Axcelis Technologies Inc (ACLS) Q1 2019 Earnings Call Transcript

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Axcelis Technologies Inc (ACLS 4.88%)
Q1 2019 Earnings Call
May. 8, 2019, 8:30 a.m. ET

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies Call to discuss the Company's results for the First quarter of 2019. My name is Joel and I'll be a coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (Operator Instruction)

I would now like to turn the presentation over to your host for today's call, Mary Puma, President and CEO of Axcelis Technologies. Please proceed ma'am.

Mary G. Puma -- President and Chief Executive Officer

Thank you Joel. With me today is Kevin Brewer, Executive Vice President and CFO and Doug Lawson, Executive Vice President of Corporate Marketing and Strategy. If you have not seen a copy of our press release issued last night it is available on our website. Playback service will also be available on our website as described in our press release.

Please note that comments made today about our expectations for future revenues, profits and other results are forward-looking statements under the SEC'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.

Q1 was a solid quarter for Axcelis, despite continued difficult market conditions. Revenue for the quarter was $91.5 million, with better than forecasted earnings of $0.18 per share driven by strong systems gross margins and tightly controlled spending. Memory accounted for only 30% of our shipments in the quarter. With the bulk of shipments 70% going to mature foundry logic customers. We expect the full year to reflect a similar imbalance in our segment mix.

The geographic mix of our segments' shipments -- systems shipments for the first quarter was Korea 28 %,China 16%, Taiwan 26%, US and Europe 17% and the rest of the world 13%. Highlighting the memory market slowdown as well as delayed investment activity in China. We anticipate weakness in the broad market throughout 2019 resulting from continuing softness in memory and in mature process technologies in some geographies.

Lower fab utilization across the industry is expected, as customers manage their inventories which combined with more conservative expense control will likely reduce our aftermarket revenue. These conditions are impacting our financial outlook for Q2 and could make the remainder of 2019 challenging as well. For the second quarter we are forecasting revenues of approximately $80 million, gross margins of approximately 40%, operating profit of approximately $2 million and EPS in the range of $0.01 to $0.03. If current market conditions continue, we believe 2019 revenues could be down by 15% compared to 2018.

We can't influence market conditions, so we will focus on what we can control. Our objectives are to maintain profitability and prepare for the next upturn. We will aggressively control our costs to manage through the downturn, while continuing to invest in R&D for new segment-focused products. These new products create competitive differentiation that supports our customers technology and manufacturing needs and will fuel growth as the market recovers.

These development efforts will focus on Purion product extensions for the image sensor market for advanced image sensor products and on the power device market in silicon carbide as well as silicon. Additionally we will be investing in Purion H product extension, specifically targeting the productivity needs of the mature process technology market and the advanced technology requirements of leading-edge logic customers.

The fundamentals of the data-centric connected world have not changed. The cycle continues to be driven by IoT in the mature foundry logic market, data storage in the 3D NAND market and then data analytics in AI, and the DRAM in advanced logic segments. 5G proliferation over the next few years will create another boost to this cycle across all segments. In the near term, we will be patient and manage our business for profitability and future growth, while our customers work down inventories and memory supply and demand come back into alignment.

Now I'd like to turn it over to Kevin to discuss our financials.

Kevin J. Brewer -- Executive Vice President and Chief Financial Officer

Thank you, Mary. I'm very pleased with the company's gross margin and earnings per share performance in Q1, given the market conditions. We are 100% focused on managing through this extended downturn for profitability without sacrificing our future growth, by managing our costs, assuming revenues could be down 15% below 2018. Currently we anticipate Q2 and Q3 to be the bottom of the cycle, the recovery beginning in Q4.

As a result we have planned 2019 -- operating expenses by approximately $12 million, reductions in headcount, variable compensation and some push out of infrastructure-related projects. While we reduced our expected expenditures, we have not delayed key product development efforts critical to resuming a strong growth trajectory as we exit this downturn. We are also continuing to work on gross margin improvement initiatives required to achieve margin targets in a long-term business model.

I'll turn to the first quarter financial results. Q1 revenues finished at $91.5 million compared to $105.7 million in Q4. Q1 system sales were $57.1 million compared to $64.6 million in Q4.

