Good day, ladies and gentlemen, and welcome to the Axcelis Technologies call to discuss the company's results for the third quarter 2021. My name is Daniel, and I will be your coordinator for today. [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. We are all participating in this call remotely, so I would like to apologize in advance for any technical difficulties. 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. Good morning, and thank you for joining us. Axcelis posted a very strong quarter due to the growing momentum of the Purion product line and strength of the semiconductor industry, particularly the mature process technology segment. Revenue for the third quarter was $176.7 million with earnings per share of $0.81, driven by strong gross margins of 43.3%. Quarterly systems sales increased significantly to $126.2 million in implant systems record. CS&I, our aftermarket business, continued to provide a major contribution to our top line and gross margin with Q3 revenue of $50.5 million. In the third quarter, 91% of shipments went to mature foundry logic customers, and 9% to memory customers with an even split between DRAM and NAND. Due to growing strength in the mature process technology market, we now estimate that segment…

Thank you, Mary, and good morning. Axcelis delivered solid Q3 financial results driven by strong gross margin performance and continued revenue growth. With our strength in a growing mature process technology market, we now expect to exceed $640 million in revenue for 2021. Growing systems and CS&I revenue, coupled with strong bookings and backlog have set up a strong finish to 2021 and position us well for expected growth in 2022. We are seeing significant leverage in our business model and expect full year operating expenses to be around 24% of revenue with gross margins above 42%. Full year gross margin assumptions include higher pandemic and supply chain-related costs and the impact of our investment in additional manufacturing capacity. Ongoing gross margin improvement will be driven by the timing of cost-out initiatives, customer product mix and continued growth in our CS&I business. Based on the strength of the market and demand for our Purion products, we are developing new financial targets that will take us well beyond our current $650 million model. We will introduce these models at our Virtual Investor Day on December 9. Before discussing the details of our Q3 financial performance, I'd like to provide an update on our supply chain and new manufacturing facility in South Korea. We have and will continue to provide guidance that reflects our current assessment of supply chain challenges. Beyond working closely with our established suppliers, we continue to qualify new sources of supply and carry a higher-than-normal level of inventory to help buffer supply chain disruption. Our sales team is also working with customers to provide purchase orders much earlier than in the past, which improves visibility for our manufacturing team. We are adding manufacturing operations closer to our customers with a goal of increasing customer satisfaction and capacity. Construction…

Thank you, Kevin. Axcelis is currently positioned for significant sustainable growth. The implant market is increasing, thanks to strength in the overall semiconductor industry, but also due to a rapidly expanding mature process technology segment. The capabilities of Purion product extensions, like the Purion VXE and Purion power series combined with the implant-intensive nature of the image sensor and power device segment uniquely position Axcelis to benefit from the electrification of the automotive market. We will continue to partner closely with our customers across all geographies in this growth segment. Axcelis has the financial means to invest in R&D, global support infrastructure and capacity to capitalize on all of the opportunities discussed in today's call. We are in the middle of one of the most exciting times in the history of the industry and are confident that we are focused on all the elements required for leadership in ion implantation. With that, I'd like to open it up for questions.

[Operator Instructions] Our first question comes from Patrick Ho with Stifel.

Congrats on a really nice quarter and outlook. Mary, maybe first off, in terms of the business environment, you talked about memory picking up at least in 3Q DRAM and NAND. Can you give a little bit of color in terms of kind of customer mix? Is it primarily with one customer you're seeing [indiscernible]? Or is it a broader mix with multiple customers?

At this point, Patrick, we're seeing that it's a broader mix with multiple customers. There's one customer in particular that has actually aggressively started placing orders, but based on the quotations that we're doing and the bookings that we have, this is what gives us the confidence to say that it's broader, and we'll start with DRAM and then expand into NAND in the second half of the year. Remember, we said we're actually already booking into the third quarter. So we've got pretty good visibility into the first half of the year.

Great. That's helpful. And maybe as my follow-up question for Kevin. Kudos to you guys for managing the supply chain in this challenging environment. And you gave a little bit of color of some of the variables that you are seeing to, I guess, mitigate against these issues, maybe specifically for Q3 given that there were more issues that arose, one, how did you manage through a lot more, I guess, competitive issues? And secondly, how do you -- how are you reacting to kind of mitigate those situations in Q4 appear to be still persistent coming off of Q3?

