Good day, ladies and gentlemen, and welcome to the Axcelis Technologies Call to discuss the company's results for the Third Quarter 2020. My name is Katherine, 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. 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 go ahead, ma'am.

Thank you, Katherine. With me today is Kevin Brewer, Executive Vice President and CFO; and Doug Lawson, Executive Vice President of Corporate Marketing and Strategy. We are all participating in this call remotely, so I would like to apologize in advance for any technical difficulties. 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'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. Good morning and thank you for joining us. 2020 has certainly proven to be an unusual year. Despite this, Axcelis has maintained a focus on driving Purion growth in key markets while addressing the many twists and turns the year has brought. Let’s start with our top priority, which is the health of our employees operating in the COVID-19 environment. Through the implementation of recommended safety protocols, we continue to run our Beverly facility at full manufacturing and lab capacity with all other employees working from home. Our sales teams around the world are operating according to their local guidelines and are working closely with our customers to ensure that we can satisfy their requirements in a safe manner. I would like to personally thank our extraordinary employees around the world who are working diligently to meet our customer commitments. I also want to thank our suppliers and customers for their support, as we strive to meet the continuing high level of customer interest in our Purion products. Our third quarter financial performance met or exceeded guidance and consensus. Revenue for the third quarter was $110.4 million with earnings per share of $0.32, gross margins of 43.6%, and a cash balance of $212.7 million at quarter end. Our aftermarket business, or what we refer to as CS&I, once again contributed significantly to our revenue and gross margin. The mature process technology markets continued to be an area of strength for Axcelis, which has been critical during this longer than expected memory slowdown. This is especially highlighted in the third quarter, where 100% of our systems shipments went to mature foundry logic customers. China has also been a strong market for Axcelis this year, with the strength continuing through the third quarter. The geographic mix of our systems shipments in the third quarter was China 66%, Korea 20%, Japan 8%, and Europe 6%. This mix highlights the strength of the mature foundry logic market in both China and Korea. We expect there will be some memory shipments in Q4, although the quarter will be heavily weighted toward mature foundry logic. China will also continue to account for a significant percentage of our fourth quarter shipments. During the third quarter, the U.S. government imposed new restrictions on sales of certain semiconductor equipment and materials to the Chinese foundry customer SMIC. SMIC is an important Axcelis customer, especially in the mature process technology market. We have thoroughly assessed the new restrictions. Tools and parts that are affected will require a license to ship in the future. After careful examination of our systems and the mature applications, they are used for, we currently expect that we will receive licenses as needed for SMIC shipments. Now turning to guidance. For the fourth quarter, we expect revenue of approximately $110 million, gross margins of approximately 41%, operating profit of approximately $10 million, and earnings per share of approximately $0.21. Using Q4 guidance, Axcelis revenues will be up 35% year-over-year. This is strong performance given that memory is expected to account for less than 35% of total revenues in 2020. When memory spending does strengthen, Axcelis will be well positioned to achieve our $550 million and $650 million target models over the next several years. Continued growth of Purion products is the key to achieving our long-term business models. During the third quarter, we shipped three new Purion high current product evaluations. We shipped the first Purion 200 to a leading power device company. The power device market is a critical market for Axcelis, and the Purion H200 is expected to play a key role in increasing our customer base and market share in this segment. The other two evaluations are for Purion H systems, the first shipped to a leading advanced logic customer. The advanced logic market segment is a key focus for our $650 million model. The second Purion H shipped to a NAND customer that currently uses the Purion XE. Expanding our Purion footprint at existing customers is a critical element of our long-term strategies for both the $550 million and $650 million models. At the end of Q3, we had six evaluation systems in the field. These evaluations represent the acceptance of our new products, penetration into new market segments, and expansion of our product footprint within an existing customer. This includes the Purion VXE and Purion XEmax, both focused on image sensors; a Purion H200 for powered devices; a Purion Dragon for DRAM applications; a Purion H for advanced logic; and a second Purion H for a NAND application. We expect to ship additional evaluation units over the next year as we continue to work closely with customers on further Purion adoption. Before Kevin reviews the financials, I would like to summarize four key takeaways. First, the mature process technology market is very strong and growing, and Axcelis is the ion implant market leader in this segment. Second, China will continue to be an important market for Axcelis, and we currently expect that we will receive licenses as needed for SMIC shipments. Third, memory is expected to recover in 2021 and will be additive to our strong mature process technology and Chinese business. And fourth, the Purion product family is extremely well positioned to support this future growth. Now I'd like to turn it over to Kevin to discuss our financials and some operational details.