Q1 CS&I revenue finished at $34.4 million compared to $41.1 million in Q4. We expect CS&I revenues to continue to be under pressure in 2019, as customers more tightly control expenses. This will likely result in a reduction in sales of upgrades, spare parts and consumables. At this point, I recommend modeling CS&I quarterly revenue at $35 million for the next couple of quarters, with a slight recovery toward the end of the year.

Q1 sales to our top 10 customers accounted of approximately 83% of our total sales, flat to Q4, with three customers at 10% are above. Q1 system bookings were $46.8 million compared to $42.1 million in Q4. With a Q1 book-to-bill ratio 0.83 versus 0.67 in Q4.

Backlog in Q1 including deferred revenue finished at $53.1 million compared to $65.1 million in Q4. Q1 combined SG&A and R&D spending was $30.4 million or 33.2% of revenue, compared to $32 million or 30.3% in Q4.

Q1 total operating expenses finished $2.6 million lower than guidance, as a result of cost containment actions previously mentioned. SG&A in the quarter was $16.7 million with R&D of $13.7 million. In Q2, we expect SG&A and R&D spending to be approximately flat with Q1 and stay at that level for the remainder of 2019.

Q1 gross margin was 41%, compared to 41.2% in Q4. Q1 gross margin was driven by continued progress on margin improvement initiatives and mix. Regarding Q2 margin of approximate 40%, which includes a recognition of an evaluation tool and a less favorable mix of planned tool shipments. For the full-year of 2019, we still expect gross margins to be in the 40% to 41% range.

Operating profit in Q1 was $7.1 million, compared to $11.5 million in Q4. Regarding Q2 operating profit of approximately $2 million. Q1 net income was $6.1 million or $0.18 a share, compared to $8.5 million or $0.0.25 per share in Q4. Regarding Q2 earnings per share in a range of $0.01 to $0.03.

Q1 inventory ended at $134.1 million compared to $129 million in Q4, driven by a higher number of evaluation tools. Q1 inventory turns, excluding eval tools, finished at 1.8 compared to 2.1 in Q4. Q1 accounts payable were $30 million compared to $36 million, in Q4. Q1 receivables were $71 million compared to $78.7 million in Q4.

Q1 cash finished at $170 million compared to $184.9 million in Q4. This reflects payment of previously accrued expenses. Did not buy back any shares in the quarter. We still have a $35 million share repurchase plan in place.

As this industry downturn continues, we'll maintain tight cost control, while we invest initiatives that are critical in achieving our $550 million business model. Investment in our products is key to achieving our growth objectives. A long-term model, which reflects gross margin of 42% to 43%, operating profit of 17% to 18%, and free cash flow greater than 15% can be found on the company website.

I'll now turn the call back to Mary for closing comments.

Mary G. Puma -- President and Chief Executive Officer

Thank you, Kevin. The success of Purion products along with large and diverse nature of our customer base have allowed Axcelis to remain profitable through this downturn, without sacrificing development projects critical to our future growth. I am confident that with our continued focus on customer needs, the technology development to support those needs and the dedication of our employees, Axcelis will continue to grow and achieve market share leadership in ion implantation.

With that, I'd like to open it up for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from David Duley with Steelhead. Your line is now open.

David Duley -- Steelhead -- Analyst

Yes, thanks for taking my question. I was wondering if you could highlight for us what you think the second half revenue will do versus the first half? I know you mentioned, I think that revenue would be down or could be down 15% for the year. Could you just talk about the implications for the second half of the year?

Mary G. Puma -- President and Chief Executive Officer

Well we said that we think that Q2 and Q3 are probably bumping along the bottom at this point and then we expect an improvement in Q4.

David Duley -- Steelhead -- Analyst

And what do you think would get better in Q4?

Mary G. Puma -- President and Chief Executive Officer

So what we're looking at right now is, we think that the memory recovery has actually pushed from late this year likely into early 2020. What we think we'll get better toward the end of the year is the mature process technology segment that should start to pick up late in the year and along with that we expect improved fab utilization, which would also provide some improvement in our CS&I or aftermarket revenues.

David Duley -- Steelhead -- Analyst

And then you mentioned some geographic weakness, could you talk about where you are seeing that?

Mary G. Puma -- President and Chief Executive Officer

Yes, what we're seeing right now is actually a lot of it is tied to China and the fact that there have been some delays in new projects based on both fab construction issues and also market conditions, and this is the overlap that we're seeing mainly with the mature process technology segment. I mean obviously there is some slowdown on the memory side as well in some of what I'll call the global customers. But in the mature process technology area in China that's certainly something where we've seen some weakness.