Yes, that's a good question, Patrick. I mean there's no doubt that the supply chain is very tight and really since the start of the pandemic, it was mostly driven by pandemic and closures of businesses. And of course, then we got into a logistics issue, and part of that is because of the pandemic part of it's just because of the volume that's trying to move right now through the industry. But early on, I think we got very aggressive with looking at our lead time offsets to MRP with suppliers, putting buffer inventory moving from some of our bottleneck suppliers and getting some new capacity put online. So I think some of those early actions certainly are helping now. Now we're doing what we've been doing since the start. We're trying to stay on top of it. I mean the team is working hard, as all companies are doing right now. We're still adding new suppliers as we see problems arise, we're reacting, and we're trying to be proactive as well. We're looking at -- continuing to look at where there may be potential bottlenecks in trying to beat it off of the past, if we can. So there's a lot of hard work. And as I think you've heard me say before, there's a lot of luck, too. I mean, it's a big supply chain. So all we're going to do is continue to do those things that have been working for us. So as far as you point out, we've been able to manage through this, and that's our intention as we continue to move forward. So I feel comfortable with our Q4 guidance that we have a good handle on what we need to do to execute this quarter from a supply chain point of view.

Our next question comes from Craig Ellis with B. Riley.

Congratulations really on 2 fronts, not just the near-term operating execution, which is remarkable in such a tough environment, but in the vision that you had years ago to really diversify out the Purion product line so you can be so well positioned for the secular drivers that you mentioned, and that's really where I want to start. Mary, as we look at the mature foundry market on the power side, and as we look at EV activity, we're currently low single-digit million units of production. But by mid-decade, we should be $10 million, maybe $30 million by the end of the decade. So there's a tremendous ramp coming. And the question is, where do you sense your diverse customers are in getting capacity in place for that ramp? How much of that are we seeing here and now in second half strength in the business? And how much would you expect to fill in as we go through 2022 with the visibility that you have in your order book?

Well, we've talked extensively about power devices and how those are actually being driven by the electrification of the automotive market. Our customers right now who serve that market are adding pretty significant capacity. I would call it full speed ahead at this point in time. And again, based on our discussions with them and we stay very close to them, not only in terms of trying to understand what the forecast is, but also in terms of understanding what the trends are in the products because -- we've talked about how our Purion power series is really a market leader, and we want to make sure that we stay that -- that it remains that way. So I would say that it's quite strong right now, and we believe that it's going to remain strong into the foreseeable future. This is not a trend that's short term. This is a trend that's longer term. And we -- again, we expect to be right there with our customers, enabling them to continue to manufacture these chips even as they evolve over time. So this is a long-term trend, Craig, and we believe it's going to remain in place for many years to come.

Yes, that's helpful. And then -- go ahead, Doug.

Yes. I just wanted to add that we are planning to do a deep dive on that market on the power market and the specialty markets at the Investor Day in December. So there'll be a lot more information.

Great. And then the second question was also in mature foundry and just flipping over and Doug, you may refer me a bit to the December session, but I wanted to see if I could get some color on the CIS part of the mature foundry market. Certainly, we're seeing very strong EV and ADAS demand there. We're also seeing very strong smartphone demand as smartphones continue to have an increase in image sensors per phone. And one of the things we've been looking for is the opportunity for Axcelis to potentially gain further share in the Japanese market. And I'm hoping you can provide a little bit of color on whether you've got any increase in optics into tapping that market and growing into a large, well-positioned customer there -- potential customer there?

So Craig, Doug can address any of those technical issues, but we're continuing to work with all of the image sensors manufacturers, particularly the large ones. Obviously, the target that you're talking about is something that we are working very heavily, not only with our team in Japan, but also really across the business. And in Japan right now, we actually have quite a bit of interest, both in image sensors but also in the power market. And that's something that we'll continue to focus very heavily on. We put a Purion XE into the power device market last year, and that's in production, and we're using that as a reference site, which has generated a lot of interest. We actually just launched a Japanese website, Axcelis website, and that should really help our Japanese customers become more familiar with and comfortable with Axcelis. So lots of ongoing activities, and that's definitely something that will be a future event for us -- a future win for us, let's put it that way.

Yes. And I think a couple of other things, we are exhibiting that semi Japan this year with the booth. We expect quite a bit of activity. And the key products relative to the image sensor market, there is the Purion XEmax, which we have 2 evaluation systems in the field that leading competitors of that customer you're referring to. So we think that, that's the product that is going to be -- drive really the next generation of image sensors.

That's really helpful. And I'll flip it over to Kevin for a question. Kevin, interesting point on the prepayments that helped with cash, $50 million, very, very strong performance. The question is, are prepayments something that we should expect to see more of in calendar '22? Or were there just unique dynamics that took place in the calendar third quarter?