Thank you, Mary, and good morning. Axcelis delivered solid third quarter performance, thanks to the continuing outstanding work around employees and supply chain partners. Strong gross margin performance with in-line revenue drove earnings per share well above company guidance and consensus estimates. During this ongoing pandemic, the health and well-being of our employees remains a top priority. We are doing our best to create a safe working environment for everyone at Axcelis. For employees required to work in our factory, we’re enforcing daily screening, physical distancing, and required use of face masks. Everyone who can work from home is working from home, so we'll continue to do so for now. Field-based teams are continuing to support our customers while following customer and country-specific protocols. Tool installations have been successfully completed by Axcelis employees, third party support, and creative virtual solutions. We remain focused on our $550 million and $650 million revenue models while continuing to invest in products and sales channels required to achieve these target models. Additionally, we have been investing in manufacturing capability with new technologies and capital expenses aimed at improving productivity and capacity. I will now turn to the third quarter results. Q3 revenue finished at $110.4 million compared to $123 million in Q2. Q3 system sales were $70.2 million compared to $76.8 million in Q2. Q3 CS&I revenue finished at $40.2 million compared to $46.2 million in Q2. Shipments of spare parts and consumables remained strong in the quarter, driven by fab utilization and customers likely maintaining a higher level of spending. Q3 sales of our top 10 customers accounted for 76% of total sales compared to 83.6% in Q2. Three customers were at 10% or above. Q3 system bookings were $26.4 million compared to $56.2 million in Q2. We had a Q3 book to bill ratio of 0.37 versus 0.73 in Q2. Backlog in Q3, including deferred revenue, finished at $45.1 million compared to $102.6 million in Q2. Bookings and backlog can fluctuate quite a bit for the quarter due to the specific order and practices with some customers working and growing within the same quarter. Q4 bookings to date have already exceeded the entire third quarter. Q3 combined SG&A and R&D spending was $34.3 million or 31% of revenue compared to $35.5 million or 28.9% in Q2. SG&A in the quarter was $19.4 million with R&D at $14.9 million. We expect Q4 operating expenses to be approximately $36 million to support numerous evaluation systems and some additional costs associated with the pandemic. Q3 gross margin was 43.6% compared to 42.2% in Q2. Q3 gross margin was driven by strong CS&I contribution, product mix, and ongoing cost-out efforts. Q4 gross margin is expected to be approximately 41% with full-year gross margin also around 41%. Gross margins can fluctuate quarter-to-quarter based on the level of CS&I contribution, customer and product mix, and the closure of VXE evaluation units. Through ongoing cost-out efforts and planned higher sales at our Purion product extensions, we expect gross margin to improve over time, as highlighted in our $550 million and $650 million target model. Operating profit in Q3 finished at $13.9 million compared to $16.4 million in Q2. Q3 net income was $10.8 million or $0.32 per share and well above consensus compared to $13.3 million or $0.39 per share in Q2. We are forecasting pandemic-related expense of approximately $1.8 million in Q4 spread across the P&L. Inventory ended at $159.7 million compared to $149.2 million in Q2 due to timing of shipments and additional inventory to support evaluation tools. Q3 inventory turns, excluding eval tools, finished at 1.8 compared to 2.1 in Q2. Q3 accounts payable were $24.3 million compared to $30.3 million in Q2. Q3 receivables of $45.2 million compared to $64.9 million in Q2. Q3 cash finished at $217.7 million compared to $197 million in Q2. Cash from operations in the quarter was $19.1 million. Our stock repurchase program remains on hold as we continue to maintain a conservative cash strategy. We will be revisiting this with the Axcelis Board in Q4 and expect to develop plans to return capital to our investors moving forward. We are finishing 2020 with strong momentum and are excited about the prospects of the 2021 recovery in the memory and automotive market. We have continued to make the necessary investments in our products and infrastructure needed for our $550 million and $650 million target model. Our customers continue to have high expectations for our Purion products, which we intend to achieve. Thank you. And I’ll now turn the call back to Mary for closing comments.

