Good day, ladies and gentlemen, and welcome to the Axcelis Technologies call to discuss the company's results for the Second Quarter. My name is Shannon McLead, and I will be your coordinator for today. I would now like to turn the presentation over to your host for today's call, Doug Lawson, Executive Vice President of Corporate Marketing and Strategy. Please proceed.

Thank you, operator. This is Doug Lawson, Executive Vice President of Corporate Marketing and Strategy and with me today is Russell Low, President and CEO and Kevin Brewer, Executive Vice President and CFO. If you have not seen a copy of our press release issued yesterday, 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 risk 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. Now, I'll turn the call over to President and CEO, Russell Low.

Good morning and thank you for joining us for our second quarter 2023 earnings call. Demand for the Purion product family continues to be extremely strong, especially in the high-growth silicon carbide power segment. Revenue for the second quarter was $274 million, with earnings per share of $1.86. Backlog remained high at $1.2 billion, with quarterly systems bookings of $193 million, also driven by Purion demand and strength in the power market. In the third quarter of 2023, we expect revenue of approximately $280 million, gross margin of roughly 44%, operating profit of around $64 million, and earnings per share of approximately $1.72. We are raising our forecasted 2023 revenue by $70 million to greater than $1.1 billion. This represents year-over-year revenue growth of approximately 20% in a year in which overall WFE is expected to decrease by 20% to 30%. We also believe it's possible to achieve $1.3 billion in revenue in the next 1 or 2 years depending on market conditions. The mature process technology market continues to be an area of strength for Axcelis, with 93% of second quarter system shipments going to mature foundry logic customers and 7% to memory customers, composed entirely of DRAM. The geographic mix of our system shipments in the second quarter was China 56%, the U.S. 13%, Korea 10%, Europe 9%, Taiwan 2%, Japan 2% and the rest of the world 8%. As has been the case since the beginning of this downturn, the power device segment and in particular, silicon carbide continues to drive our growth. We are actively engaged with all our customers in this high-growth market segment, winning business from new customers and expanding our footprint in existing customers. We now expect approximately 60% of our shipped system revenue in 2023 to come from this segment, with around 35% of total shipped system revenue coming from silicon carbide applications. We're seeing increased adoption of Purion H200 silicon carbide and Purion XE silicon carbide systems and now have 3 Purion H200 silicon carbide evaluations underway with customers in multiple geographies. Two of these systems are 150-millimeter and one is a 200-millimeter system. These evaluation units give our customers a head start qualifying productivity limiting recipes as they ramp to high volumes. It also enables the customer to conduct optimization work on their devices utilizing the higher energy and dose capabilities of Purion H200 silicon carbide. In 2023, we expect revenue from silicon carbide customers to be spread relatively evenly across the Purion Power Series product family. Axcelis is the only iron implantation company that can deliver complete recipe coverage for all power device applications. We are considered to be the technology leader and the supplier of choice to provide the best product family and manufacturing capabilities. This means that using Axcelis tools provides the lowest risk path to high-volume manufacturing required to support aggressive fab ramp plans. Axcelis places significant value on enabling our customers to succeed in this exciting market by providing differentiated product performance and a high level of customer satisfaction. As the industry downturn continues, we now estimate that memory will account for less than 10% of our shipped systems revenue, weighted towards DRAM. We expect the PC market will lead the industry out of this downturn beginning in the second half of 2024, with 2025 returning to a healthy level of growth in consumer electronics, advanced logic, and memory. While our memory and advanced logic customers are experiencing this downturn, Axcelis remains close to them, supporting their installed base and working with them on their future technology and manufacturing needs. During downturns, there is an increased ability to collaborate with our customers to expand opportunities for Axcelis through the next upturn. We have multiple evaluation systems in these markets and many customer engagements designed to increase our footprint in these segments. As the industry exits this downturn, we expect to return to healthy growth in these markets. This combined with continued strength in the Power segment will drive Axcelis to our $1.3 billion model and beyond. Now I'd like to turn it over to Kevin.

