Anyone paying attention to Axcelis Technologies (NASDAQ:ACLS) knows that management has turned the company around from a product and financial perspective. The company's business prospects have been transformed after developing and introducing the Purion platform of ion implant tools over the past three years. The company's balance sheet is vastly improved following a sale leaseback transaction executed in January 2015 that added $49 million in cash to the balance sheet. Cost cutting and streamlining has lowered costs and improved margins - the full benefit of which will begin to be demonstrated when ACLS delivers higher revenues.
The long-term competitive positioning of Axcelis has benefited from the increasing technology demands of 3D NAND and sub 20nm DRAM manufacturing. Axcelis' spot beam technology is particularly well suited for these applications and they stand to benefit in a meaningful way from line conversions and new capacity additions. Evidence that the company's Purion platform of ion implanters is well suited to meet the needs of increasing demands by DRAM and 3D NAND manufacturers can be found in company announced evaluation and production tool shipments.
Samsung has been a large Purion customer over the past 18 months and it was announced in January that a second Korean DRAM manufacturer accepted a tool that it was evaluating. Widely known to be SK Hynix, Axcelis has a very large opportunity to supply Hynix's M14 plant that is ramping as I write this report. Semiconductor analysts have estimated that the M14 plant could eventually produce 100,000 wafer starts per month (WSPM), which would require approximately 55 implanters. If ACLS were to win half of the 55 tools required to run the DRAM plant, or roughly 27 Purion XE tools, the revenue opportunity would be $135 million over time, which is very significant to the company. Axcelis is awaiting acceptance of an evaluation tool from the Intel Micron Flash Technologies (IMFT) joint venture in Lehi, UT. It is widely believed that the tool will be accepted in a matter of months, if not weeks. Acceptance of the tool and follow-on production orders for NAND and 3D Xpoint manufacturing would be hugely positive as the volume of tools would be substantial and the positive impact to Axcelis' reputation would likely open many more doors.
So why is Axcelis' stock price not reflecting the competitive, operational and financial turnaround that has been widely understood and analyzed by investors and sell-side analysts? I place the blame on excessive fear of short-term disappointment in the stock market. We can be fairly confident that SK Hynix and IMFT will order a bunch of tools over the next couple of quarters but we don't know if the ramp up in orders will begin to ship at the end of March or sometime in Q2. As a long-term investor, I really don't care because I believe the business opportunities to be large, meaningful and transformative, but I understand not all investors have a long-term time horizon.
Equipment orders should begin to ramp higher soon
Recently announced orders suggest the current quarter will be very good, setting up an opportunity to be invested for substantial long-term gains with little risk of short-term pain. Here is what we know: Revenue guidance for 1Q16 was mid-$60 million. Let's call it $65 million. 4Q15 reported revenue was $71 million and comprised of Global Service Solutions (NYSEMKT:GSS) of $30 million (service and maintenance) and Systems revenue of $41 million (equipment orders). GSS revenues are fairly stable but Systems revenues, which are ion implant tools, can be somewhat volatile quarter to quarter, especially in memory. Of the $41 million in 4Q15 Systems revenues, 70% were foundry and logic and 30% memory. In February, Axcelis issued a press release announcing a follow-on multi-system Purion H order from a DRAM customer had shipped. Let's assume, conservatively, that multi-system means two tools. Purion H sells for about $3 million, so we can assume $6 million from this order. In early-March, ACLS issued a second press release announcing multiple Purion XE orders from three customers in China. And just this week, Axcelis announced that it has shipped another Purion XE to a memory customer in the Asia Pacific region. Purion XE sells for about $5 million a tool, and I'm conservatively guessing that the orders being shipped by quarter-end were for five tools, or $25 million (four memory and one logic). That's $26 million of memory tool shipments compared to $12 million in memory shipments in 4Q, when the company did $71 million in revenue compared to its 1Q guidance of $65 million. Said another way, ACLS would have to ship an additional $5 million of unannounced tool orders to foundry or logic customers compared to the $28 million it shipped in 4Q just to make its 1Q numbers.
As shown in the table below, I assume GSS revenues decline slightly to $29 million in the first quarter, and using my $26 million of estimate of announced memory orders, Axcelis would need just $10 million in logic and foundry orders (including the one order announced this month and compared with $29 million in logic and foundry orders in 4Q15).
Oh, and by the way, some smart sell side analysts have been able to deduce that Intel was one of the Chinese customers referenced in the March press release. This would be the first order from Intel as far as I can remember, potentially opening up another set of opportunities as Axcelis continues to increase its market share.
|Revenues ($ mil)||4Q15A||1Q16E|
Big market share gains are coming
Longer term, Axcelis management is confident that the advantages of the company's spot beam technology for advanced applications will help the company achieve a mid-20% market share this year and a mid-30% share in 2017. This is up significantly from the 10% share a couple of years ago. While this represents a big gain in share, I would note that management has been spot on with its guidance of the significant share gains seen thus far. Axcelis cut costs substantially during the downturn, and as revenues begin to ramp, I believe that the company could generate revenues of more than $400 million and EPS north of $0.50 in 2017. Backing out cash on the balance sheet of $85.8 million, $0.70 per share, the stock currently trades at a price-earnings multiple of approximately 4x my 2017 EPS estimate. Way too cheap to ignore for a company that has a significant order tailwind and significant market share gains ahead.
In addition to the good fundamental story for Axcelis, the company is a likely takeover candidate in 2017. As ion implantation is essentially a duoploistic market, with the other player wholly-owned by Applied Materials, I believe that ACLS is a likely takeover candidate for large equipment player such as Lam Research (NASDAQ:LRCX) or another player looking to provide a broader range of equipment to customers.
Disclosure: I am/we are long ACLS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.