Good day ladies and gentlemen and welcome to the Axcelis Technologies call to discuss the company's Results for the Fourth Quarter and Full Year 2019. My name is Daniel and I will be your coordinator for today. At this time, all participants are in 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, Daniel. 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. 2019 was a challenging year for the industry with memory spending remaining low throughout the year. But the year also showcased a very healthy Axcelis. A focused strategy on ion implant, combined with the hard work and dedication of our employees and the encouragement and support of our customers and suppliers enabled us to achieve several critical milestones in our drive to market leadership. In 2019, we continued to expand the Purion installed base, growing our large and diverse group of customers. We also sharpened our focus on key market segments in the mature process technology area such as image sensors, power devices, and mature foundry and logic. And finally, we grew our family of Purion product extensions with the launch of four new Purion implanters, specifically targeted at these segments. These new products are built on the common Purion platform and designed with our new concurrent product development methodology. This approach enables…

Thank you, Mary. Our Q4 financial results finished strong with revenue, gross margin, and earnings per share were well above company guidance and consensus estimates. Based on our full year 2019 results, this marked the first time Axcelis has remained profitable, through a full industry cycle. We have now achieved over five years of consecutive quarterly profits, while making investments that put the company in a stronger competitive position, as we enter what should be an extended growth period. Through the introduction of new Purion product extensions and continuous cost-out activity, we improved our gross margin year-over-year making this the second consecutive year, with gross margin greater than 40%. Additionally, we maintained a strong balance sheet, free of debt and instituted a share repurchase program. To align with our market segment strategies, we updated our $550 million revenue model, which we believe is achievable over the next two years, based on a strong memory cycle. We also added a new $650 million model, which should be achievable in four to five years. Both models reflect stronger gross margin performance, lower operating expense as a percent of revenue and significant increases in operating profit and free cash flow. I'll turn to the fourth quarter and full year 2019 financial results. Q4 revenue finished at $107.7 million, well above our guidance, compared to $69.5 million in Q3. Q4 system sales were $71.4 million, compared to $36.8 million in Q3. Q4 CS&I revenue finished at $36.3 million, compared to $32.6 million in Q3 driven by improving fab utilization and upgrade sales. Full year 2019 revenue was $343 million, compared to $442.6 million in 2018. Systems revenue was $202.6 million, compared to $280.4 million in 2018. CS&I revenue was $140.4 million, compared to $162.2 million in 2018. Q4 sales to our top 10 customers…

Thank you, Kevin. We are pleased with our strong fourth quarter performance and excited by the expectation of an extended upturn driven by innovations enabled by 5G technologies. Through continued partnership with customers and collaborations with our peers, Axcelis will offer a steady stream of Purion innovation that will support the 5G-enabled world. We believe this will drive us to a leadership position in Ion implant benefiting shareholders, customers and employees alike. To reiterate the statement I made to open our Investor Day in September, Axcelis is uniquely positioned with the capability, DNA and unwavering focus to solve customers' high-value high-impact Ion implant challenges. With that, I'd like to open it up for questions. Daniel?

[Operator Instructions] Your first question comes from Patrick Ho with Stifel. Your line is now open.

Thank you very much, and congrats on a nice quarter and to the year. Mary, maybe first off in terms of the mature technology node opportunities still ahead in 2020. Do you see that as being more broad based this year, or is it going to be concentrated with a few customers given some of the fab projects out there?

Okay. What we're seeing right now Patrick is that it's going to be broad based in terms of number of customers as well as geographies. As we said we expect for the segment to continue to remain strong through 2020 particularly with a focus on power devices and image sensors.

Great. That's helpful. And maybe as my follow-up question in terms of the new products you discussed at your Analyst Day last year and the extensions you mentioned some are obviously a customer site evaluation and some are still within your headquarters right now. Is 2021 where we're going to see those extension products I guess hit high volume, or could they occur some time in the second half of this year?

Well we're -- for some of those products we are going to see repeat orders come through this year. But I think you're right the majority of -- our expectation is that the majority of additional orders we'll get for those products will come next year 2021.