David Duley -- Steelhead -- Analyst

Okay. Final question for me. Could you talk about this calendar year, what sort of expectations you have for the high-end foundry logic space and Japan?

Mary G. Puma -- President and Chief Executive Officer

Well we are proceeding with the plans, excuse me, that we have in both of those segments. We have an evaluation in the advanced foundry logic segment that continues on and that we expect could provide some additional revenue in the future. And in Japan, we're making continued progress with SCREEN Semiconductor, we had their management team over here a couple of weeks ago and there's a lot of progress that's been made in terms of getting the customer accounts, plans in place and activities rolling there as well as with the demo and training center in Hikone. So again that's proceeding as planned, but that as we've talked about both of those segments in fact are places that we've talked about where it could take some additional time to see any meaningful revenue from those two segments.

David Duley -- Steelhead -- Analyst

Thank you.

Operator

Thank you. And our next question comes from Patrick Ho with Stifel. Your line is now open.

Patrick Ho -- Stifel -- Analyst

Thank you very much. Mary, maybe as a follow-up to your comments on the mature process. Are you seeing specific applications that are driving, I guess the slowdown in spending by the customer. I guess what I'm getting at it is like automotive, smartphones are you seeing those specific applications driving the slowdown in that segment?

Mary G. Puma -- President and Chief Executive Officer

Yes, Doug is going to respond to that.

Douglas A. Lawson -- Executive Vice President, Corporate Marketing and Strategy

Hey Patrick.

Patrick Ho -- Stifel -- Analyst

Hey Doug.

Douglas A. Lawson -- Executive Vice President, Corporate Marketing and Strategy

It's that it appears that it's kind of spread. It's it's sort of geography-based as Mary said with the Chinese economy and China in general, we're driving a bunch of it. That's led to a lot of inventory -- high inventories by many of the customers in this segment. So that does them in general to ramp down some of their fab capacity a little bit. As that inventory bleeds off, and we would expect them the utilizations will go back up, helping our service business and then leading to additional system sales. So I don't think it's one specific segment.

Patrick Ho -- Stifel -- Analyst

Great. Kevin, maybe as a follow-up. Gross margins are hanging in really well despite the projected decline in revenues for the June quarter. Are you still seeing, I guess the cost out initiatives you talked about in the past having an impact, and as we progress through this year and into 2020, they become a bigger impact allowing you to keep gross margins at 40% and above, especially at these lower revenue levels.

Kevin J. Brewer -- Executive Vice President and Chief Financial Officer

Yes, I mean we we are making continued progress on the cost out Patrick. We've had these multi-year gross margin improvement roadmaps in place. The business is executing well to those. There is still a number of cost improvement projects that are teed up through engineering as well as supply chain. And also on the product extensions, these are areas where we've been able to deliver better pricing. So the product extensions are also helping move the margins. But we're still working the margins very hard, as I said in the call, we've pulled back on some of the operating expenses, but things critical to future growth or margin improvement we're still spending in those areas to drive improvement.

Douglas A. Lawson -- Executive Vice President, Corporate Marketing and Strategy

Yes, Patrick, just one other thing to add, both Mary and Kevin commented on investing in the new products. All of those new products are being designed very much with improved gross margins in mind. So.

Patrick Ho -- Stifel -- Analyst

Great. And final question for me on the product extensions front. That's obviously a great way to, one, keep your existing customer base on the Axcelis platform, but also present potential new opportunities. How do you balance I guess the requirements or I guess the productivity improvement that customers are looking for and providing the right extension. I guess what I'm trying to get at, how do you invest appropriately and not across the board just because a customer requests something?

Kevin J. Brewer -- Executive Vice President and Chief Financial Officer

Yes, so we have a strong marketing group that spends a lot of time with our customers. We actually spend a lot of time with, in the case of foundries our customers -- customers, they really understand where the market's going and what the needs will be, so that we can balance that versus an individual customer request versus what the market overall needs and then we make our decisions based on that.

Patrick Ho -- Stifel -- Analyst

Great. Thank you.

Kevin J. Brewer -- Executive Vice President and Chief Financial Officer

Thanks, Patrick.

Operator

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

Peter Peng -- B.Riley -- Analyst

Hi, this is actually Peter Peng filling in for Craig Ellis and thanks for taking our question. On your memory shipment, the 30%, can you provide a rough write up between DRAM and NAND mix?