Thank you, Kevin. We are pleased with our third quarter financial performance as well as our expected performance in 2020 overall. We are excited by recent and upcoming evaluation shipments of both new Purion product extensions and enhanced Purion-based products that will keep Axcelis on track to achieve our target business model. Axcelis has a competitive Purion product line, a broad and diverse customer base, a strong balance sheet, and a dedicated team of employees. These are the strengths that will continue to drive our growth, ultimately taking us to a leadership position in ion implantation. With that, I'd like to open it up for questions.

Our first question comes from Patrick Ho with Stifel. Your line is open.

Thank you very much and congrats on a nice quarter. Mary, maybe first off in terms of the mature technology note, can you give a little more color on the types of devices that you saw strengthened during the third quarter and whether you see any changes in the third quarter in terms of the market mix in that segment?

So, as we said, the mature process technology market is very strong and it's growing, and we see a lot of strengths, particularly in the image sensor and just general mature foundry business. We see automotive recovering, and that's going to be a positive for the power device market. We mentioned that memory really hasn't recovered yet. So, in Q3 we had no systems shipments to the memory segment. But we do expect memory to come back a bit in Q4, so that will change the segment mix a bit. But in general, the mature process technology segment is going to be our strongest segment in the fourth quarter. And China actually for us is quite strong. We had 66% of shipments in Q3, so it will continue to be strong in Q4. I would say the majority of the business that we get from China is in the mature process technology segment, so we'll continue to see business from that segment as well.

Patrick, just to add a little bit to that. So the mature foundries are running at very high utilization rates. And so, in addition to the strength in image sensors, as Mary mentioned, the power device market is starting to come back as automotive recovers. But a lot of the strength is in material products related to all the glue logic, all the small parts that go into making gaming systems, TVs, and monitors, which have benefited from the work-from-home environment. So that's a little bit of a boost to the mature markets.

Great. That's helpful. Maybe, Kevin, as my follow-up question, in terms of gross margins, you mentioned how CS&I mix, as well as the cost-out efforts. As we look at Q4, given the evaluation units you've talked about, is that kind of the biggest impact on a quarter-to-quarter basis in terms of the variables that affect the December quarter gross margins?

Yes. So as you point out, Patrick, CS&I, we've always said that's accretive, so whenever we have a big mix of CS&I that certainly helps. Within the products themselves, we have that page in the investor presentation that does show the relative Purion products, with the high energy being the highest gross margin, followed by high current and medium current lagging. So, if there is a product mix shift with more high energy versus high current or more CS&I versus systems, those all will influence it. Evaluation tools, as you pointed out, typically margin drag, and when eval hits, it does move our margins. Even though this year, we're going to be at a full-year average of 41%, as I mentioned, we had a tough start in Q1, with margins in the 38% range, due to several evals converting over. So going forward, as the evals come in, they will impact the quarter, but depending on what the rest of the mix is doing, sometimes you can alleviate some of that. If you have a perfect storm with a lot of high currents and lower margins alongside evals, that can create challenges. However, we are continuing to drive cost reductions and have effective roadmaps in place as we move forward towards the 550 and 650 models.

Great. Thank you very much.

Thanks, Patrick.

Thank you.

Thank you. Our next question comes from Craig Ellis with B. Riley. Your line is open.

Thank you for taking the questions, and team, congratulations on the good financial and strategic execution in the quarter. So, Mary, I wanted to start off just by following up on some of your CS&I commentary. So the third quarter was the second consecutive quarter where we saw revenues above 40 million. Do you believe that the segment is resetting structurally higher into the low 40s, or are we just seeing something that's more temporal in the near term with sales as we would think about calendar '21 potential likely to go back to that mid-30s range?

