% to 41% to 42% to 43%..

Yes. So I should have mentioned when Peter asked the question too. The product extensions are, obviously, a piece of it as well as the cost out. So the incremental to get to the 42% to 43% is continued improvement on our margin improvement initiatives. We have detailed road maps in place.

And then as product extensions we've been talking about in our Analyst Day that we're having in September we'll be sharing more detail with how product extensions as well as the cost-out will move our gross margins at the next level. And, obviously, our goal is not to stop at 42% to 43%.

We're shooting for much higher but it's a journey to get there and we're making pretty good progress so far..

Great. Thank you very much..

Okay. Thanks, Patrick..

Thank you. And our next question comes from Gus Richard with Northland. Your line is now open..

Yes. Thanks for taking my questions. Can you talk -- you mentioned that your quote activity has stepped up quite a bit.

Can you just give a little more color on which part of the mature market, or is it also memory?.

Yes. So I think I've mentioned prior to this that the probably the two major points on the quote activity is that it is significantly heavily weighted towards mature process technology, which is not surprising given where we are in the cycle and also heavily weighted towards China, which I explained before. Obviously, there's a lot going on there.

And it's China and it's China mature process technology, again just to clarify that..

And Gus within that market there's a lot of activity on power devices and continued activity on image sensors. So those two segments continued to really provide the strength for us..

Okay. Thanks. That's helpful. And then looking into the first half you expect memory to start to recover. And I think you said NAND was going to be the first one. What evidence of them are you seeing that that recovery is going to occur, or is it just the downturn has been so long as so Steve that it just got to get better? Okay..

No. I mean, obviously, we're triangulating on data points that are out there, but we're also staying pretty close to our customers. And our best take at this point in time based on discussions with them is that it will be sometime the first half of 2020. Again, I can't put a lot more clarity around that at this point..

Okay. But it is the combination of conversations just for customers as well as it's been pretty rough in the memory market at this point and certainly unlikely to go lower..

Yes..

Okay. All right. Thanks so much..

Thanks, Gus..

Thanks..

Thank you. This concludes the Q&A portion of the call. I would now turn the call back over to Mary Puma who will make a few closing remarks..

Thank you, Jimmy. We will be attending the D.A. Davidson Fast Connections 18th Annual Tech Conference on September 4th in New York City. And we also hope to see you at our Investor Day on September 24 also in New York City where we will be introducing the next wave of Purion products. Thank you for your support..

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