Mary G. Puma -- President and Chief Executive Officer

Yes, the DRAM was about 12% of the 30% and the flash was the remaining 18%.

Peter Peng -- B.Riley -- Analyst

Great, thank you. And then just on the gross margin, if I look at your Slide 20, there seems to be visible improvement in the last two quarters, looked like a point improvement per quarter. Can you talk about the underlying drivers there?

Kevin J. Brewer -- Executive Vice President and Chief Financial Officer

Yes, so it's continuing to come from margin improvement initiatives that the Company has ongoing which include supply chain, value engineering, improvements in the warranty and installed costs as these tools become mature and repeat orders, growing fabs, as we see those costs come down. And then it's again its product extensions that we were discussing this, we get better pricing with the extensions, so that's helping to drive the margins.

So we've -- as you know we've made a lot of progress over the last years focusing really on the systems margins. We always say that the service side of business at CS&I is very accretive and in our investor presentation you can see the improvement standard margins that's come across through the Purion platform. So the good news is, we haven't run out of ideas on how to improve things more and we're working through a number of initiatives still. So that's what's really proper. These gross margins are up to the point where we feel comfortable keeping the full-year at 40% to 41% and our longer term model at the 42% to 43%.

Peter Peng -- B.Riley -- Analyst

Great. And then one more for me is, can you talk about what the triggers are for activating your share buyback program?

Kevin J. Brewer -- Executive Vice President and Chief Financial Officer

The only trigger I can tell you is that we're going to be opportunistic, we are in a blackout period right now and it's something that Mary and I will review from time to time and we've discussed some trigger points of the Board as well.

Peter Peng -- B.Riley -- Analyst

Great. Thank you guys.

Kevin J. Brewer -- Executive Vice President and Chief Financial Officer

Yes, thanks Peter.

Operator

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

Gus Richard -- Northland Capital Markets -- Analyst

Yes, thanks for taking the question. Just to follow-up on the mature products. Is it reasonable to assume that the power semiconductor guys are weak, CMOS image sensors remain strong and then you've got some weakness in emerging companies in China. Would that sort of be a good explanation of the weakness?

Kevin J. Brewer -- Executive Vice President and Chief Financial Officer

Yes, I think just in the power devices, I mean image sensors certainly continue to be strong. As you know the mature segment makes up a very large number of products and devices, it's a very big customer base in terms of fabs, but also in terms of fabulous customers. And so it's more on on the rest of those products that are impacted. And I think when you look at the China market, the economy is not doing as well and that's cut back on some of the electronic spending, that's impacted some of the Chinese customers of ours. But it also impacts some non-Chinese customers of ours that ship via China. So it's probably more on the impact of the non-CMOS image sensor or power device market.

Gus Richard -- Northland Capital Markets -- Analyst

Okay, got it. And then your annual guidance is roughly down 15%. You also state that two Q2 and Q3 are going to be about -- you expect to be the bottom which would imply September probably below Q1. That, if you do the math, you kind of come up with in excess of 20% sequential growth in the fourth quarter. And again, a, am I doing the math right? and b, is it -- what gives you the confidence two quarters out?

Kevin J. Brewer -- Executive Vice President and Chief Financial Officer

So, yes I mean the math is right. We have the Q1 number, we've basically said flat Q2, Q3, kind of the bottoms, so the remainder of the delta is sitting in Q4.

Mary G. Puma -- President and Chief Executive Officer

Right, and I mentioned earlier that, we expect a mature process technology segment to potentially pick up Q4 and along with that the aftermarket or our CS&I business, as we believe fab utilization will begin to improve in that quarter as well. So, I think you're looking at it the right way.

Kevin J. Brewer -- Executive Vice President and Chief Financial Officer

And Gus, I think from a confidence standpoint, if you look at what our customers and customers' customers especially have discussed during this earnings seasons, there's been a lot of discussion about their inventory and their plans over the next couple of quarters to bring that down. And so that will drive the improvement in terms of the mature business from a fab standpoint.

Gus Richard -- Northland Capital Markets -- Analyst

Okay. And then just last one for me and I'm sorry I didn't do the math on this. I think the cash decline about $15 million in the quarter continues to walk me through the uses of cash.

Kevin J. Brewer -- Executive Vice President and Chief Financial Officer

At a high-level that was expenses that were accrued last year and there was some capital spending in there as well.