Well, we're not going to give a path for 2021 at this point in time, but we have been saying in the past that CS&I, or our service businesses, runs around 30% of our revenues. Recently, it's been running around 40% of our revenues. Based on what we know today, that's a pretty good percentage. Basically, it goes back to what Doug just said. Right now, there's a high level of fab utilization at the foundries, particularly in China, and we're also seeing customers in China maintain high minimum stock levels, given the pandemic and some of the geopolitical risks that we've all been talking about. So right now, I think the 40% range is a good place to be, but again, we'll just have to wait and see what 2021 brings. And again, we're not going to give a forecast for that at this point.

Okay, that's helpful. And certainly on the mature foundry side, we've seen absolutely abundant signs that foundry utilizations are very high and IBM is moving up. Going back to that China point, can you help us understand what the next steps are? When do you expect to receive licenses? And, Kevin, how do we think about the way you manage inventory and other issues so that once received, you can actually ship products on a timeline that you would like?

The restrictions just came out recently at the end of September. As a business, we've worked very hard to understand what that means for us. We've worked very carefully with legal counsel, our outside trade attorneys, and semi, our industry group, to keep abreast of the situation and help us work our way through it. So as I said, we've thoroughly assessed the new restrictions. We have identified that there are Axcelis tools and parts that will require a license to ship in the future. We're going through all the steps required to meet the U.S. government guidelines. At this point in time, we have confidence that we are going to be granted the required licenses. So it's all in process at this point, Craig. There's nothing more specific to give other than that.

Yes. From an inventory point, Craig, we're driving ahead, as Mary said, with confidence that these licenses will be granted. We did a thorough review of the technologies our tools are being used on, which gives us a bit more comfort regarding our assumptions. We're moving forward with inventory, whether it be for systems builds or CS&I, and within our guidance, we factored everything in right now, including any potential impact of placements.

Got it. And then housekeeping, Kevin. Could you identify how many evaluation tools you've incorporated into the fourth quarter guidance and how to think about OpEx?

Yes. We currently have 60 evaluation tools in the field. It's probably double what we had at any previous point in time, if not double, pretty close to double. Typically, we have one, two, maybe three tools out there, and there's six right now, with additional eval tools planned to go out. So there's a lot going on with the newer product extensions and a lot of interest in the product. As we talk about this, it's going to help with the margins too, with more customers moving over to some of the product extensions or the drag on those tools. There is a substantial amount out there right now, and it's likely to grow.

Craig, just to add some color. If you do the math on it, there are two evaluations going on in memory; one’s a Purion Dragon for DRAM, one’s a Purion H for NAND. We've got three in the mature process technology area; one is a Purion H200 for power devices, then there are two high energy tools for image sensors. There’s also one Purion H for advanced logic. That's the mix by segment. Four of them are high current and two of them are high energy. So it’s a nice mix across all the segments that we play in and for the tools that we're trying to use to evaluate the market. Having four high current evaluations is important, as we've discussed, because high current is the largest segment in implant, and it's an area where we think we can drive significant growth. So it is very good. As Kevin said, we expect to put more out in the field to help us drive towards our 550 and 650 models.

Indeed. And if I could, lastly on housekeeping. Kevin, I'd expect that beyond the fourth quarter for OpEx, we would see some FICA and fringe costs in the first quarter. Anything else we should be aware of as we look beyond Q4?

No. I’ve said before that this $36 million range is the range we're going to stay in for a while, especially with the number of evals going out. Now we've got the targets out for $550 million and $650 million. The $36 million range is where we'll be for now. We've been running some pandemic expense as well, which is hitting everywhere. So that $36 million range is where we are at this point.

Got it. Thanks, everybody.

Okay. Thanks, Craig.

Thank you.

Thank you. Our next question comes from Christian Schwab with Craig-Hallum. Your line is open.

Hi. Great. Congratulations on the good execution in the quarter. I was between conference calls, so I apologize if it has been addressed already. But after a prolonged memory slowdown that we highlighted at the beginning of the call, Mary, how do you see the memory market recovery as we go through 2021?