Yes just to add to that Patrick we have a step-up in evaluation tool spending this year that's driving some of those placements.

Right, and that will be again a future's look into 2021 where we'll see some repeat orders from those.

Yes.

Great. And maybe my final question for you, Kevin specifically with these new products and the impact to gross margins. You did mention obviously the evaluation use typically have lower gross margins. So I understand that on the model. But you also said longer term they'll have higher gross margins. How quickly can you get them I guess get gross margins higher once they start volume ramping to customers? Is it going to take some time as it usually does, or is there a quicker step up to get to those higher gross margins?

Well, there's definitely a quicker step-up with the product extensions and the typical new products release. And I think we're still very comfortable with our $550 million model with gross margins in that 42% to 43% range. So as we ramp towards that we'll continue to see the margins improve. We're getting off to a little bit of a slow start in Q1, but I think even with that for the full year we're going to be above 40% and I expect to see the follow-on quarters beyond Q1 above that 40% mark as well. So we're very optimistic about the product extensions driving margin improvement and we're continuing to work the cost out. That's become something we never let up on. So volume definitely is going to help us.

Thanks a lot guys.

Got you

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

This is Peter Peng calling for Craig Ellis. Thanks for taking the question. First off is just on the DRAM color. Is the expectation NAND followed by DRAM, or do you kind of see DRAM pulling in versus NAND? Just wanted to get color on that?

Yes. So for us in the implant side of that market as Mary said, we're seeing it kind of split, with NAND it's incremental adds in capacity to some technology. And then DRAM, it's incremental adds and the shrinks. And so from an implant perspective, we're sort of seeing both. We expect NAND to continue through the year. And as was mentioned in the script, we're starting to see an increased level of activity -- quote activity for DRAM projects which could materialize at the end of the year. But we're really expecting 2021 to be the time when it all comes together for both.

Got it. And just off of 1Q it seems like the memory and foundry logic is pretty split. Is that kind of the expectation throughout calendar 2020, or is memory going to ease off? And how should I kind of think about the profile and mix of calender 2020?

So we are still currently expecting memory to be lower in the 35% of our systems this year. As we said with the quote activity increasing in DRAM that could change in subsequent quarters, but for now we see it lower. We do see increased activity in the mature markets a lot of activity in image sensors, a lot of activity in the mature foundry logic space, just in general. So that will continue to drive that piece of the business up.

Got it. And one final question. On the service line, nice to see a quarter-on-quarter rise. Is that line item more stable throughout the calendar 2020, or do you see kind of a increase year-over-year?

Well we're starting to see the fab capacity start to come up. So utilization is improving. So that will obviously drive that as well as all the new tools that we plan to ship. So we've been on a run rate higher than that. I think if you go back probably a little over a year we've had some quarters that were closer to $40 million. So I would expect the same strength and the debt line should continue to improve.

Great, thank you, guys. Congratulations on strong result.

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

Great, thanks. Fantastic quarter, guys. As we -- Kevin did I hear you say that you expect to be approaching or at your $550 million target model in 2021, or did I not hear that right?

Yes within the next two years.

Within the next -- okay perfect. And then when we get to the '21...

From a run rate -- Christian from a run rate point of view we could definitely be there in 2021. I just -- it's too early to say what the year is going to look like but...

And we also predicated on a memory recovery.

Yes it does...

In -- later this year in 2021 which is more likely.

Yes.

Right. And that was my next question. Thank you. Is -- how do you guys see that significant memory recovery taking place in 2021? Is that going to be very DRAM specific or a combination of Flash and DRAM?

Right now we see it as a combination, Christian. It's really -- we'll start to see the 5G phones towards the end of this year, having more impact and that's driving higher DRAM as well as some higher NAND. And then of course, the cloud and the general storage platform is driving for NAND. So we see 2021 as being sort of the next big cycle from a memory perspective, where there's significant fab expansion and new capacity.

Okay, great. Fabulous. No other questions. Thank you.

Thanks.

Next question.