Well, it is customer specific. And I will tell you, it's one particular geography with some of our smaller and, what I would say, newer customers. There is a -- in the PO terms, there are prepays that are associated with that order. So depending on where the mix is from quarter-to-quarter, Craig, that could occur more or less. So it's -- I wanted -- I did want to mention to this quarter because it was more significant, and we had a pretty significant cash generation from operations. So I just wanted to flag that.

Our next question comes from Christian Schwab with Craig-Hallum Capital.

Congratulations guys on this really fabulous execution. Kevin, did I hear you right that your backlog went from $272 million last quarter to $406 million this quarter?

Yes, you did. And last quarter was a record, and this obviously was a new record, yes.

Okay. Fantastic. So not just maybe some of the thunder that might come on December 9, but can you guys kind of talk about, in particular, the silicon carbide market where I think you have an implant product where your competitor really does not and that industry is looking for material wafer growth? And I'm sure you're aware, there's not too many cars per wafer right now. That may or may not change in the future, especially if we go to $300 million. But can you kind of quantify the opportunity for you guys in that marketplace alone?

Well, I think, Christian, the -- as I said, we're going to have a deeper dive on this on the Investor Day, more than we can do in a quick Q&A. But we expect this year, our both silicon and silicon carbide power combined will be 25% to 30% of our systems revenue. So that's up from last year, which I don't have a chart in front of me, but I think it was around 17%. And so it is continuing to grow, and automotive is probably the key driver. There's a lot of power switching that goes on in the car, a lot of silicon in addition to silicon carbide. So we're seeing a lot of activity across all geographies. There's -- there was a lot of activity in Europe, really starting it. The Japanese market has always been pretty strong in power. Recently, the U.S. market has really started to go after it aggressively as seen by several customers' earnings reports in the past week or 2. And the Chinese market is very, very active. So -- it's a worldwide phenomena. There's a big push worldwide on EVs. And so we expect it to continue to grow, and we continue to develop the Purion power series family.

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

So first, Kevin, I wonder if you could give us a summary or an update on just where we are, where you are in the valuation systems, what you expect to close by the end of this year, which looks like the impact margins a bit? And which ones are going into 2022, it might be impactful there?

Yes. So I think Mary mentioned there's 5 evaluation systems currently out in the field. And in Q4, we expect to convert multiple ecosystems. So we didn't put the exact number in there, Tom, but it's -- let's put it this way, it's 3 or more. So going forward, I expect we'll still have a few evals in the field in quarter 1. But we are also continuing to put evaluation tools out. As a matter of fact, a fairly large portion of our current inventory number beyond having some buffer inventory for supply chain issues is evaluation systems both shipped or work in process in the factory. So I don't expect the evaluation tools to drop off in any meaningful way. In the near term, we're going to continue to put them out there. And as you know, the more evals we have out there, the more opportunity we have to convert to revenue and future growth. So the margin impact is always a little bit of a disappointment, but it's a short-term disappointment because a lot of these new evals as well are the product extensions, which are -- as we've talked about before, they have higher ASP and the margins are certainly more accretive than some of the base products.

Okay. Yes, one of those high-class problems. Okay. Maybe shifting over to the memory market for either Mary or Doug. A year ago, at this time, we were looking into 2021, we thought it's going to be a nice recovery year for memory. It didn't materialize, but it was dwarfed I guess the mature business being so strong. But I'm just curious, when you look out into '22, how does memory look different this year than it did a year ago?

Well, I think we -- if you look at pricing trends and so forth, they're beginning to support growth in terms of additional capacity. The demand, if you look at any of the Gartner or IC Insights reports show an increase in overall demand for memory over this next coming 5 years. So we expect that there will be capacity additions, as Mary mentioned in the script was we have begun to see some of that this year. We expect that to continue next year. And so we expect it to be a better year than last year in terms of overall memory. But for our business, I think your comment in terms of the mature business [indiscernible] this year, the mature business is very big and -- for us and is more implant intensive actually than memory. So I would expect that next year, we'll continue to see percentage-wise a stronger mix towards mature memory even though memory will be growing.

Okay. That's helpful. And then final question, I guess, for Kevin, again, when you look at the backlog ramping up here, the booking is very strong and business going into the third quarter and now next year, are you capacity constrained in any sense? I mean is it going into the third quarter because that's when the customers need the tools? Or is it kind of restrictions on how fast you can get these tools out the door?