Okay. So, like others in the industry, we did see an increase in memory in the first half of 2020. At the beginning of this year, we said that memory could account for about 35% of our systems revenues in 2020, and it's likely to come in slightly shy of that. We had no memory shipments in the third quarter. We do expect some in the fourth quarter. But we still expect memory spending to come back in 2021, and that's kind of where we are right now. We're continuing to watch it and talk to our customers and assess the situation.

Christian, it's Doug. The mix – remember for us, it's all about wafer starts. We don't participate significantly in NAND additions. For NAND, it's about wafer start additions, and for DRAM, again, a little bit with the shrink, but more again on wafer starts. So this quarter clearly with zero shipments is likely the bottom, it starts to pick up next quarter and then moves through the year. It looks for us to be kind of split right now between DRAM and NAND. So a little bit is going to depend on how the customers decide to ramp and, of course, which customers are ramping first. So I think we’ll see both.

Okay, great. That’s the only question I had. Thank you.

Thanks.

Thank you. Our next question comes from Tom Diffely with D.A. Davidson. Your line is open.

Yes. Good morning and nice results in light of having no memory in the quarter. That's pretty good. So, Mary, just following up on the China situation, have you been given any indication of how long it takes to get a license, and have any of the other equipment companies received licenses yet?

The answer is we're just waiting and watching and talking to our peers through semi at this point in time. I think everybody's just trying to learn what this all means. At this point, we really don't know what the timeline is. But we have confidence we will be granted the required licenses.

Okay. And is this impacting your initial view of the fourth quarter though with some business kind of delayed until you work through the process?

Again, things move in and out of quarters. I can't say that it had a significant impact on the fourth quarter. But again, we had a lot of work to do, not just from a systems standpoint but think about all the parts that we sell. The team has done a really nice job just digging through everything and pulling the pieces together. At this point, Q4 is what it is, and we’ll continue to move on. We've applied for what we need to apply for, and we’ll see how the process plays out.

Okay. And then when you look at the evaluation tools in the field right now, based on the feedback you're getting, which programs or end markets do you think will be the first to go to volume manufacturing for the new tools?

I actually think that memory will, especially the high energy tools, will come to fruition, which is mostly in image sensors, just because it's a very strong market, and our customers have a lot of data on how our tools will perform there. Also, I mentioned that was in the mature process technology and image sensors. I think the memory market will also, when it ramps up, when we see memory recover, I believe we will see some volume buys, clearly from the high current tools that we're putting in: both the Purion H and the Dragon. I think, as you know, putting a tool into advanced logic is a long and tedious process. It's at least one year of evaluation and the customer needs to work with their customers to get approval to actually put it into production. So that's the one that will likely take longer to see any volume buys on. I think I mentioned in the script that it's more directly tied to our $650 million model than the $550 million, which indicates it could be several years out before we start to see some volume tied to that.

Okay, great. Then finally, any update on how the evaluation in Japan is going with the older tool?

Well, it's not an older tool. We do have legacy tools in Japan, and we've had those there for several years. The evaluation is actually for a brand new Purion XE that went through a power device customer. It's been installed and is under qualification right now, and it's actually going quite well. Is that what you were referring to?

Yes.

All right.

Thank you. Our next question comes from David Duley with Steelhead Securities. Your line is open.

Thanks for taking my question. I guess my first question is on the size of the market. I know that's not a big focus for you guys, but if you could just review what the overall size of the implant market is, and specifically really what the high current portion of the market is now as a percentage of the overall market? And maybe just help us with, I think it's a really important area for you to pick up market share in. Do you have market share goals in this segment of the market, or how should we think about your progress in penetrating this largest piece of the implant market?