Thank you, Russell, and good morning. We are pleased with our second quarter 2023 financial results and are excited about full-year revenue, which is now expected to exceed $1.1 billion and represents year-over-year growth of approximately 20%. Looking at our second quarter, revenue and earnings per share finished well above guidance due to solid execution and continued strong demand for Purion. Q2 revenue was $274 million, with system revenue at $215.2 million and CS&I at $58.8 million. Q2 earnings per share of $1.86 was significantly above guidance due to higher-than-expected revenues, gross margin, and favorable spending. We also benefited from a much lower effective tax rate this quarter, driven by tax deductions associated with stock compensation. Strong bookings and quoting activity for systems in the Power segment continued in the quarter, which supports our expectation that approximately 60% of systems revenue shipped will come from this market in 2023. CS&I revenue will fluctuate quarter-to-quarter, but should be modeled at approximately $248 million for 2023 and $300 million for our $1.3 billion revenue model. Q2 gross margin finished at 43.7% and 170 basis points above guidance, driven by lower costs in deferrals and a slightly improved mix. We expect Q3 gross margin to come in higher at approximately 44% and forecast further gross margin improvements in Q4. Key functions across the business remain laser-focused on margin improvement. There are numerous initiatives underway to lower the cost of goods and drive higher sales of Purion product extensions, which allow us to model gross margin of approximately 45% in the $1.3 billion revenue model. Turning to operating expenses, the second quarter ended at 20.4% of revenue, better than our guidance. We expect OpEx in the third quarter to be approximately 21%. As always, we will continue to tightly control spending while investing in areas of the business that support growth, solidify our technology advantage in the specialty markets, and increase our footprint in the memory and advanced logic markets. Additionally, we will continue to invest in our employees and infrastructure required to achieve our financial models. One example of infrastructure investment is our new state-of-the-art logistics center in Beverly, Mass located just a short walk from our headquarters. The facility will open this month and is expected to be fully operational during Q4. We also plan to further ramp our Beverly and Korean operations as capacity needs grow and are comfortable that we have initiatives in place that support our $1.3 billion revenue model. We ended Q2 with $452.9 million of cash, cash equivalents, and short-term investments and generated $32.7 million of cash from operations. Cash in the quarter was impacted by higher inventory required to support the expected increase in second half revenue. In the quarter, we repurchased $12.5 million of stock and have returned over $157 million to shareholders since 2019 through our share repurchase programs. Axcelis has the rare opportunity to grow revenue and profitability during a significant industry downturn. This is a result of strong product positioning in a power device market and continued strong execution in a challenging environment. We also look forward to continued growth in memory and advanced logic as the overall semiconductor market recovers. Once again, I want to thank the entire Axcelis team for their continuing and outstanding performance. I also want to thank our supply chain partners for their hard work supporting Axcelis and our customers for their confidence in our ability to deliver. I will now turn the call back to Russell for his closing comments.

Thank you, Kevin. Axcelis anticipates revenue exceeding $1.1 billion in 2023 and reaching $1.3 billion in the next one to two years. This growth is achievable due to several factors. Firstly, the implant total addressable market has more than doubled in recent years and is projected to grow between 10% and 15% annually, with mature market segments accounting for over 60% of the total addressable market. Secondly, the demand for implants in devices, particularly in image sensors, is high, and the mature nodes are showing increased implant intensity, peaking at 28 nanometers. Thirdly, high-value Purion product extensions will be tailored to enhance power and image sensor device manufacturing, positioning Axcelis as the only company with a product line that can meet all implant recipes in these vital markets. This sets Axcelis up to take advantage of significant growth in the mature process technology sectors. Finally, Axcelis has strong long-term customer relationships and a deep-seated cultural commitment to ensuring our customers' success. I appreciate our employees, suppliers, customers, and investors for your ongoing support. I would now like to open the floor for questions.

Thank you. Our first question comes from Ethan Widell.

This is Ethan Widell calling in for Craig Ellis. So the surge in margin was a nice surprise, does this impact your confidence in hitting 44.5% by fourth quarter and 44% overall for the year?

This is Kevin. It was a nice surprise in Q2 and part of it came from better costs as well as a little bit better mix and some of the deferrals. I think on the last call, we talked about the second half becoming much stronger than the first half to get towards that full year target of about 44%. We're probably a little bit of the strength in Q2 took away from Q3 a little bit, but we still think Q3 is up from Q2, and then in Q4 I expect to see further improvement off of that Q3 number of approximately 44%. So yeah, we're still anticipating being in that 44% range for the full year.

Are you seeing signs that SK Hynix and Micron are increasing the demand for Purion Dragon?

