Axcelis Technologies, Inc. Q4 2007 Earnings Call Transcript

Feb.18.08 | About: Axcelis Technologies, (ACLS)

Axcelis Technologies, Inc. (NASDAQ:ACLS)

Q4 2007 Earnings Call

January 31, 2008 5:00 pm ET

Executives

Stephen G. Bassett - Executive Vice President and Chief Financial Officer

Mary G. Puma - Chairman and Chief Executive Officer

Matthew Flynn - Executive Vice President, Global Customer Operations

Analysts

Satya Kumar - Credit Suisse

Jim Covello - Goldman Sachs & Company

Timothy Arcuri - Citigroup

Peter Kim - Deutsche Bank Securities, Inc.

Weston Twigg - Pacific Crest Securities

Presentation

Operator

This is the Axcelis fourth quarter of 2007 earnings release conference call. As a reminder, today's call is being recorded. Later, we will conduct a question and answer session and instructions will follow at that time.

I would now like to turn the call over to your host, Mr. Steve Bassett. Please go ahead, sir.

Stephen G. Bassett

Good afternoon. This is Steve Basset, Executive Vice President and Chief Financial Officer for Axcelis Technologies. Welcome to our conference call to discuss our results for the fourth quarter of 2007.

If you have not received a copy of our press release issued earlier this afternoon, it is available on our website. With me today are Mary Puma, Chairman and Chief Executive Officer and Matthew Flynn, our Executive Vice President of Customer Operations.

After the prepared remarks, there will be time for questions. Playback service will 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 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.

We reported a net loss for the fourth quarter of $10.6 million or $0.10 per share on revenues of $89.6 million. Approximately $2.5 million of the loss was attributable to restructuring charges relating to a reduction in force action we took during the quarter.

Operating results were impacted negatively by the slow down in the market and by changes in product mix, which drove gross margins to lower than expected levels at 35.4%. Aftermarket business, which includes sales, spare parts, product upgrades and service labor, remained strong, generating revenues of approximately $42 million. Our aftermarket business continues to generate margins that are accretive to the business as a whole.

New system orders were $44 million, up from $33 million in the previous quarter. The low level assistance bookings reflects the overall soft market conditions and we expect this weakness to continue at least through the first quarter of 2008. Based on the geographic location of the fab, Asia accounted for 74% of systems orders, with 10% coming from the U.S. and 16% from Europe.

Memory manufacturers accounted for 49% of new systems bookings, with boundaries at 32% and logic at 19%.

R&D spending and SG&A expenses for the quarter were in line with our original forecast at $40 million, down approximately $1 million from Q3 as we have started to realize some benefits from recent cost reduction actions.

While we believe the business is currently sized properly, we continue to challenge spending levels. We recently had a two-week plant shutdown over the holidays and we have another week shutdown planned for the summer.

The contribution from SEN for Q4 consisted of $1.2 million in royalties and $2.1 million of equity income, representing Axcelis' 50% share of SEN [staid] earnings.

Looking forward to the first quarter of 2008, Axcelis' revenues are projected to be in the range of $80 million to $95 million. Approximately $12 million of revenue will come from the Optima HD. This will be the first quarter in which we have recognized Optima HD revenue.

Gross margins are projected in the range of 33% to 35%. We are experiencing margin pressure from the low level of systems volume and new products. As we recognize revenue on new products, we expect this pressure to continue throughout 2008 and do not see any significant changes until we enter 2009.

We have a margin improvement roadmap for the Optima HD and other new products addressing both material sourcing and design changes and expect margins to be at more normal levels exiting 2008.

Operating expenses are forecast at $40 million, down approximately $2 million from the first quarter of 2007. Equity earnings from SEN are projected at $3 to $5 million.

With a lower revenue from the base business, we are projecting a net loss for the quarter of $0.04 to $0.08 cents per share.

I want to take a minute to discuss the balance sheet. We ended the year with cash of $101 million. We have long-term debt of approximately $80 million, which becomes payable in January of 2009. Throughout 2007 we have explored various financing alternatives and are currently assessing several options. Even though we expect to generate positive cash flow from operations in 2008, we do intend to refinance the existing debt. I expect to have this completed in the first half of the year.

