Good day, ladies and gentlemen and welcome to the Axcelis Technologies call to discuss the company's results for the Second Quarter. My name is Shannon McLead and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Doug Lawson, Executive Vice President of Corporate Marketing and Strategy. Please proceed.

Thank you, operator. This is Doug Lawson, Executive Vice President of Corporate Marketing and Strategy and with me today is Russell Low, President and CEO and Kevin Brewer, Executive Vice President and CFO. If you have not seen a copy of our press release issued yesterday, 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 risk 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. Now, I'll turn the call over to President and CEO, Russell Low.

Good morning and thank you for joining us for our second quarter 2023 earnings call. Demand for the Purion product family continues to be extremely strong, especially in the high-growth silicon carbide power segment. Revenue for the second quarter was $274 million, with earnings per share of $1.86. Backlog remained high at $1.2 billion with quarterly systems bookings of $193 million, also driven by Purion demand and strength in the power market. The third quarter of 2023, we expect revenue of approximately $280 million, gross margin of roughly 44%, operating profit of around $64 million and earnings per share of approximately $1.72. We are raising our forecasted 2023 revenue by $70 million to greater than $1.1 billion. This represents year-over-year revenue growth of approximately 20% in a year in which overall WFE is expected to decrease by 20% to 30%. We also believe it's possible to achieve $1.3 billion in revenue in the next 1 or 2 years depending on market conditions. The mature process technology market continues to be an area of strength for Axcelis, with 93% of second quarter system shipments going to mature foundry logic customers and 7% to memory customers, composed entirely of DRAM. The geographic mix of our system shipments in the second quarter was China 56%, the U.S. 13%, Korea 10%, Europe 9%, Taiwan 2%, Japan 2% and the rest of the world 8%. As has been the case since the beginning of this downturn, the power device segment and in particular, silicon carbide continues to drive our growth. We are actively engaged with all our customers in this high-growth market segment, winning business from new customers and expanding our footprint in existing customers. We now expect approximately 60% of our shipped system revenue in 2023 to come from this segment, with around 35%…

Thank you, Russell and good morning. We are pleased with our second quarter 2023 financial results and are excited about full-year revenue, which is now expected to exceed $1.1 billion and represents year-over-year growth of approximately 20%. Looking at our second quarter, revenue and earnings per share finished well above guidance due to solid execution and continued strong demand for Purion. Q2 revenue was $274 million with system revenue at $215.2 million and CS&I at $58.8 million. Q2 earnings per share of $1.86 was significantly above guidance due to higher-than-expected revenues, gross margin and favorable spending. We also benefited from much lower effective tax rate this quarter, driven by tax deduction associated with stock compensation. Strong bookings and quoting activity for systems in the Power segment continued in the quarter, which supports our expectation that approximately 60% of systems revenue shipped will come from this market in 2023. CS&I revenue will fluctuate quarter-to-quarter, but should be modeled at approximately $248 million for 2023 and $300 million for our $1.3 billion revenue model. Q2 gross margin finished at 43.7% and 170 basis points above guidance, driven by lower costs in deferrals and a slightly improved mix. We expect Q3 gross margin to come in higher at approximately 44% and forecast further gross margin improvements in Q4. Key functions across the business remain laser focused on margin improvement. There are numerous initiatives underway to lower the cost of goods and drive higher sales of Purion product extensions, which allows us to model gross margin of approximately 45% in the $1.3 billion revenue model. Turning to operating expenses. The second quarter ended at 20.4% of revenue and better than our guidance. We expect OpEx in the third quarter to be approximately 21%. As always, we will continue to tightly control spending, while investing…

Thank you, Kevin. Axcelis expects to achieve revenue greater than $1.1 billion in 2023 and $1.3 billion over the next 1 or 2 years. This growth is achievable due to the following factors. First, the implant TAM has more than doubled in the last few years and are expected to grow between 10% and 15% annually with mature market segments representing greater than 60% of the total TAM. Second, Pat [indiscernible] and image sensors are highly implant intensive and the general mature nodes have increasing implant intensity peaking at 28-nanometers. Third, high-value Purion product extensions will be designed to optimize power and image sensor device manufacturing, making Axcelis the only company with a product line capable of covering all implant recipes in these key markets. This uniquely positions Axcelis to benefit from high growth in the mature process technology markets. And finally, Axcelis' strong long-term customer relationships and a fundamental cultural desire to win by making our customer successful. I want to thank our employees, suppliers, customers and investors for your continued support. With that, I'd like to open up for questions.

Thank you. [Operator Instructions] Our first question comes from Craig Ellis from B. Riley Securities.

This is Ethan Widell calling in for Craig Ellis. So the surge in margin was a nice surprise, does this impact your confidence in hitting 44.5% by fourth quarter and 44% overall for the year?

