Good day, ladies and gentlemen and welcome to the Axcelis Technologies Third Quarter 2016 Conference Call. My name is Liz 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. [Operator Instructions]As a reminder, this conference is being recorded for replay purposes. 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.

Thank you, Liz. With me today is Kevin Brewer, Executive Vice President and CFO; and Doug Lawson, Executive Vice President of Corporate Marketing and Strategy. If you've not seen a copy of our press release issued earlier today, 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. Today, Axcelis reported third quarter financial results with revenues with $65.7 million, gross margins of 36.7%, and earnings per share of $0.07. Our systems mix in the quarter was 100% mature foundry and logic, supporting continued strength of the internet of things. The high energy and medium current tools we shipped in the quarter were driven by image sensors, RF devices, and silicon carbide powered devices. The mature process technology segment also drove increased demand for used tools, pushing our CS&I [ph] revenues above typical levels. Q3 was unusual and then it marks the first quarter in two years that we have had no systems revenue from the memory segment or from Korea. 86% of our systems revenue for the quarter came from the US and Europe with the remaining 14% from China. Typically, we see a mix of about 25% from China and 25% from the US and Europe combined, with Korea usually…

Thank you, Mary. Before I review the second quarter financials, I would like to take a minute to cover our gross margin objectives and results. We remain focused on gross margin improvement and understand its importance to driving higher earnings per share. Our long-term business model has not changed for the gross margin target 40% or greater driven by continued cost product activity, clear pricing strategies and higher volume. In Q3 the gross margin was 36.7%, down from Q2 as expected. The initial shipments of our new Purion M for silicon carbide application carry higher cost associated with development cycle and some higher cost material. We continue to deliver quarter-over-quarter margin improvement on Purion products through value engineering project, supply chain optimization, lower manufacturing cost and reductions in install and warranty cost. As Purion H and Purion M products mature and additional cost cutting initiatives are realized, we expect margins on these products to be more closely aligned with Purion XE. Since ramping up production of full Purion product line with Purion H in Q1 of 2015, system standard margins has improved 680 basis points on a rolling four quarter average. New product line expansion such as the EXE, VXE and silicon carbide tool enabled peer pricing strategy that when combined with ongoing cost cutting initiative and planned volume increases drives overall our business gross margins to greater than 40%. For any given quarter we can expect to see some fluctuation in gross margins driven by mix and other one time event. However, the important thing to remember is we are making steady progress on lowering our cost to good sold which in turns driving system margins higher. Looking at our third quarter results. Q3 revenue was $65.7 million compared to $64.5 million in Q2. Q3 systems sales were $30.9…

Thank you, Kevin. As a result of the full Purion product family, the robust IoT market and stronger operating model, Axcelis is now able to sustain profitability in periods of low implant memory spend. The new Purion product extensions are driving further adoption share gains and higher margins. As the industry gears up for strong build cycle, we expect our Purion penetration success to position us for growth in both 2017 and 2018. Share gains in this year will continue to be driven by a broader customer base and increased spending in both the memory and mature process technology segments. Our gross margin improvement initiatives remain on track and we believe that we are well positioned to deliver our long-term model which will yield attractive earnings for our shareholders. With that I'd like to open it up for questions.

[Operator Instructions] Your first question comes from the line of Craig Ellis with B. Riley. Your line is now open.

Thanks for taking the question and congratulations on the ongoing margin progress in the business. So the first question, I admittedly jumped on a little bit late, was just a high level question on the back half of the year relative to expectations three months ago, can you just frame how memory is playing out versus what would you had expected and then the same thing versus foundry and logic?

Sure. Well we did expect memory to begin pickup in Q4, and then gain additional steam moving into 2017 both Q1 and beyond. The best information that we had really as recently as our analyst day was that the spending would start in Q4 and in fact would likely be a little bit heavier in Q4 than it has played out. What it has happened is I've [indiscernible] I've actually spent considerable time in Asia recently and have gone to our customers and confirmed some of the ship dates. And as it turns out, what has happened is that some of the spending that we had expected to happen in Q4 will actually happen in Q1. So at this point in time, we -- as we said in the call, Craig, we expect actually to see material improvement in our Q1 revenues gross margins, and EPS. So, at this point, it is really a timing issue more than anything else. Nothing has fundamentally changed in our story in terms of market share gain, gross margins; the long-term business model remains intact.

Sure. And just kind of to understand that memory timing ship that you are talking about Mary, is all of the memory that you hit previously expected in the fourth quarter falling into the first quarter with some of it falling into a subsequent quarter in 2017?