And this is Doug. You had a slight issue with the connection, but I believe you're inquiring about the high-bandwidth memory. The content of the implant is consistent across all types of DRAM, whether it’s HBM or others. The positive aspect of the HBM ramp is that it begins to improve the capacity utilization of the memory fabs. This is the initial step towards returning to a healthy CapEx cycle. Following that, we anticipate the PC refresh cycle to start next year, which will significantly boost memory CapEx spending in the second half of next year and contribute to a strong 2025.

Our next question comes from Jon Dorsheimer from William Blair.

And Russell, strong one out of the gate, so congratulations on the quarter. I guess first question, just around your thought process in terms of the guide. And if demand is causing the pull-in if you will, I'm just wondering, what's your greatest areas of concern that would limit your ability to kind of take up that 2 to 3 year type target, specifically, how are you monitoring the health in the channels with respect to globally, but specific to China that we don't see a return to a healthy used market, which seems to be pretty lean right now? And then I have a follow-up.

Jed, this is Doug. Currently, we are optimistic about raising our full-year guidance to $1.1 billion and anticipating pulling in the $1.3 billion model to one or two years from now. The power market is where we are seeing the strongest demand. As I mentioned to Ethan earlier, we're starting to observe an increase in utilization among the memory sector due to the growing strength in AI activities. The refresh cycle for PCs will be crucial, so we are closely monitoring that. Additionally, consumer electronics are likely to be the next significant driver for mature markets, particularly for mature foundry logic products. We expect this to become evident around 2024. This is what gives us the confidence to expedite the $1.3 billion model. However, this year, the $1.1 billion model is being significantly supported by the strength in power, especially silicon carbide.

I’d like to follow up on silicon carbide specifically. Infineon made a significant announcement regarding a $6 billion investment in Kulim. My question is about your silicon carbide offerings, particularly how the 150 millimeter compares to the 200 millimeter in terms of tooling and any field upgrade capabilities. Additionally, I’m wondering about the spending in Malaysia. It would be helpful to understand the differences between the 150 and 200 millimeter options.

Hi Jed, it's Russell. We have the complete Purion platform for the Power series available in both 150 and 200 millimeters, including the xc-silicon carbide, m-silicon carbide, and H200 silicon carbide. It features a field-upgradable kit that enables switching between 150 and 200. The machines are fundamentally the same, but minor modifications are required for wafer handling and scanning to accommodate the larger substrate. As mentioned, it's an upgradeable kit that can be utilized in the field.

Our next question comes from Tom Diffely from D.A. Davidson.

Maybe a couple more on the silicon carbide side. So with some of the recent ebbs and flows in the EV end markets, have you seen any changes or any modifications to the new fab construction plans that are expected over the next couple of years?

No, actually, it continues to accelerate. At this point, silicon carbide is still supply constrained. There is quite a bit of activity. One of the things we often notice when we talk to U.S. investors is that there can be a somewhat narrow view of the EV market. Globally, the EV market is growing quite rapidly, which is driving the silicon carbide investment, and we expect that to continue. We're seeing no signs of that changing.

And then also, I guess, when you're thinking about the end product, does it matter to you if the companies are creating discrete or modules? Is there a difference in the implant?

Well, we're only involved in the discrete in the silicon carbide wafer fab side of things. So after they package that, then they would put it in a module, and there's no implant impact in the module manufacturing.

And a question for Kevin on the logistics center. Maybe just a little more color on the impact of both your capacity and potentially margins over time with the new center opening up.

Yes, so the new center is going to handle all of our incoming material and here, we currently have about 10 different locations we call material front. So that's going to improve overall efficiency. We're not going to try and move back and forth between two cities surrounding us grabbing material. Also, if required, we could clear out additional space in that facility to put some manufacturing, but what's really happening at this point, as we remove some of the remaining stockroom out of the Beverly headquarters, that frees up more manufacturing space in Beverly. From an infrastructure point of view, we're pretty much done now with what we need to do. We have a lot of additional capacity we can add on a second and third shift. Our manufacturing team continues to use the Kaizen process to drive improvement, and there are a number of Kaizen. In terms of more buildings between the Korea operation, the Beverly site and this new logistics center, I'm very comfortable with our capacity to hit the $1.3 billion and potentially beyond that. We've got very good supply chain partners too, and worst case, if we need to put some contract manufacturing capacity in place down the road, that's another option. So long and short of it, I feel very good about where we're at.