This is Kevin. It was a nice surprise in Q2 and part of it came from better costs as well as a little bit better mix and some of the deferrals. I think on the last call, we talked about the second half becoming much stronger than first half to get towards that full year target of about 44%. And we're on that, we're probably a little bit of the strength in Q2 took away from Q3 a little bit, but we still think Q3 is up from Q3, up from Q2. And then in Q4, I expect to see further improvement off of that Q3 number of approximately 44%. So yeah, so we're still -- we're still anticipating being in that 44% range for the full year.

And then are using signs that the -- I've been with memory strength that SK Hynix and [Technical Difficulty] Micron are driving higher Purion Dragon demand [indiscernible]?

And this is Doug. So you broke up a little bit, but I think you're asking about the high-bandwidth memory. So for implant, the implant content is similar for any of the DRAM, whether it's HBM or other types. So what we see as far as sort of the goodness of the HBM ramp is, it starts to utilize -- bring up the capacity utilization of the memory fabs. That's the first step in getting back to a good CapEx cycle. Then we see PC refresh cycle kicking in, as we said sometime next year and that will really start to drive memory CapEx spending towards the second half of next year and create a healthy 2025.

Our next question comes from Jon Dorsheimer from William Blair.

And Russell, strong one out of the gate, so congratulations on the quarter. I guess first question, just around your thought process in terms of the guide. And if demand is causing the pull-in if you will, I'm just wondering, what's your greatest areas of concern that would limit your ability to kind of take up that 2 to 3 year type target, specifically, how are you monitoring the health in the channels with respect to globally, but specific to China that we don't see a return to a healthy used market, which seems to be pretty lean right now. And then I have a follow-up.

Jed, this is Doug. So I think right now, our guidance, our optimism in terms of raising the full year to $1.1 billion and pulling in the $1.3 billion model to 1 or 2 years from now. The strength is in the power market for us, that's where we're seeing the biggest drivers. We are beginning -- as I was saying to Ethan on the last question, I think we're starting to see the memory guys start to increase their utilization as a result of some of the strength in the AI activity. PC refresh cycle is going to be key there, so we're monitoring that. And then consumer electronics are probably the next big driver in terms of the mature markets as a whole for a mature foundry logic type of products. And we're watching that and expect that to be a 24 type of event. So that's what gives us the confidence to pull that $1.3 billion model in. But this year, the $1.1 billion model, it's very heavily being driven by the strength in power and especially in silicon carbide.

And then just as a follow-up on silicon carbide specifically, major announcement by Infineon in terms of the $6 billion investment in Kulim and I guess my question for you is trench is obviously more capital intensive and publicly they've noted the 200-millimeter. And so my question around your silicon carbide offering or offerings, that does 150 offer a -- is it a different tooling or what changes within your tool in terms of field upgradable versus 200? And I'm assuming none of that or we haven't seen the Malaysia spend. So, yes, I guess just 150 versus 200 would be helpful.

Hi, Jed, it's Russell. So 150 versus 200, so we still have the complete Purion platform for Power series. So the xc-silicon carbide, the m-silicon carbide, the H200 silicon carbide are all available 150 and 200. And essentially, it's a field upgradable kit that allows you to go between 150 and 200. So it's essentially the same machine, but obviously, the wafer handling, the scanning needs to be modified slightly for the larger substrate. And like I say, that's an upgradeable -- a field upgradable kit.

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

Maybe a couple more on the silicon carbide side. So with some of the recent ebbs and flows in the EV end markets, have you seen any changes or any modifications to the new fab construction plans that are expected over the next couple of years?

No, actually, it continues to accelerate, I mean at this point, silicon carbide is still supply constrained. And so there's quite a bit of activity. And one of the things we often note, when we talk to U.S. investors is, there's a little bit of a -- not being mean here, but a little bit of a parochial view of the EV market. Globally, the EV market is growing quite rapidly. And so I think that's driving the silicon carbide investment and we expect that to continue. We're seeing no signs of that changing.

And then also, I guess, when you're thinking about the end product, does it matter to you if the companies are creating discrete or modules? Is there a difference in the implant?

Well, we're only involved in the discrete in the silicon carbide wafer fab side of things. So after they package that, then they would put it in a module, there's no implant impact in the module manufacturing.

And then a question for Kevin on the logistics center. Maybe just a little more color on the impact of both your capacity and potentially margins over time with the new center opening up.

Yes, so the new center is kind of handle all of our incoming material and hitting and potentially right now, we've got probably about 10 different locations we call material front. So that's going to improve overall efficiency. We're not going to try and all over between 2 cities surrounding us grabbing material. Also, if required we could clear out additional space in that facility to put some manufacturing, but what's really happening at this point, as we remove some of the remaining stock room out of the Beverly headquarters, that frees up more manufacturing space in Beverly. So we've got -- from an infrastructure point of view, from a Brexit mortar point of view, we're pretty much done now with what we need to do. We have a lot of additional capacity we can add on a second and third shift. Our manufacturing team, when I say done, our manufacturing team continues to use the kaizen process to drive improvement and there are a number of Kaizen. But again, in terms of more buildings between the Korea operation, the Beverly site and this new logistics center, we -- I'm very comfortable with our capacity to hit the $1.3 billion and potentially beyond that. And we've got very good supply chain partners too, worst case, if we need to put some contract manufacturing capacity in place down the road, that's another option. So long and short of it, I feel very good about where we're at, at this point.