Yes. I think what we'll see is that we will see -- we'll certainly see memory spending not only in Q1 but also into Q2. We've talked for a long time about how we expect to see an uptick in memory. Perhaps a little bit of DRAM, but more likely in the 3D NAND area moving into 2017.

Okay. The next question is more of a second half question just on the spares and services business. Why would that -- take to $34.5 million in the third quarter not unusual for us to do that periodically, is it going to retain that level in the fourth quarter or should we expect it to normalize back at something closer to $30 million to $31 million?

Yes. I think we expect it to normalize back, Craig, to the $30 million to $31 million. It does get a little choppy sometimes in quarters depending on the used tool volume that’s in there. I mean this quarter, this is the way things played out with so many upgrades and tools and stuff, it popped up a little bit higher.

Okay. Thanks, Kevin. And then lastly and another high level question just from your vantage point, looking at the broader INM [ph] market, any thoughts on where we are tracking for this year relative to what I think was kind of $850 million midpoint previously and preliminary thoughts on next year stand, can it get into the mid $900 million range or is it likely to be something less than that from the intensity that you are seeing within the customer base? Thank you.

Craig, our view is for 2016, it is coming in around right around $850 million. And we do see the next year it gets back up into the $950 million range, and then we will grow a little bit more beyond that.

And share thoughts this year, Doug.

Share thoughts for this year, we expect 2016 will be pretty much flat with 2015, so right around in that 18% range, and then for next year grows to 22% to 28% on the higher TAM.

And what would account for the variance from the prior 20% to 25% target versus something that's closer to 18% this year. Whether there is a variance in the plan that the company would have had at analyst day and mid year?

It is all in memory move that Mary discussed. So just the memory systems that we had anticipated would be in the fourth quarter that are coming in on the first quarter shift, the annual TAM. The business, the total units all of that stuff hasn't changed at all. It's just where the fence post is strong.

And I am sorry about -- question that you mentioned the share number for next year, what was that number you provided?

22% to 28%

22% to 28%, okay, all right, thanks. I'll hop back in the queue.

Your next question comes from Edwin Mok with Needham & Company. Your line is now open.

Hey, guy, this is Arthur on for Edwin. Thanks for taking our questions. And I really appreciate the visibility that you offer going into 1Q. You mentioned you saw some increase in mature foundry logic in 1Q on top of some forecasted increase in memory spending. On the mature foundry logic side, what are you seeing in a market that is driving that growth in 1Q? Is it the continued trends and image sensor RF and silicon carbide power devices?

So I think the commentary was more that Q4 -- that Q3 was very much weighted 100% to foundry and logic. As we move into Q4 and into Q1, we'll begin to see the memory side come back much stronger. Right now, we see the mature, logic and foundry market is very stable. It is in a good place and it will bounce around quarter-to-quarter as is the nature of that particular segment. But it has been driven by image sensor, power device, RF; it is very dependent on which customers you are expanding and for kind of what end products that they are selling into. So there is some dependency in that market on product cycles for their customers, whether it is automotive or phones or telecom-type stuff.

Hey, thanks for that color. And so you guys have highlighted good progress with the Purion M platform over the past year; I think you recently announced the multi system order for manufactured devices for the wireless communications market. Just wanted to get a sense of longer-term how do you envision the mix shifting within the Purion product family?

Well, I think the Purion product family, if we look Purion H is very much targeted, well first all of the products are targeted across all the segments. But Purion H is very much memory focused that's where the volume is. That's where the highest use of high current tends to be. We see a lot of activity on Purion XE, again from memory especially in the NAND side but there is a lot of use of high energy in image sensors as well as several of these specialty devices. So there has been an uptick in terms of high energy use in the foundry market for example. And then Purion M, we are seeing that kind of across the board. We got the specialty customers that are doing things like the silicon carbide where it is 150 millimeter hot implant that we've go what was recently announced -- announced yesterday was the RF customers that's a standard type of product going into that segment. That same version of Purion M was sell into the DRAM and NAND market. And then image sensor market likes Purion M quite a bit as a result of the low metals contamination. So we see it spread. I mean it is very much a product that fits very well across all the segments.

Your next question comes from is from the line of Patrick Ho with Stifel Nicolaus. Your line is now open.

Thank you very much. Mary, given the consolidated customer base that you see today, so it is completely understandable on the timing move from customer to customer, however, lot of your customers tend to be both NAND as well as DRAM, was there one specific market segment among -- between those two that cause some of the timing delays?