Before I turn the call over to Mary I want to add some color on what we expect for the upcoming year. We believe we are well-positioned to take advantage of opportunities when the market turns around. Our current portfolio, our product portfolio is in very good shape. The Optima HD has proven to be a competitive, high current tool and it will enable us to regain some of the market share we have lost over the past few years.

The introduction of the Optima XE to the high-energy market is well timed. This will allow us to take advantage of the transition to single wafer and maintain our dominance in high energy.

Despite weak market conditions, cash flow should be positive as evaluation tools shift in 2007 convert to revenue, translating to a reduction in inventory levels. And our business model provides excellent leverage which will produce improved financial performance as volume increases.

I will now turn the call over to Mary.

Mary G. Puma

Thank you, Steve. I'd like to take a few minutes to share my views on current market conditions and provide an update on our progress.

Market conditions in the fourth quarter remain challenging and visibility is poor. Like many participants in the semiconductor industry, we do not see any changes in these conditions and we expect continued weakness into 2008.

The memory segment, which has recently outperformed, is seeing noted weakness and projects are experiencing longer delays than anticipated as capital spending continues to be pushed out.

These are industry-wide and global issues that we will have to work through. In the fourth quarter, Axcelis, as expected, was adversely impacted by this ongoing weakness. Customer buying remained soft, putting our base business under continued pressure and, unfortunately, capital spending uncertainty, particularly in the memory market, has negatively affected the timing of the roll-out of the Optima HD, as our initial penetrations were in this segment.

The news is not all bad, however. We continue to have significant confidence in the potential of the Optima HD to successfully compete in the single-wafer high-dose implant market. This optimism is based on the performance feedback that we are receiving from customers.

On our last earnings call we cited positive production data from customers for the Optima HD. We now have five straight months of very solid evidence that the Optima HD has achieved consistently higher productivity in head-to-head competition.

Let me emphasize that I am not citing results from a single tool. These results were achieved in production at a customer fab across a fleet of Axcelis Optima HDs.

What do these results mean for Axcelis? As many of you know, we were late to market with our single-wafer, 300 millimeter high-dose tool. As a result, the Axcelis team has been focused on accelerating our Optima HD product development program, while at the same time incorporating new technology that addresses emerging market requirements in ion implants.

The data cited previously proves, as expected, that the Optima HD delivers superior productivity versus the competitor's tools due to higher beam current and faster recipe tuning, meaning that we have succeeded in penetrating the market with an innovative, competitive, alternative single-wafer, 300 millimeter high-dose tool.

Last week, in fact, a large chip manufacturer who is not a current customer, visited our Advanced Technology Center to demo the Optima HD. They termed our Optima HD performance impressive, referring to the fact that in 18 months, we have delivered productivity that exceeds what our competitor has been able to achieve in over ten years with their existing platform. Further, they believe that the Optima HD has much more runway left to deliver even higher productivity and superior process performance versus our competitor's tools.

Does this mean that Axcelis challenges are behind us? No. We recognize that our commercial success will take time given current market conditions. However, and I want to put particular emphasis on this point, Axcelis is absolutely well-positioned to compete successfully in the single-wafer, high dose implant market.

In fact, we are in the best position today that we have been in years. We are already starting to see the superior productivity of the Optima HD resulting in customers selecting our tool over our competitors' offering.

So where does Axcelis stand? We recognize that we have a lot of work to do and will be measured by our execution over the coming quarters. However, let's put in perspective where we currently are.

In the first quarter, we expect to recognize more revenue on 300 millimeter high-dose tools than we have in the last three years combined. And throughout 2008, Axcelis expects to build on this success as we receive a measurable split of high-dose business from our existing customer base and further penetrate second-wave customers in the logic and foundry segments.

Changing gears, I want to briefly touch on the progress we are making with the Optima XE, our new single wafer high energy tool and the latest developments with SEN. The launch of the Optima XE at SEMICON Japan was very successful and we've had tremendous interest from numerous customers for this tool.

We are already the market share leader in the high energy space with our multi wafer tool, the Paradigm XE. All of our major high energy customers have been to our Advanced Technology Center in Beverly for demonstrations of the Optima XE and these demos were very successful. They showcased the tool's significantly enhanced productivity and highlighted seamless process matching to the Paradigm XE.