Gus Richard -- Northland Capital Markets -- Analyst

Okay, got it. Alright, that makes sense. Alright, thank you.

Kevin J. Brewer -- Executive Vice President and Chief Financial Officer

Thanks, Gus.

Operator

Thank you. And our next question comes from Mark Miller with The Benchmark Company. Your line is now open.

Mark Miller -- Benchmark Company -- Analyst

You indicated the mature founders in China were weak and weakening. And I was just wondering about the Chinese domestic NAND producers, are they scaling back, I know the large companies are scaling back. But are they trying to ramp still or they be throttling back their capital spending?

Kevin J. Brewer -- Executive Vice President and Chief Financial Officer

They're still planning to ramp. They're still at a very low level in terms of wafer starts. And so, probably not really having a meaningful impact on the overall NAND market at this point. But they will plan to continue to ramp through this year and could start to have some meaningful impact on the market as we go into 2020.

Mark Miller -- Benchmark Company -- Analyst

Are you expecting any improvements in Europe or that's going to remain flat or down over the next couple of quarters?

Kevin J. Brewer -- Executive Vice President and Chief Financial Officer

We don't expect any improvements in Europe. I think Europe falls into the category of -- for us largely a mature process technology. So it's going to group with that, that analysis that we would expect that would ramp up a little bit as we get into the later part of the year.

Mark Miller -- Benchmark Company -- Analyst

Do you expect to -- Excuse me.

Mary G. Puma -- President and Chief Executive Officer

I was going to say Mark, there's a lot of planning going on in Europe right now for some new projects that will be coming online in 2020.

Mark Miller -- Benchmark Company -- Analyst

When do you think 5G will start showing up as being a positive impact. That's later this year or next year? Terms of 5G.

Kevin J. Brewer -- Executive Vice President and Chief Financial Officer

Yes, so, 5G will affect the entire market. It's not just the 5G devices. So as 5G ramps, it increases the ability to get data from one point to another much faster which means you tend to increase storage and analytical capability and so forth in addition to all of the communication devices that they are involved. So I think it's a gradual ramp over the next few years actually. So it probably provides another kicker to this cycle as we come out.

Mark Miller -- Benchmark Company -- Analyst

Thank you.

Kevin J. Brewer -- Executive Vice President and Chief Financial Officer

Thanks Mark.

Operator

(Operator Instructions) Our next question comes from Christian Schwab with Craig-Hallum Capital. Your line is now open.

Christian Schwab -- Craig-Hallum Capital -- Analyst

Hey, great thanks for taking my question. I just got a little late, but can you, Mary, can you talk about what happened during the quarter that you now expect weakness into 2020 versus previous expectations of potentially improving near the end of the year? If there's any specifics regarding delayed times and push out or what you're hearing from the customer base?

Mary G. Puma -- President and Chief Executive Officer

Well, I mean, there are a number of projects out there that we had originally anticipated potentially could start taking equipment in the fourth quarter and from discussions with our customers and continuing to pulse the market. What we're hearing now is that those projects will not in fact start to take equipment until early 2020. So that's really essentially, what changed is just planning on the part of our customers.

Christian Schwab -- Craig-Hallum Capital -- Analyst

And can it be, is that on both DRAM and NAND or any other further specifics you could add there?

Mary G. Puma -- President and Chief Executive Officer

Yes, it's across the Board basically. I mean we all know that there are certain large memory customers who have a number of projects in both DRAM and flash that will proceed at sme point. But again the timing now appears to be early next year versus late this year.

Christian Schwab -- Craig-Hallum Capital -- Analyst

Great, no other questions, thank you.

Kevin J. Brewer -- Executive Vice President and Chief Financial Officer

Thanks, Christian.

Operator

Thank you. This concludes the Q&A portion of the call. I will not turn the call back over to Mary Puma, who will make a few closing remarks.

Mary G. Puma -- President and Chief Executive Officer

So we have a busy investor conference scheduled in Q2 and we hope to see you at one of these conferences. We will be at the 20th Annual B. Riley and Company Investor Conference on May 22nd in LA, the 16th Annual Craig-Hallum Institutional Investor Conference on May 29 in Minneapolis, the Stifel Cross Sector Insight Conference on June 12th in Boston and the Ideas Conference on June 13th also in Boston. Thank you for your support.

Operator

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

Duration: 30 minutes