Yes. I think we've done a very good job meeting what customers have required for ship dates. So I would say, Tom, that the majority of it really is meeting what the customers' requirements are. As I mentioned, we do have the Korea facility online now, which extremely excited about because if we -- if I look at the timing of how quickly we brought that up and running, it's actually quite remarkable what the team accomplished. And we did start manufacturing this week, as I mentioned, and we'll start shipping in Q1. So that's going to certainly help out into the next year shipments. The near-term requirements, we've got covered with our current manufacturing in Beverly right now. So there's really not any constraints there. I'll say it again, the teams, both manufacturing and supply chain across the business, people -- we're pedaling the bike hard right now, but we're keeping up with it. So Yes. So I think maybe your question might become, I know, throughout the year, we have heard from others in our peer group that the pushing deliveries out or they quit taking more deliveries in 2021, things like that. We haven't really made that an issue at this point because I think, again, we've kept up with what customers are needing for to meet their requirements.

Our next question comes from Charles Shi with Needam & Company.

I'm asking on behalf of Quinn Bolton here from Needham & Company. So I want to start with a question. I think you guys mentioned mature foundry logic, not only on a dollar basis, but on a percentage basis, next year is shaping up to be even stronger than this year. So I want to ask a question given how strong the bookings are and given your visibility all the way through like third quarter next year, how much of that demand you are seeing today is the underlying market demand? Or is there any like a shift of those customers, the purchasing behavior from like just in time, purchasing to like maybe just in case purchasing because the lead time is so stretched out?

I would say at this point, our sales team does a really good job trying to shake out exactly where people are just trying to get in line versus where the requirements are, and they do a lot of background work on the, for example, is the fab built? What's the status of the fab? Where is the equipment going? And so we believe that the bookings that we have right now are bookings that will remain in place. Obviously, there are going to be some movement. There always is in terms of fab readiness. But we're very comfortable with the fact that the customers who are actually placing orders are going to take that equipment basically in the time frame that they've indicated. And we're building to that. So we watch it. There's -- we do internal reviews with the sales team and the manufacturing team. It's almost on a daily basis at a minimum every week, there's a review to take a look at inventory levels and things that changes in the forecast. So we manage it extremely closely. So if any of those things do happen, we're on top of it. And at this point in time, again, we feel it's pretty certain. And so we don't think that there's a lot of speculative buying out there at this point.

Mary, so maybe the next question, I want to ask more specifically about power devices, the demand you are seeing. Obviously, there are probably at least 3 major type of power devices, silicon BCD, IGBT, silicon carbide with various implant intensity, I would say they're all high, but maybe there may be some difference there. So based on 2022 order book, are you kind of seeing a shift in terms of the mix between these 3 types of power devices from '21 to '22? Is there more bias with silicon carbide or IGBT does more sophisticated power device types?

It's a split, Charles. It's -- we're still relatively early in the game in terms of -- I mean, power devices have been around for eternity. But we're kind of in the early game of this new use in EV applications. So I think it's split across the board. It really depends on that customer's primary strategy. Some are focused on silicon and IGBT, some are focused on silicon carbide. There's other customers that are focused on GaN. So I think we're just seeing across the board. There's a lot of power device demand across a bunch of industries. But automotive is probably the biggest driver.

Got it. Maybe my last question, back to the eval. I noticed that your Purion Dragon eval for DRAM and Purionb XEmax eval for image sensor has been a little bit for a while. I wonder whether you can update the progress there and those 2, obviously, very important for your expansion in DRAM and the image sensor market. So I would like to see if you can provide any color on those 2.

Yes. As Kevin mentioned earlier, we have 5 evals in the field, 2 high currents and 3 high energies. One of the high currents is the Purion Dragon that you mentioned that is being qualified for DRAM application. Now that customer has already qualified the Purion Dragon for NAND application, and it's in production. So we're going through the paces here. I think as you know, valuations -- some can close early. Some can take a little bit longer. Typically, when it takes longer, we're working with the customers to ensure that they have all of the performance that they want. And sometimes those steps actually change from originally what we agreed to -- we mutually agreed to and expand. So that Purion Dragon eval, it's on track. We're working through it, and we're looking forward to having that closed and having that tool go into production very shortly. In terms of -- let me just mention the other Purion H eval that's out there. It's for advanced logic. That's going very well also. And we believe that, that is a great opportunity for us to further penetrate the advanced logic market in the future. In terms of the high energy, you mentioned the Purion XEmax. We actually have 2 Purion XEmax' in the field, both for image sensor development and both of those are going very well. So there's no delay on that. And again, we didn't really give out a time line in terms of when those evaluations would close. But I would say that at this point, they're both on track. So that's very positive. And then the last eval is a Purion XE silicon carbide system, which is out with a power device manufacturer, and that's also proceeding very well. So I think we're on track. And again, I'll say the word more or less based on each specific customer experience at this point in time.