Customers have indicated that both aspects are critical in assuring a smooth transition to this new tool. We are ready to ship our first Optima XE to a customer this quarter.

Turning to SEN, although the Japanese market remains weak, we are pleased to report that in the fourth quarter SEN won a large multi tool order from a major customer. SEN also continues to make progress with their single wafer high dose tool, the SHX. SEN remains well-positioned to maintain their dominant Japanese implant market share in 2008.

Before I open up the call for questions, let me summarize several key points. First, Axcelis has a complete portfolio of Optima single wafer implanters which customers confirm are competitive and are winning.

Second, the Optima HD has demonstrated that it can beat the incumbent process tool of record. In head-to-head competition, the Optima HD has delivered consistently higher productivity based on higher beam currents and faster recipe tuning than our competitors' tools. We will strengthen our market share position in high dose implant throughout this year.

Third, Axcelis has successfully launched our Optima XE single wafer high energy tool. We expect enhanced performance and a seamless transition to the Optima XE to enable Axcelis to maintain our dominant position in high energy.

Finally, and most importantly, we believe that Axcelis is back on the path to success. We look forward to an improvement in market dynamics which will allow us to better demonstrate the progress that we have made.

I'd now like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, the question and answer session will be conducted electronically. {Operator Instructions) First we'll go to Satya Kumar at Credit Suisse.

Satya Kumar - Credit Suisse

Yeah, hi. Thanks for taking my question. Mary, a question on the Optima HD. You talked about a weaker memory CapEx environment which I thoroughly agree with but at least some of your marquee HD customers are actually not really [inaudible 4:20] CapEx and we hear are one of the stronger spenders even in this kind of environment, what is the dynamic [inaudible 4:26] no major repeat orders for the HP despite being qualified into production at these large memory customers and what will cause that to turn around?

Mary G. Puma

Well, Satya, I guess I'm a little bit confused by the fact that you believe that our largest customers have not been impacted by the downturn. There are definitely some major projects that have been impacted by the downturn and in the fourth quarter the delays in memory projects have pushed anticipated orders even further into 2008 than we originally anticipated. So in our mind, the slow down of the memory segment really has had a negative impact on capacity buys for the Optima HD. We don't anticipate this as lost business it's just simply that some of the orders and shipments that we had expected have been delayed and pushed into 2008.

Satya Kumar - Credit Suisse

Okay. Okay. If I look at your Optima HDs, how much did you recognize as revenues in Q4? How much do you plan to recognize in Q1? And are you also recognizing bookings for previously shipped HDs as you recognize the revenues?

Stephen G. Bassett

This is Steve. We have not recognized any Optima HD revenue to date. We do estimate that we'll recognize $12 million in the first quarter of 2008.

Satya Kumar - Credit Suisse

And that's where there've been bookings as well, right?

Stephen G. Bassett

Actually, the tools that we will recognize as revenue in 2008, most of those have been booked. We have a number of evaluation tools that as the evaluation periods end, throughout the next year, then they will show up in bookings and revenues at that time.

Satya Kumar - Credit Suisse

So how many is there in the installed base right now that you will recognize for 2008 and also how many do you have in your inventory that you can sell in 2008?

Stephen G. Bassett

I think the installed base today is twelve and we probably have, in inventory built right now, I think six.

Satya Kumar - Credit Suisse

Okay, I'll re-queue. Thanks a lot.

Operator

Thank you. Next we'll go to Jim Covello with Goldman Sachs.

Jim Covello - Goldman Sachs & Company

Thanks so much for taking the question. Just a couple quick ones. First, relative to the business model, you know, is the industry conditions making you think any more about streamlining the product portfolio in terms of the non-implant stuff?

Mary G. Puma

No, I think we're pleased with the actions that we took in the third quarter of last year with [Kering] and RTP. We're very confident about our dry strip business. In fact, despite the fact that we didn't comment on it in our call, we have been demoing our next generation dry strip tool, the Integra, and we've been really getting very positive feedback from our customers. So, you know, we're very excited about the opportunities that the dry strip segment offers us.