Our next question comes from Nicolas Doyle from Needham.

Nick Doyle on for Quinn Bolton. It looks like book-to-bill was slightly below 1 for the first time in a couple of quarters. Is this an anomaly or a function of the extended system backlog? And then also, what are you seeing on the bookings front looking into the second half? How far out are bookings being placed?

This is Kevin. So let me answer that. I'll start off by saying, we're going to see book-to-bill fluctuate a little bit, I think until there's really a much broader-based industry recovery. We were down a little bit on bookings this quarter, $193 million compared to the last quarter, which was about $100 million higher. But if you go back the prior quarter, it was down probably $100 million from the last quarter. This thing kind of goes up and down, but I think the real key here is we have a very strong backlog; still, $1.2 billion is a very large backlog for the company. In terms of bookings and backlog both, we're taking orders out into 2025 right now. I don’t think I'm worried about this book-to-bill because I think a couple of quarters ago, we were under 1, and then we popped back up under 1 and again with such a strong backlog. That systems backlog, if you consider we have a $250 million CS&I business sitting on top of that, there's more than enough revenue to get us quite a bit down the road past our bookings and other tools. Again, I think we'll see it bounce around a little bit until there is this broader base industry recovery. The power segment is very strong still. I think we now believe that 60% of the year's bookings have come from power. I think on the last call, we might have said it was 55%. We're seeing additional strength coming through power right now.

Nick, this is Doug. I want to add one more comment. We also monitor quote activity, which remains very high, particularly on the silicon carbide side. These companies are planning to build factories over the next couple of years, which is another positive sign of continued strength.

For my follow-up and you kind of touched on these points in the call, but more directly, what is the company's expectation for the memory recovery in 2024? It sounds like you're thinking second half driven by PCs. Maybe you can touch on what you're seeing in terms of the PC strength coming back where you're seeing that? And can the company hit the $1.3 billion model without the recovery in the memory market?

Hey, Nick, it's Russell. Thanks for the question. So regarding what we see with memory, we stay very close to our memory customers. We've historically been very strong in the memory market. Once the market starts to recover, we're expecting to see a lot of benefit from that. A lot of people looking for green shoots. At the moment, we're talking to our customers, I'm thinking the second half of '24 is likely to be a pretty strong year in 2025 as far as memory goes. That's kind of what we're seeing. This question regarding path to $1.3 billion, we've previously said we'd be looking for a consumer spending recovery in order to propel us to the $1.3 billion, and that would be obviously a recovery in memory and some other mature processes like image sensors. I think we are seeing strength in our power business beyond what we expected. However, with that strength in the power plus a recovery in consumer spending, we see us getting to $1.3 billion in the next 1 or 2 years.

Yeah, I think the bottom line on it, Nick, is that there are multiple paths to that $1.3 billion model. That's why in the call we said depending on market conditions. It really depends a lot on a bunch of different combinations.

Our next question comes from David Duley from Steelhead Securities.

A couple, I was just wondering, have you seen recent adoption of silicon carbide in other markets besides the electric vehicle market? And which markets would you expect to be early adopters outside of EV?

It's Doug, thanks for the question. Yes, I mean, if you look at our customers' websites, their press releases and so forth, they are talking quite a bit about applications in energy, industrial applications. The thing with silicon carbide is, it's a tremendous benefit to automotive because of the savings that it can provide in module weight and heat generation and so forth, as well as the performance of the devices. It's a little more costly, but as volumes increase, that cost comes down and that opens it up to other markets, especially the energy and industrial markets where weight and heat are important, but the performance is desirable as well. So we expect that this will be another growth area beyond just EVs that's associated with silicon carbide. Yes, we are definitely hearing that from our customers. For us, we don't see it necessarily directly because our customers would build the same devices using our Purion H, Purion XE, and Purion M silicon carbide tools, whether it's going into an EV or into an energy or industrial application.

And then as far as lead times go, could you just help us understand where lead times are currently? And I guess, you mentioned you're taking orders for 2025. How much manufacturing capacity do you have for 2024? Or maybe another way to ask it is, what is the current quarterly capacity availability?