No. I don't think so, Patrick. We are participating on both sides of the equation so to speak in terms of DRAM and the 3D NAND. So it was really just a matter of how the customers laid out, when they want the shipments in particular for the systems. It wasn’t any one thing that caused or any one project that caused some of the things in Q4 to actually happen in Q1. And I won't call it a push out either. I would just say it's simply timing as the customer firmed up their plan; this is just where the equipment fell.

Okay. Fair enough. And then maybe going to the foundry side of things. China continues to be a growth opportunity for the entire industry particularly not only the mature technology side but on the inventory for side where you've talked about in the past. The Purion M penetration is there. Can you give a little bit of color of, one the China opportunity for Axcelis as a whole and maybe also on infrastructure that maybe needed to be built to capitalize upon that opportunity.

Okay. So Axcelis is actually has a pretty good position in China. We've actually gone back and taking a look at some statistics on our revenues in China. And I'd say on an annual basis we actually have about 25% of our systems revenues is come from China. So again we already have a pretty good install base and infrastructure there. I think the way we are looking at China is there are a couple of different segments. There are fabs that are basically totally Chinese funded. There are the fabs too, I call them domestic fab like the SMIC and then there are the fabs that have corporate parents that are outside of the country. And so we've taken a look at what the requirements for all of those. And I'd say that based on that we expect to participate in most of the market opportunity that is there. A lot of these customers have actually recently taken at least one of our Purion products and that's one of our major strategy just to lead with one and then go in and follow with additional pipes not only repeat orders for the one that's there but then additional type of Purion product. So I think, again I think we've got a lot of the seeds sown there. We got good relationship. The thing that we need to do and I am sure you heard this from our peer companies and our competitors is it's a huge geography. And so with some of this new fab there is start up required in terms new offices, laying in inventory, making sure that we have the appropriate number of field services as applications people available to actually serve this new facility. So that's an analysis that we are going through right now. We've actually been going through and continue to go through and our goal is to make sure that we make the appropriate investment to be able to participate in that growth.

Great. And maybe a final question for Kevin in terms of gross margins. Now in the past we've seen the effects of valuation units on specific quarters when they get recognized. As we look forward how many more of these at least over say like the next 12 to 18 months can we expect where there maybe a quarter we -- I don't say blip but where you may experience one of those quarter impacts. Are we only expecting one or two more of these type of quarters or is there going to be something that still has yes legs or extendibility going into say even 2018?

Yes. I'd definitely say Patrick through 2017 based on the current evals we've got out there and what I know that's coming at us, we will continue to see recognition and then there is somebody [they are going to spend] in 2018. I guess the only thing I would say though is as the volume increases the impact of one of these tools hitting in a particular quarter will have less on an impact obviously on a bigger quarter it does on the current quarter. So and the other thing is too unlike some of the first evals we are getting a little bit better with these tools. The costs are little bit better. So they are never going to be a great dive but the impact of should lessen as we move forward but the original question we are going to see this in 2017 and out into at least the first half of 2018 in terms of closure. [Multiple Speakers] and so but I am we are still saying by end of 2017 we expect to exit 2017 with gross margins in 40% range. So we are not backing off our gross margin target. These things are baked in there I guess is the best way to put it.

[Operator Instructions] Our next question comes from the line of Mark Miller with Benchmark. Your line is now open.

I am sorry I was also in a call that was running over. But could you give the bookings and system backlog again?

So the bookings were $23.1 million and so now book-to-bill of 0.86 and the backlog was $20.6 million for the quarter.

Okay. In terms of the expected share gain next year since NAND and Flash is going to be probably the strongest area of capital equipment increases, are you expecting to get put most of the share gain in that area? And also will some more for Purion H type systems relative to Purion M? You've done better done I think with your Purion M at certain memory manufactures in Purion H. I am just curious what products going to drive most of the share gain?

Hi, Mark. It's going to actually be pretty good mix. At the beginning part of the year we would expect with some of these new projects kicking off that it is a little more weighted towards high energy, towards the Purion XE, is tends to be some of the first things that they move in from an implant standpoint. And then we would expect to see the Purion H. Purion M it kind of cuts across the board so we will see probably a little more activity from that like we have recently in the mature foundry and logic market.

Okay. Just one final thing. What was the cash flow from operations?

We finished at $72.34 million up from $67 million. So we generated about $5 million of cash in a quarter.

We have a follow up question from Edwin Mok with Needham & Company. Your line is now open.

Hey, guys, sorry, I joined a little late. Just and if this question is asked I apologize but I think you had talk little about timing of shipment that give you good visibility in 1Q but those shipments will have in fourth quarter. Are we talking about one or two tools especially like given the high XTE Purion need or we talking about multiple tools? And that's timing starting in the 1Q, should expecting more front end loaded first quarter mean a lot of things are ship in January, early February timeframe.