Dave, this is Doug. The implant market we typically said is about $1 billion in size, about plus or minus 10%, depending on where we are in the cycle. Our view is that it's probably growing to be on the top end of that, more like $1.1 billion, oscillating a bit depending on the cycle. Growth is being caused by a couple of factors. One on the high energy side, there's growth as a result of the image sensor market, especially to some degree in the power device. Those two segments are very implant intensive. They purchase tools like the VXE and the XEmax, which have much higher ASPs. That's driving up the TAM from that perspective. The current side is also growing proportionally, as that's growing from more material modification requirements. As far as the exact share goes, we don't really track it specifically because it's hard to get that data from everybody. But the estimate is that high energy constitutes 25% to 30% of the TAM, high current is 50% to 55%, and medium current makes up the rest. In the high energy space, we have very high market share, particularly in key areas with products like the VXE. We believe we're very well positioned for growth in high current with the Dragon product targeting very specific productivity applications in low energy ranges and high doses. And then with the Purion H, the newest version of the Purion H, now looking at advanced logic as well as some new memory applications, again, all of these are aimed at the more difficult and challenging implants for our customers.

And as far as the CMOS image sensor market goes, do you have an idea about how big a section of the overall market that is? And obviously, it's growing and there are three or four key customers around the world. Maybe comment on penetrating the Japanese customer or your progress potentially getting into that customer.

Yes. We don't comment on the exact size of the image sensor market because it's difficult. A lot of image sensors are built in standard mature foundries on standard mature logic process flows with some additional steps to do the image sensor piece. It's difficult to estimate that, and we don't break out the specifics relative to the high energy piece which is more specific to the image sensor market. We can't provide a precise implant market size for that. The image sensor market as a whole is growing quite substantially. As for a customer you're referring to, with all image sensor customers, we're targeting utilizing VXE and then the XEmax. The XEmax brings much higher energy levels, which are critical for the most advanced image sensors. More importantly, the boost technology reduces the metals contamination issues quite substantially, which is enabling capability for advanced image sensors. Therefore, those will be the two technologies that leading edge image sensor companies will be looking at.

I just wanted to clarify a couple of things. The tool that you shipped to the power device, was that a high energy tool, the Purion H?

No. The power device evaluation, the tool was a Purion H200. It was a high current tool.

Okay. Purion H200. Okay. I was talking to the one to ship. There was an image sensor also shipment. What type of tool was that?

The two image sensor shipments were high energy tools, specifically a XEmax and then a Purion VXE.

Our competitor is always making improvements. It's one of the things that customers like about having a strongly competitive market with Axcelis and our competitor, is that we're continuously both improving our products, the capabilities, productivity levels, and overall cost of ownership for them. The key for us is, we believe that Purion Dragon is a tremendous leap forward in terms of our current technology, and the Purion XE, VXE, and XEmax continue to be market leaders in technology, also in key growing markets like image sensors and power devices.

Hi, guys. Most of my questions have been asked, but I guess, Kevin, I wanted to come back to the gross margin. Revenue roughly flat sequentially, yet margins down 250 basis points. Doesn't sound like the change in margin is really any kind of an absorption issue, so is it really just product mix within systems? CS&I revenue I think is – it sounds like it's roughly flat at about 40% of sales. So it feels like it's got to be either a mix within the systems shipments or your expectations to recognize revenue on perhaps some lower margin eval tools? Just trying to make sure I've got all the moving parts right.

Yes. Quinn, in Q4 it’s the systems mix that is influencing the gross margins. It’s a mix between the high current and high energy that impacts the Q4 number.

Got it. Okay. Thank you. And then on the Purion H eval unit going into NAND, I know you guys have a very high share in high energy applications for both NAND and DRAM. I just wanted to make sure that this Purion H is sort of TAM expansive for you at that customer rather than a Purion H coming in to replace where a high energy tool may have previously been used?

It is. It's actually a new customer for us, and it's a new fab. So it is expansion for us.

Great. Okay. Thank you very much.

Thank you.

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, Katherine. I'd like to thank you all for joining us today. We hope to talk with you virtually at several upcoming investor events. We will be participating in The Benchmark Conference next week and in December, the CEO Summit and D.A. Davidson Semi Cap Laser and Optical Conference. We also expect to conduct several virtual NVRs during the quarter as well. We thank you for your continued support and please stay healthy.

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