Good day, ladies and gentlemen, and welcome to the Axcelis Technologies Call to discuss the company's results for the Third Quarter of 2018. My name is Christy and I will 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] 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, Christy. 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 earlier today, it is available on our Web site. Playback service will also be available on our Web site 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. Q3 was a solid quarter for Axcelis with revenue of $95.4 million, gross margin of 41.8%, operating profit of $10.7 million or 11.2% of revenue and earnings per share of $0.26. Included in the quarter is a tax benefit of $1.4 million or $0.04 per diluted share related to 2017 tax reform. Even with this one-time adjustment, these results were in line with or above guidance and consensus estimate. Guidance for the fourth quarter includes revenue of approximately $100 million, gross margin of approximately 40%, operating profit of around $10.5 million and EPS of about $0.20. As a result of slower than expected second half industry spending, we will likely end 2018 with revenue slightly below our $450 million target model, the goal we set back in January. Our achievement of the 40% gross margin goal in that target model has allowed us to continue to invest in Purion product growth…

Thank you, Mary. We delivered solid Q3 financial results with gross margin, operating profit, EPS all above guidance and consensus estimates. Strong gross margin performance at 41.8% was driven by continued execution of our gross margin improvement roadmaps as well as a favorable mix of systems and CS&I. Margin improvement continues to be an area of focus across the business. As I discussed last quarter, we are targeting initiatives on the things we can control like strategically investing in CS&I projects targeted at margin expansion, pursuing cost out through value engineering and lean manufacturing initiatives, leveraging higher volumes across the supply chain and purchasing more material from our global suppliers. With regards to operating expenses, we continue to align incremental spending with initiatives expected to drive margin expansion and revenue growth. I'll review the third quarter financial results. Q3 revenue finished at $95.4 million compared to $119.3 million in Q2. Q3 system sales were $56.4 million compared to $73.9 million in Q2. Q3 CS&I revenue finished at $39 million compared to $45.4 million in Q2. Q3 sales to our top 10 customers accounted for approximately 80% of our total sales compared to 70% in Q2 with three customers at 10% or above. Q3 system bookings were $62.8 million compared to $61.8 million in Q2 with a Q3 book-to-bill ratio of 1.08 versus 0.84 in Q2. Backlog in Q3, including deferred revenue, finished at $81.3 million compared to $74.1 million in Q2. Q3 combined SG&A and R&D spending was $29.2 million or 30.7% of revenue. This was in line with our guidance and compares to $29.7 million or 24.9% in Q2. SG&A in the quarter was $16.4 million with R&D at $12.8 million. In Q4, we expect SG&A and R&D spending to be approximately 30% of revenue or flat to Q2.…

Thank you, Kevin. Our broad and diverse customer base has allowed Axcelis to perform significantly better during this pause than in the past. Strength in both Purion and legacy tools coupled with product offerings focused on power devices and image sensors have provided strength during this memory slowdown. Our CF&I business has also been performing well consistently delivering revenues in the $40 million range as greater numbers of Purion systems exit the warranty period and fab utilization remains high. We are now focused on achieving our $550 million target business model in the next couple of years. By adding key wins in Japan and China to the expanding Purion footprint at existing customers, we will have penetrated the accounts required to achieve this goal. With $550 million in revenue in our line of sight, we have begun efforts to identify both organic and inorganic growth to take revenues beyond this target business model. The Axcelis team has worked very hard to bring us to this point. We want to thank all of our employees for their efforts. We are excited about the success this has brought Axcelis and the financial returns this will deliver to shareholders as market dynamics strengthen. With that, I'd like to open it up for questions.

Thank you. [Operator Instructions] Our first question is from Craig Ellis with B. Riley. Your line is open.

Hi. This is actually Peter Peng calling for Craig Ellis and thanks for letting us ask a few questions. Just wanted to touch on China. Some of your larger cap peers says that China is relatively on track. Just based on your discussions, what are you seeing for 2019?

Yes. I would say in general most of the projects are on track. We're seeing customers who have been building fabs actually starting to populate now with some tools and that's in some of the start-up fabs, some of the memory start-ups in particular. Some of the more established Chinese customers are actually continuing, especially if they're in the mature process technology area or mature foundry/logic area, to buy actually quite heavily. So, we think that things at this point are on track.

Great. And on your memory, one of your large memory customers, it seems like from their 4Q CapEx, it seems like there is a huge surge. When would you see that kind of benefiting you, is this perhaps a first half or a second half kind of phenomenon?