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

Yeah, good morning. Maybe just a follow-up question on memory. What is your relative exposure to the DRAM market versus the NAND market? Because we're seeing a lot of companies talk more about a NAND recovery this year than DRAM and yet you still have a little more exposure looks like on the DRAM side?

Yes. So in terms of -- if it's new wafer starts or new capacity that's added we're -- it's pretty equal. It's a different product mix for us. NAND will see more high energy. And in DRAM we'll see more high current. So a slightly different product mix, but similar opportunity when there's a full cycle of big capacity adds. When we're in the situation where we're in kind of in 2020 where there's layer additions we don't participate in the layer additions. That's where the dep and etch processes participate. But oftentimes, there are some additional implants that go into the next node and definitely into any new capacity that's added. And so that's how we participate there. And again, it's a little more high energy for us. NAND we participate both in the technology shrink, which usually requires some new and more difficult implants and as well as in the capacity side.

Okay. That's helpful. And then Mary I might have missed on your comments about the coronavirus. Did you quantify that at all, or how much that's impacting your outlook for the first quarter?

Yes. So Tom what we said is we've put into our guidance what we feel the impact is at this point in time and that we're continuing to monitor it because it is -- as you know it's a changing event kind of daily. But at this point, our guidance assumes any known impact from the virus.

Okay. And for you does that impact your systems business CSI, or is it more on the manufacturing side?

It would be across-the-board impact. I mean a lot of it has to do with -- in terms of shipments getting shipments into certain areas and then trying to get parts out. But now at this point we haven't -- I would say we haven't seen a major impact from it. And again, we've assessed where we are at this point and have included that into our guidance.

Okay. Thanks. And then finally Kevin, when you look at the margin progression you're expecting over the next year or so are all four of the new tools nice accretive margin structures, or is there a difference between the four products from a margin point of view?

So the products that we released back in September they're all very good margins. And I would say accretive for the most part to where we are today, especially on an average they definitely accretive to the average systems margins we have right now.

Okay. Thank you for your time.

In general, Tom when we look at the segmented markets and we look at designing products specifically pyramid sensors and for power devices and for certain challenging implants there's higher value to be had for the customer and that's reflected in pricing and margin.

Okay. Thanks guys.

Thank you. And our next question comes from David Duley with Steelhead. Your line is now open.

Thanks for taking my questions and congratulations on nice results. Just as far as the evaluation systems go, could you just kind of walk us through the accounting impact of those. I guess I understand the margin impact was there a revenue impact? And how exactly are you accounting for these?

Yes. So there's a margin impact because the costs are typically higher on these tools. As we have them in the field, we're making changes to them and that goes against the gross margins. Sometimes the pricing is in the lower end on an eval tool. So that's a margin impact. There is -- also on the operating expense side, there's a lot of support from engineering and selling that go into these tools. So that increases your OpEx as well. So those are really the two areas David. It kind of hits us on both sides.

And then -- and the only other place is they do stay on our balance sheet as inventory until they're converted.

Yes, right. That is a good point. So our inventory they're considered our assets until we convert the PO at the end of the eval cycle.

Okay. And are there more of the evaluation systems to come during the year?

So we have one evaluation system outstanding today, it is at a memory customer. But, yes, I mean, as Kevin mentioned, our evaluation budget for the year is up. So we fully expect to place multiple evaluation units across multiple segments, across all of the segments during the year.

Our year-over-year eval budget is up measurably.

And when -- I realize it's difficult to judge, but when do you expect these evaluation systems to produce repeat orders?

Well. So the evaluations that are in the field and expected to close in this quarter, we would have opportunity at that point for follow-on orders as the customer ramps that particular process or that capacity. So in the case of the Dragon that's in DRAM and NAND as that gets some capacity adds for those processes, then we would have opportunity. That could be follow-on orders in 2020. We definitely would expect higher volumes as we go into 2021, as the memory market recovers more fully. As far as the products like the XEmax and H200 that are more segment focused, those go to -- tend to go to a broad base of customers. And so, we would expect follow-ons there as they ramp that particular process flow. Again, that could happen fairly quickly or a little bit later depending on their needs.