Jim Covello - Goldman Sachs & Company

Okay, and then my follow-up would just be do the industry conditions and then, actually, a ramp up of the new tool, what do they make you think about industry consolidation? Do you think it makes it a little more likely, you know, from the standpoint of the difficulty of the industry plus the fact that the tool is starting to pick up a little bit of traction?

Mary G. Puma

Jim, I'm not sure what you're asking me? Are you asking me, again, the question that you asked last quarter?

Jim Covello - Goldman Sachs & Company

Pretty much.

Mary G. Puma

Okay, well, I guess I'll give you the same answer then, that I gave you last quarter. At this point in time, you know, we believe that our current valuation does not reflect the true value of this business and we believe that shareholder value will be maximized by executing against our current business plan. And again, I think you'll start to see some significant pick up in the Optima HD throughout 2008 and, hopefully, that will give you confidence that you don't need to ask that question later on in the year.

Jim Covello - Goldman Sachs & Company

Thanks, Mary.

Mary G. Puma

Okay.

Operator

Thank you. Next we'll move to Timothy Arcuri with Citi.

Timothy Arcuri - Citigroup

Hi. I'm just, Steve, I'm just trying to true up some numbers here. So last quarter I had down that as of the end of September there were eleven Optimas shipped and there were thirteen that were ordered and three of the shipments were Imaxes. Can you give us an update on those numbers?

Stephen G. Bassett

We shipped one more tool during the quarter. We have a couple of other orders that haven't shipped.

Timothy Arcuri - Citigroup

Okay. Okay, then, with respect to the backlog in response to a previous question you were saying that $12 million of the revenue in Q1 will come from HD and I think you had said, previously, that you had, like, five of those that you had already put in backlog as of the end of September. So did you put, since there was only, it sounds like, maybe, one more order this quarter, so is it fair to say that there's, kind of, six in backlog right now?

Stephen G. Bassett

No. None of the tools are actually sitting in what we report as backlog. We have five tools that we've shipped against purchase orders which have been booked and shipped so that there're not in the backlog. Those we'll prefer to revenue shortly. Then we have another seven tools that are in the field that have shipped against evaluation contracts.

The cost for those tools is actually still sitting in the inventory that we report on our balance sheet. Those evaluation contracts, and at various intervals throughout 2008, and at the time the evaluation contracts end, we will be issued a PO which will be included in our bookings and we will bill it and we will recognize the revenue at that time.

Timothy Arcuri - Citigroup

Okay, so just so I'm clear on that, so out of the $12 million that's going to revenue in Q1 that's, basically, the five tools that had already been placed into orders, not backlog, but orders, previously?

Stephen G. Bassett

Yes.

Timothy Arcuri - Citigroup

Okay. And then, I guess, last thing. So is the pick up in HD, you know, revenue, as I look at the incremental number of systems that are being booked or that, you know, that were shipped there was only one more shipped this quarter, I guess. Are you still as optimistic, given the kind of real-time incoming order rate for the HD? Are you still as optimistic as you were, you know, with respect to the, you know, hockey stick that you'll see in new product revenue in '08? Because it seems like, you know, you, kind of, had this initial slug of business and now that's, kind of, flowing to the P&L but it's not clear what's going to actually follow that? Thanks.

Mary G. Puma

Well, we haven't given any forecast about what we expect to happen in 2008 other than we expect to get orders and ship more Optima HDs than we have in the past.

So, Tim, just because of the fact that the market has slowed down, I mean, obviously, it's very disappointing because it's hindered our progress at some level because, as I mentioned before, the customers that are really what we would call our existing customer-base aren't buying right now. It doesn't mean that we aren't as optimistic about the future of the tool. In fact, we're more optimistic about the future of the tool given the fact that we've gotten some very solid performance data and performance feedback from both customers who are using the tool and customers who have come to demo the tool.

So, you know, again, we're very positive about the future outlook for the Optima HD.

Timothy Arcuri - Citigroup

Okay. Thanks.

Operator

Thank you. Next we'll go to Peter Kim at Deutsche Bank.

Peter Kim - Deutsche Bank Securities, Inc.

Hi. Thanks for taking my question. I was wondering if you guys wouldn't mind segmenting out what percentage of your systems orders was the Optima?

Stephen G. Bassett

The Optima in Q4, I don't believe that we recorded any bookings. We had one Optima tool that shipped in the fourth quarter but I think that that was recorded as a booking in Q3.