It will probably be the first half of 2019 I would suspect at this point in time. Again, we are in a slight pause right now from some of our memory customers, but we expect things to pick up in 2019.

One more question. Just on the -- your Taiwan potential customer. Do you see that as a 2019 benefit or is this going to be more 2020 kind of case?

I think it will start in 2019. It's something though that will ramp over time. So while it starts in 2019, it's likely to be higher volume in 2020.

Great. That's all I have. Thank you.

Thank you.

Thanks, Peter.

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

Yes. Good afternoon. Good execution in a tough environment. When we look at memory in 2019, would you expect that to be more like second half weighted as far as a recovery in shipments for you right now, is that would you'd be thinking?

I mean our visibility into 2019 isn't great. But based on what we know today, I think that that's probably a pretty good assumption.

And then how much longer do you believe or have confidence that non-leading edge equipment spending can remain robust?

Hey, Christian, it's Doug. It appears like it's going to continue for a while. There's quite a bit of spending there and quite a number of different applications. So, we've seen a lot of high energy activity related to image sensors and embedded memory and so forth and then a lot of productivity improvements as a result of products like the Purion H in those areas. And in the mature foundry, productivity is the key. These technologies are relatively -- they're mature by definition of the name and the yields tend to be fairly high so productivity is how they make their money.

Right. And then, lastly, as far as taking a look at different ways to get above $550 million at some point. Are you looking -- can you give us any type of idea of what you think would be as far as product or support or where is the leverage in the Axcelis model to bring in something else or acquire something else. I'm kind of trying to figure out what you -- obviously, I don't want you to tell me what you're going to buy. But I'm confused about where you think that there could be leverage in scale and synergies?

Yes. Well, I think we're doing that evaluation right now, Christian. And the things -- we have good front-end channels; we know that market very well. We are very good on the physics side of things and so we have very strong manufacturing capabilities of very complex equipment. So, those are attributes that we can work off of. But we're in the middle of that evaluation and as we know more, we'll let you know.

Okay. Sounds fair. Thank you. No other questions.

Thanks.

Thank you. Our next question is from Patrick Ho with Stifel. Your line is open.

Thank you very much. Maybe first for either Mary or Doug. With your initiative in Japan with SCREEN, the region is a very good mix for both memory as well as the mature technology nodes. I guess in the very early stages that you are right now, are you seeing an interest from one or the other in Japan right now or in time do you believe it's going to be a relatively balanced mix?

I think right now we're seeing interest from a broad customer base so it would be mix of both memory and the mature foundry/logic or mature process technologies segments. And so I think over time we would expect the mix that we have today, which is relatively split to probably hold in Japan as well.

Great, that's helpful. And maybe, Doug, as a follow-up to Christian's or one of the questions earlier about the sustainability of the mature technology nodes. You've mentioned productivity, is that the biggest driver because we are seeing some capacity additions, especially in the CMOS image sensor or a retrofit of fabs, is the productivity the biggest driver for the sustainability or are there potentially new fab projects and capacity expansion plans that will drive volume?

There's definitely new projects. Many of these companies are doing expansions to existing fabs and in some cases, there is actually new fabs being built. The image sensor and power device market we classify within that group and both of those require more than just productivity. The image sensors are very dependent on very high quality, high energy systems for high yields in these complex image sensors. And the power device market is moving more and more toward silicon carbide for their high-voltage, high-speed switching applications and the Purion high temperature capabilities become critical for that. In general though in a mature fab that's running at high volumes with a big product mix, productivity is a very big deal to them.

Great. And final question maybe for Kevin in terms of the gross margin profile, which has held very, very well despite some of the volatility we're seeing near term. You've talked a lot about the efforts you've done on the system side of the business with the Purion platform and the leveraging of commonality. Can you give a little bit of color of efforts you're taking on the CS&I business? And what I'm looking for there is the install base gets larger, I'm sure it's becoming I guess a strange deal with more and more customers. How do you keep that business margin profiles at its high levels? Are their efforts you're taking within that business that can even improve it down the road?