This is Kevin. Yes, I think I said it earlier, but there’s plenty of capacity right now for the order rate we’re seeing in shipments that are required. Once this new logistics center comes online, that's going to help us. We also have, as I mentioned, additional manufacturing Kaizen that are ongoing right now as part of our normal process. We're a little bit more heavy with them right now as the logistics center is getting filled with material. Yes, we've got lead times, we're booking orders in 2025, but our lead times are much shorter than that. In the past, we've always said that with the ship from cell process, assuming material is on hand, we can turn tools within the quarter if we need to. Our supply chain continues to improve. Our suppliers are keeping up with us and allowing us to ramp. We're adding more capacity almost daily. So our lead times are not a problem with customers right now. Our performance in this regard has been quite strong.

Final question for me is regarding gross margin. I think I asked this question on the last conference call to hit the 44% target for the year, Q4 gross margins are going to spike up, I guess, 250 or 300 basis points, let's say, right around 47%. If they're exiting the year at 47%, why would they drop back down to 45%?

Yes, well, first thing I would say is, we won't exit at 47% because part of that spike got taken out with Q2 coming at 43.7%. But you're absolutely right, David, when we were talking about 42% in Q2, the math to get you there had a pretty big step-up in the second half, and we'll still have a step-up. We're going to have 44% in Q3, which suggests we still need a stronger Q4. The new math may bring it close to 45%. The thing that moves margins around is the mix, that's a big piece of it. As we continue to bring in and complete these gross margin initiatives, that’s been a key driver for gross margins over the years. I always talk about full year gross margins because quarter-to-quarter, things can move around. But if you look at our progress on a full year basis, we've been continuing to notch things up. Based on our expectation to end the year at 44%, that notches it up a bit more where we have quarters of above 45%. When we do our models, we're talking about full year averages. So when you look at the $1.3 billion model, we're considering a full year, not just 1 or 2 quarters of greatness.

Kevin, let me just jump in with one thing. You said mix, but I want to make sure it's clear; there are two mixes we worry about or look at. One is the type of systems; the product extension high energy has better margins than some of the standard products. The second is the systems versus CS&I, because we move to $1.3 billion, a big piece of that growth comes in systems. That does put a little pressure on the margins, because the percentage-wise, it's still roughly the same for CS&I, but it's a much higher revenue gain in terms of the systems.

Yes, that is a good point. I probably should remember to mention that. We always say that CS&I is accretive. However, if you look at what takes us from the current run rate to $1.3 billion, the majority of the increase is coming from systems. Therefore, that growth is still strong, and that’s a factor contributing to margins both positively and negatively. We are making progress, and we’re seeing a mix of systems contributing to our revenue gains.

Our next question comes from Mark Miller with the Benchmark Company.

One of the companies I cover in the laser business was indicated they were seeing some slowing in the EV market in China. I'm just wondering what you're seeing?

Well, I think, Mark, from the device standpoint, we're not seeing any slowing. We're a couple of steps away from the actual cars, and so far, the silicon carbide demand is still very high and still supply constrained. We're not necessarily seeing that or being impacted by that.

You mentioned a number of evaluations underway both for silicon carbide and memory, I'm just wondering if you could quantify that.

Yes. So Mark, this is Russell. Right now, we have 9 evaluations in the field, I would say they're across all market segments and products. We have evaluations in memory, image sensors, mature foundry, and power. Three of the evaluations are out there; I think we made a press release on this with the H200 silicon carbide tools in the power. We have an XEmax for image sensors, and a twindragon at an advanced logic R&D center where we're looking to basically get designed in from the start. We have evaluations in all market segments and products, aiming to work closely with customers for continued growth in those areas.

Just one housekeeping question. What was CapEx?

I'm sorry, I was muted; it was $3 million mark in the quarter.

This concludes our Q&A portion of the call. I will now turn the call back over to Doug Lawson, who will make some closing remarks.

Thank you for joining us today. We have a very busy investor calendar in the coming months. We'll be at the Fourth Annual Needham Virtual Semiconductor and Semi Cap One-on-One Conference on August 22nd, the Jefferies Semiconductor, IT, Hardware, and Communications Technology Summit on August 29 in Chicago, and the Benchmark 10th Annual Tech/Media Telecom Conference on September 13 in New York City. We hope to see you at one of these events. Thank you.

This concludes the presentation. Thank you for your participation in today's conference, and you may now disconnect. Have a good day.