Right. Even potentially before the evaluation closes.

Right.

Okay. And final question for me is, you've always had one of the best implanters for the CMOS image sensors. And you look at the number of cameras per phone and it's up pretty nicely going versus historically. How big can the CMOS image sensor business be for you guys as far as a market opportunity, or any way you can characterize it and I would expect -- would you expect there to be significant growth this year versus last year in that segment?

So, it's a little bit difficult for us to measure the market exactly, because some of the implanters that we sell into that market are going to a general-purpose foundry where they might use it for other things. But as a whole, you're absolutely right Dave. The market is growing pretty significantly. Implant is a very key enabler for some of the more advanced technologies, whether it's higher pixel count or BPV, deep IR and reds. And so, products like the XEmax and the VXE really enable our customers to do things there. And for us, they're much higher-priced systems than a standard high energy tool. And so that grows the market in terms of revenue, additionally beyond units. And I think the last thing -- comment on that is, many of these image sensors are sent out to different foundries. And so most foundries want that business and for them to be able to have that business, they really need to put the best implanter in place. And so, the implanter are -- we might start with an evaluation at a key foundry or key IDM that's doing image sensors and it will quickly roll out like the VXE did to many of the other foundries so that they have that capability.

Okay. I said it was last question, but I had one more. Just on the virus. There are a couple of memory fabs in the ground-zero of this thing, have you been able to ship units into those factories, or could you just talk about what some of the logistics are to get tools into those locations, if they are active at this point?

So at this point, Dave, we can't comment on specific customer shipment. We could talk about China. We're not going to talk about specific provinces in China or specific customers. So, I think, we'll just keep it where we left it. Both Kevin and I said that, we're monitoring it very closely. We factored what we know today into our Q1 guidance and we'll just continue to watch it and take appropriate actions.

Thank you.

Thanks.

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

You're guiding to 50% memory content in the first quarter yet 35% for the year. I was just wondering in terms of your thinking Intel and some others have come out and expressed some caution about data center spending being cyclically slowing second half of the year. Is this part of your thinking in terms of your projections for memory this year versus 2021?

Well, in general what we've seen from a memory perspective for this year, Mark is there's not one gigantic driver. There is a lot of little things right? There's Window 7 retirement. There is the initial 5G phones that we'll start to see more of towards the end of the year. So there's a bunch of smaller things. There's the initial 5G infrastructure, which is driving some memory and so there's not that one big thing. We expect that to really start to happen in 2021 when all of those factors are starting to come together and it will drive the volume of both DRAM and NAND, so for this year, we see a little bit of a pickup in this quarter. As we said, we're seeing a higher quote activity for DRAM could materialize in the second half. But for right now we're staying at 35% in terms of what we expect the mix to be for memory.

And what are you seeing you're getting much business from the domestic Chinese. Has that starting to ramp? I mean Yangtze Memory has an aggressive ramp. Just was wondering if you're playing into that opportunity?

It is. We have -- we talked about how typically -- or the majority of our business in China was from some of the global multinationals. But at this point in time we are seeing a mix with the domestic Chinese customers and we expect that to continue throughout the year.

And finally service margins were negative it looks like, I mean what -- was there some added cost for services? It kind of spiked up this quarter in terms of service cost?

Well, so CS&I as a whole -- it is very accretive. That's spare parts and upgrades and used tools. And the -- you must be looking at the SEC document. That breaks out just the labor piece Mark. And that runs very low margins anywhere from negative to single digits. But in general, our service business when you look at it in entirety it's very healthy. And overall margins are still very accretive to the business.

Thank you.

Thanks.

Thank you. [Operator Instructions] Our next question comes from Gus Richard with Northland. Your line is now open.

Yes, thanks for taking the question and congratulations, good quarter. Just on the Q4, can you give us a split on the mature, how much of that was image sensors or foundry logic et cetera?

So we don't get down into the specific market segments, but we said 61% of our shipments were mature process technology, 46% of that was what we would categorize as foundry business and the other 15% was logic.