Yes. I would call it multiple tools. And Q1 actually does have more system that would be front end loaded versus some of the recent quarters that we've talked about where I know people have been asking about cash. And we talked about how the quarters have been more back end loaded. So you miss the commentary that it really simply a matter of timing and December 31 comes when it does and some will ship before that some will ship after that but there is really been no change in terms of our expectation on the number of end types of tools that we will be getting between Q4 and Q1. It's just simply a timing issue.

Okay, that's fair. And then maybe just kind of forward question around that you guys had three strong logic sales this quarter and that's even like earlier in the year, obviously it takes some time for customer to digest -- do you have visibility to lay additional projects that you believe could materialize and some even will benefit you on that side, maybe in China or some other areas, can you give us some color on that?

Yes, So Edwin the mature market in the past you've always heard me refer to it is the lack of all market, clearly with the IoT activity over this last year and half, it's become much more than that. So it's a little more predictable. The thing that it really drives that at this point is product cycle for their customers. So whether it is automotive, phones, the various devices they are selling into. So that drives when customers are going to buy. And we are in touch with each of those as they are planning. And in the foundry market to support the guys that are fablers or fab light those guys are investing pretty consistently and that's a heavy amount of investment in China right now. And so we are very active there. And again a visibility is interesting in NAND market because you have visibility that there is -- there is going to be need for a new modem device it is coming and you got two or three potential customers that are looking at it. What you don't know until you get closer is which one of them is going to get in. And usually that's when you will see the PL so.

Great. Last question I have on the share gain target you guys lay over 2017, obviously you guys have been very strong in high energy but in high current, medium current those are areas that we've gained share right. How much confident are you that customers will give you in the position where you guys are splitting in the customer relations where you guys are splitting some of these between you and your competitor. How much confident are you that your customers will you give that business given your competitor again is a much bigger company so they have potentially can use commercial current and stuff like that if I have to limit their share loss if you will.

So, Edwin, it comes down to this innovation benefit that we've talked about a number of times. What the customers are gaining out of this is they are clearly gaining better technology, they are gaining competition between Axcelis and our larger competitor and all of that really drives advancement in productivity, process performance, lower cost of ownership and those are things that over the last couple of years since we have the Purion H and XL have been clearly demonstrated. There are solid numbers behind this innovation benefit. So customers understand that this is energy, is there and I think that those who have tried have enjoyed it. We are beginning right now to penetrate where we have evaluation and we actually have a number of ongoing engagements right now from a demo and application perspective. Those customers are all being our major competitor respond in one way or the other. And that's a great thing. So and that's really what's driving all of these. At the end of the day it comes down to this innovation benefit.

We have a follow up question from the line of Mark Miller with Benchmark. Your line is now open.

Just wondering what causes you to have great confidence now than you have previously when you thought you would be picking up the share earlier this year? What gives you confidence now your Q1 forecast is going to be as stated?

Well, we always knew that the project that customers in particular our memory customers are starting to spend on, we knew that they were going to happen. Again the question was always around the timing and as I said a little bit more if it is going to happen in Q1 versus Q4. We spend a lot of time now with those customers talking about exactly when they would like the shipment and when those shipments -- our expectations from when those shipments will go out. I'd say there tends to be at this point in time since they made the commitment to make the investment, there tends to be a lot more certainty around the date. And there certainly a lot more certainty around the dates with customers buying for memory than there is this mature process technology segment. So we feel pretty good and in fact we've already got orders for some of the units out into the first quarter. So those things are starting to really solidify. And so we are gaining confidence daily.

It won't have anything to do with some of the challenges and maybe trying to bring up next generation 3D NAND Flash? People might be having new challenges any thought.

No, the customers are doing fine on their end. It is more of the commodities game, when is the right time to start adding capacity based on what the pricing is for DRAM or NAND.

Spot flash pricing just went to our multiyear week high last week. So maybe they are waiting for that so

Yes. This concludes the Q&A portion of the call. I'll now turn the call back over to Mary Puma who will make a few closing remarks.

Thank you. I want to thank you for your continued support. I'd also like to thank those of you who attended our Investor Day in New York City last month. Materials from that events as well as our current investor presentation are available on our website. We are going to be presenting at the Midtown Cap Summit in New York on December 8, and the Needham Growth Conference in January. We also expect to be on the road during the quarter doing some NDRs. We hope to see you soon. Thank you.

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