Okay. It's a good question, Patrick. So, we have almost for the last two years now been investing more in that side of the business. We put a fairly big team of engineers into the group to focus on upgrades in particular. And upgrades -- it's one of those markets where you create your own market, the upgrade is not there until we come out with it and typically we are going after things that are productivity improvement or some type of yield improvement. So, we have been driving more upgrades into that side of the business. We are also, as you point out, we're getting more volume that's coming out just with some additional tools out there and volume always helps cost. So, we are getting a little bit of pickup from the volume. So between the upgrades we're working on and the additional volume, we're trying to move those margins even higher because that is, as you pointed out and as we always say, is a very accretive part of the business, want to make sure it stays away. So, we are definitely focused there and we have a team of engineers working on that side of the business.

Great. Thank you very much.

Thank you.

Thank you. [Operator Instructions] Our next question is from David Duley of Steelhead Securities. Your line is open.

Thanks for taking my question. Just a couple. What length of warranty period do you guys have on the Purion tools and you mentioned that the Purion install base tripled I think over the last couple of years. Could you give us a number for the install base?

I mean if we did say that, I'm not sure when we did or we did triple.

We didn't give any numbers and we are not going to give any numbers, Dave.

Yes. But the typical warranty period, Dave, is 12 months on a Purion tool which is standard for other products as well.

Okay. And then the opportunity once they come off warranty? Clearly 2017 was a good revenue year versus '16, so you should have a nice bump up in the service and support revenue from that year. I'm kind of trying to figure out what the growth rate might be here or the trajectory might be for the service business going forward with all of those tools rolling off warranty?

Well, I mean what we've been kind of telling people right now is that modeling at $40 million is probably the right run rate and as we move forward towards our $550 million model that would come up a little bit from there.

Okay. And then versus -- I think last quarter you were still hopeful that you might be able to achieve $450 million in revenue this quarter. I think you were just a bit light on that, maybe $10 million or so. I was curious as to what area that you didn't achieve your goals in.

We had a few tools move around, but as you know, it doesn't take very many tools to have a miss for us. But it was mainly in the memory area that we had some movement.

Was that in NAND or in DRAM?

It was in NAND.

Okay. And then final thing from me. Doug, could you give us an idea? I think we can do the straight numbers with your revenue now guided to Q4, but we don't have the denominator and how big do you think the implant market was in 2018?

Dave, we estimate the market to be a billion plus or minus about 10% pretty much every year between the new applications that come on and the productivity improvements that reduce it, it's pretty much over the last 10 years averaged right around there. So, we don't try to get the pencil any sharper than that.

Okay. Thanks.

Thank you.

Thank you. Our next question is from Mark Miller with Benchmark. Your line is open.

Just wondering how many fabs you mentioned you shipped the tool in Japan. How many evaluations do you have tools -- fabs do you have tools in?

We have two evaluations currently out in the field. One in a memory customer and one at a leading edge logic foundry.

Next year could you going to give us a little insight in terms of what would be your leading growth areas, would it be Japan, of course, you're not doing anything this year; but Japan, China, or mature foundry in terms of year-over-year improvements?

Well, we've talked about how we're focused on Japan right now. We're making a very significant investment there and it's a very large market, about $150 million to $200 million. So, that's obviously an area where we expect to have some growth. We will likely have some evaluation units in 2019, but significant revenue won't likely come until 2020. We've all talked about China and how it's a growing geography. So we would expect to continue to see growth there. We've made commentary during the course of this year how we've actually invested in the infrastructure in China to support that growth. So, again we're anticipating that it will take -- we'll start to see more in 2019. And then there's also the memory area for us, we expect to see additional growth in that area as well.

Would that growth be coming from DRAM because Western Digital, I think Micron, and also maybe Samsung have been talking about scaling back because of the NAND oversupply.

They certainly have discussed that. We don't expect that that is going to be something that's going to last throughout the entire year next year. So as far as your question relative to 2019, we would expect that there will be DRAM and NAND activity as they continue to balance their fabs and add capacity as demand requires it.

And finally, could you provide cash from operations for September, please?

$1.9 million and $17.2 million year-to-date.

And CapEx, I'm sorry, you have CapEx too?

I don't have that at my fingertips, maybe uncertain. Somewhere around $2 million, Mark, probably the right number for the quarter.

Thank you.

Thank you. And this does conclude today's Q&A portion of the call. I would now turn the call back over to Mary Puma, who will make a few closing remarks.

Thank you, Christy. We hope to see you in the coming months on the road in Beverly or at the Benchmark Discovery Conference on November 29 in Chicago. And we will also be at the New York City Summit on December 11 and the Needham Conference on January 15, both in New York City. Thank you for your support.

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