Okay. And then in terms of Q1, just trying to quantify the risk going forward. Do you have a sense of what you expect your regional mix to be?

At this point, we're not going to disclose that. I will say as it -- typically is it's very Asia focused. But it will be a mix from all the usual suspects in terms of the countries that we ship to.

Got it. And then a housekeeping question. I didn't catch the booking number on the quarter. What was that?

Bookings was $77.2 million.

Got it. Okay. That’s it for me. Thank you.

Thanks, Gus.

Thank you. And our next question comes from Quinn Bolton with Needham & Company. Your line is now open.

Hi guys. Congratulations on the nice results. I wanted to just ask seems like many of your WFE peers have talked about the foundry logic business in 2020 being front-end loaded, but I think those comments really pertain to be advanced foundry logic space. Given that most of your foundry logic is tied to the mature nodes, how do you see the profile first half versus second half in the mature specialty foundry logic segment? Is that flatter, or is it back-half loaded, or do you think it may also be front-half loaded?

It's pretty steady. It's driven by a very broad base of customers and a pretty broad mix of products and new devices. From an implant perspective, the mature markets are actually great because, implanters worry more about the individual devices running in these foundries versus just processing wafers. And so, the bigger the product mix and the broader the customer base, the better the implant opportunity is in the mature markets. So, we see it as good solid business throughout the year. And so...

And then I wanted to follow-up on some of the evals that you closed this quarter or will close in the March quarter, specifically Dragon. We've all seen I think in past cycles when memory turns on, it can turn on in a hurry. And I guess my question is, to the extent that some of that DRAM activity that you're starting to see quotes for, if that pulls more into the second half of 2020. First, can you get the Dragon system up and produce to meet that accelerated time schedule? And if you can meet that time schedule, would it have an impact on margins, or do you think you could ramp margins on an accelerated shipment schedule if that scenario plays out? Thanks.

All right. So I'll start with the -- sort of the business side of it and then Kevin can talk about the margins. Yes, we expect to get follow-on orders from the evals. There were three evals we closed, all memory evals, two are high current. One was high energy. One of those high currents with the Purion Dragon and we fully expect to get additional follow-on orders for that in 2020.

Yes. I think from a higher volume point of view, Dragon will be more of a 2021. I think a lot of the business we gained this year in high current will be with the existing high current tools we have. But as Mary said, as these evals close, we expect to see follow-on with the Dragon tools in those areas.

And I guess the last part of your question Quinn. Do we have the ability to ramp the product quickly? And the answer to that is, yes. So, keep in mind that, we have a lot of commonality with the Purion platform and the end station and so forth. And so, we do have the ability to ramp the product quickly.

But it sounds like from Mary's comments that the Dragon is probably -- even if you see some of these projects start to accelerate that Dragon is still probably more of a 2021 volume ramp. So, I just want to make sure I got the right sort of expectation.

Yes.

Okay. And then lastly around -- sorry go ahead.

I was just going to say and that's really in line with how we see the memory market playing out, where the real volume ramp is 2021. And that aligns well with Kevin's comments in terms of our road map up to the $550 million model. Memory is required and these new products really put us in a good position to get to that 42% to 43% in that model.

Great. And then just wanted to -- a final question on Dragon, but you'll close the first eval tool. Can you give us any update on how you think or what the opportunity is to place eval tools on the advanced logic side for Dragon, or do you think most of those evals for Dragon going forward stay on the DRAM or NAND side?

Well, I mean we continue -- we've talked about this many times. We continue to work with -- there are now four customers really or five who are working at advanced nodes for logic and we're working with all of them. So, at some point, we continue -- we expect to penetrate into that market segment, but we're not going to make any specific comments about which products and what the timing on that is. We'll just continue to work at it.

Okay. Thank you.

Thank you.

Thanks, Quinn.

This concludes the question-and-answer portion of the call. I will now turn the call back over to Mary Puma, who will make a few closing remarks.

Thank you, Daniel. We want to thank all of you for listening to our call and we hope you can join us for Susquehanna's 9th Annual Technology Conference on March 12 in New York City. We thank you for your continued support.

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