Peter Kim - Deutsche Bank Securities, Inc.

If you take a step back and do you have an assessment for what your market share in high current was in 2007 and would you project it going in 2008?

Mary G. Puma

No, we don't have any actual numbers at this point but we don't anticipate seeing any measurable difference in our implant market share in 2007.

Peter Kim - Deutsche Bank Securities, Inc.

So you think you held your market share in 2007 and you don't have an outlook for 2008?

Mary G. Puma

Well, I told you I don't really know what the numbers are in 2007 but I don't expect any significant increase or deterioration.

For 2008 we do believe that we should see an increase in market share and as I said during the call, you know, we recognize minimal 300 millimeter high current revenues over the past several years and in the first quarter of this year we'll recognize more 300 millimeter high current revenue than we have over the last three years.

So it's fair to assume that this should result in increased high current market share in 2008. But, you know, I can't give you specific numbers on a 2007-2008 comparison.

Peter Kim - Deutsche Bank Securities, Inc.

Okay. Moving on, can I ask about your ongoing arbitration with SEN. Have you guys settled this issue and have you sold any single wafer high current tools in Japan?

Mary G. Puma

There have been no changes in the status of the arbitration over the last quarter and just to refresh everybody's memories the arbitration is over resolving the royalty due on SENs high current single wafer implant tool, the SHX.

As we said, for several quarters we expect the result to be that SEN will take out a license of Axcelis' technology so that SEN can manufacture and sell the SHX at a royalty rate similar to SEN’s other products.

In terms of have we sold any tools in Japan, some Japanese customers have expressed their interest in the Optima HD Imax and the Optima XE which are tools that are not currently licensed to SEN. So, until these products are licensed to SEN, Axcelis is engaging directly with Japanese customers on those products and as we make progress against our sales activities in Japan we will report that to you.

Peter Kim - Deutsche Bank Securities, Inc.

And, if I may, lastly, have you recognized any royalty payments from SEN for any single wafer high current tools that SEN has sold and is there some kind of a side pot of those funds that you would recognize at one time if you were settle the arbitration with SEN?

Stephen G. Bassett

We have not recognized any of the royalties on the single wafer high current tools. If the arbitration is settled in our favor then we would recognize the revenue at that time after we negotiated the royalty rate.

Peter Kim - Deutsche Bank Securities, Inc.

Great. Thank you so much.

Stephen G. Bassett

And I should add that we do fully expect that the arbitration will be settled in our favor.

Peter Kim - Deutsche Bank Securities, Inc.

Well, how long do you think this arbitration is going to go on for?

Mary G. Puma

Well, if you take a look, which we've done, obviously, and benchmarked against other arbitrations that have been held in Japan it's, typically, a multi-year process so we expect, perhaps, into 2009 at the earliest, before we get a decision.

Peter Kim - Deutsche Bank Securities, Inc.

Okay. Thank you.

Operator

{Operator Instructions) Next we'll go to Weston Twigg at Pacific Crest.

Weston Twigg - Pacific Crest Securities

Hi there. I just have a few questions here. One, just looking at the gross margin, the systems gross margin, it looks like it was actually negative last quarter. Can you explain why?

Stephen G. Bassett

The systems gross margin was down, was actually up slightly from the previous quarter, I think.

Weston Twigg - Pacific Crest Securities

I mean, just showing, based on the press release, it looks like it was a negative number here.

Mary G. Puma

A negative number?

Weston Twigg - Pacific Crest Securities

Yeah. [Inaudible].

Stephen G. Bassett

[Inaudible] consisted of gross margin, we don't provide specific margin information on systems and our aftermarket business but our total margins were 35.4% and they were up slightly over the previous quarter.

Weston Twigg - Pacific Crest Securities

Okay. And then, just wondering if you have any idea when you might recognize revenue on your first Optima XE and, maybe, your first Imax tool?

Mary G. Puma

The Imax should be in 2008 and we expect that the Optima XE would be 2008 as well.

Weston Twigg - Pacific Crest Securities

Perfect. Okay. Thanks.

Operator

And that does conclude today's conference. Thank you for participating and have a nice day.

Mary G. Puma

Okay. Thank you very much for joining us.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!