[Operator Instructions] Our next question comes from David Duley with Steelhead.

Just a couple of clarifications. You gave us a percentage of systems revenue for both power and CIS. Could you repeat those percentages again?

Yes. Let me find this. So in terms of shipments for the quarter, we had, what we said, 91% was mature process technology. We have -- actually, Doug, did we give that out -- do we give it out by segment, specific segment? I have it, but I don't -- I don't remember actually saying that in the script. So Dave, I don't think we actually gave it out. I think when we get to...

I'm almost positive. I wrote it down, but...

I said that...

[indiscernible] revenue is power, and 20%, 25% is CIS is what I think you said for Q3.

I said, yes, I didn't give a specific number. Yes, that's what we basically estimated that it would be, but we didn't give out the specific breakdown. And as Doug said, you're going to get more detailed information on December 9, when we actually do a deep dive into that segment. So I'm sorry, Dave, you are right. But we didn't give the exact numbers.

Okey dokey. No. And then when you talk about power and CMOS image sensor being more implant intensive, can you help me understand exactly what that means, how many implants is for 10,000 wafers or however you can characterize it what does it mean to be more intensive for those particular applications with implant?

Yes. So the devices that they're building are in order to adjust the transistor characteristics and so forth. They require more implants. They require deeper implants, and so they tend to have a lot of high energy applications within them. They require fairly significant adjustment in plants to get the performance where they want them to be, to get the -- adjust for the presale voltages and leakages to enhance the device performance and so forth. So they're very optimized types of devices. And so that creates a higher implant intensity. It's hard to break it down specifically to per 10,000 wafer start or per 100,000 wafer start because it's very customer mix and recipe dependent. And so -- but they are more implant intensive than most other devices and more so than memory and definitely more than FinFET type transistors and so forth in advanced logic.

Okay. And with this record orders and backlog, what should we expect for the first half of next year? Given that your manufacturing slots are full for the first half, what imputations does that have for revenue in the first half of next year?

We're not going to give any guidance or forecast into 2022. That will be something when we -- we'll give you some general information. We talked about some new models that are coming out that are implant specific, and we'll provide that at our Investor Day. And then obviously, when we get to the full year call in February, we'll give you more information on 2022.

Our next question comes from Craig Ellis with B. Riley.

And I wanted to direct it towards the CS&I business. Mary, you mentioned the GSD product that had press released recently. And the question is, is that something that investors should expect would be material to CS&I's potential revenues in calendar '22. And on the topic of revenues, $50 million in the third quarter. I think the company said $50 million in the fourth quarter. So is $50 million kind of the new run rate for that business?

So let me answer the first part of that Ovation, and then I'll turn it over to Kevin to address the financial part of it. The GSD Ovation is -- it's basically available in terms of -- as upgrades to our installed base of legacy tools, namely the high current and the high energy tools. It provides our customers with a path forward for improved performance on the tools that they already have. It can be ordered as a separate configuration, but I think the main benefits we're going to see is through these upgrades that we have. So it's something that is important, but it's really part of the ongoing investment in innovation that we're making in that aftermarket business. And because the mature process technology segment is so strong, and we have such a very large installed base there, this is a really good investment for Axcelis to be able to continue to drive growth in that area with our customers.

Yes. And Craig, I think there's no doubt that $50 million seems like it's kind of the new number because we've been at that level for quite a few quarters now, high 40s into the low 50s. Certainly, with all of the buying going on and what our consumable business right now has been keeping this number elevated. And I think more importantly, too, our installed base is growing, right? We've shipped a lot of tools over the last several years, and that's beginning to take hold now where there's kind of an entitlement that goes with a tool shipment. So what the right number is? I mean, it's certainly a lot higher than where it was when we were always saying it was in the mid-30s based on where we're running. When we put out our new models on the 9th of December at the Investor Day, I'll be more than happy to share our assumptions in those models for CS&I going forward, Craig. So I think if you give me a month, I can probably provide a little bit more color on that. But certainly, $50 million at this point is I think it's an area we're going to stay and hopefully, this continues to grow. And when we put out new models, again, I can discuss more about that.

This concludes the Q&A 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. I want to thank everyone for joining us today. We hope to talk with you virtually and see you in person at upcoming investor events. In November, we will be participating in the Benchmark Company Technology Virtual Investor Conference. And in December, we will participate in person at the CEO Summit in San Francisco and at the D.A. Davidson Semicap, Laser and Optical Virtual Conference. We will also be hosting a virtual Investor Day on December 9. We hope to see you there, and we want to thank you for your continued support.

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