Our next question comes from Nicolas Doyle from Needham.

Nick Doyle on for Quinn Bolton. It looks like book-to-bill was slightly below 1 for the first time in a couple of quarters. Is this an anomaly or a function of the extended system backlog? And then also, what are you seeing on the bookings front looking into the second half? How far out are bookings being placed?

This is Kevin. So let me answer that. So I'll start off by saying, I mean, we're going to see book-to-bill fluctuate a little bit, I think until there's really a much broader-based industry recovery. And we were down a little bit on bookings this quarter $193 million compared to last quarter, which was about $100 million higher. But if you go back the prior quarter, it was down probably $100 million from the last quarter. So this thing kind of up and down, but I think the real key here is we have a very strong backlog, still $1.2 billion is a very large backlog for the company. And in terms of bookings and backlog both, I mean we're taking orders out into 2025 right now. It doesn't mean that all our capacity is necessarily sold in '24, but we're pretty full, but we're going out into -- in 2025. So I don't -- I'm not worried about this book-to-bill because I think a couple of quarters ago, we were under 1 and then we popped back up under one and again with such a strong backlog, that systems backlog if you consider we have $250 million CS&I business sitting on top of that. I mean there's more enough revenue that gets you quite a bit down the road out over booking and other tool. So again, I think we'll see it bounce around a little bit until there is this broader base industry recovery. Power segment is very strong still. I think we now believe that 60% of the year's bookings have come from power. I think on the last call, we might have said it was 55%. So we're seeing additional strength coming through power right now.

Nick, let me just -- this is Doug, let me just add one more comment. The other indicator we watch is the quote activity. And our quote activity remains very high and it's exceptionally good in the silicon carbide side. And these guys are planning factories out over the next couple of years. So it's -- that's another good indicator in terms of continued strength.

And for my follow-up and you kind of -- you touched on these points in the call, but more directly, what is the company's expectation for the -- for a memory recovery in 2024? It sounds like you're thinking second half driven by PCs. Maybe you can touch on what you're seeing in terms of the PC strength coming back where you're seeing that? And can the company hit the $1.3 billion model without the recovery in the memory market?

Hey, Nick, it's Russell. Thanks for the question. So regarding what we see with memory, so naturally we stay very close to our memory customers. We've historically been very strong in the memory market. And once the market starts to recover, we're expecting to see a lot of benefit from that. A lot of people looking for green shoots. I think at the moment, we're talking to our customers, I'm thinking the second half of '24, giving a pretty strong year in 2025 as far as memory goes. That's kind of what we're seeing. This question regarding path to $1.3 billion, so I think we've previously said that we'd be looking for a consumer spending recovery in order to propel us to the $1.3 billion and that would be obviously a recovery in memory and some of the other mature processes like image sensors. I think we are seeing strength in our power business beyond what we expected. But I think with that strength in the power plus a recovery in the consumer spending, we see us getting to $1.3 billion like we say in the next 1 or 2 years.

Yeah, I think the bottom line on it, Nick, is that there's multiple paths to that $1.3 billion model. So that's why in the call we said depending on market conditions. And so it really depends a lot of thing on a bunch of different combinations.

Our next question comes from David Duley from Steelhead Securities.

A couple, I was just wondering, have you seen recent adoption of silicon carbide in other markets besides the electric vehicle market? And which markets would you expect to be early adopters outside of EV?

It's Doug, thanks for the question. The -- so yes, I mean, if you look at our customers' websites, their press releases and so forth, they are talking quite a bit about applications in energy, industrial applications, the thing with silicon carbide is -- it's a tremendous benefit to automotive because of the savings that it can provide in a module weight and heat generation and so forth, as well as the performance of the devices. It's a little more costly. But as volumes increase, that cost comes down and that opens it up to other markets, especially the energy and industrial markets where the weight and the heat iron is important, but the performance would be nice to get. And so we expect that, that will be another piece. In the presentation, we show that there's a good growth area above EVs that's associated with silicon carbide. So, yes, we definitely are hearing that from our customers. For us, we don't see it necessarily directly because our customers would build the same devices using our Purion H, Purion XE and Purion M silicon carbide tools, whether it's going into an EV or into an energy or industrial application.

And then as far as lead times go, could you just help us understand where lead times are currently? And I guess, you mentioned you're taking orders for 2025. How much manufacturing capacity do you have for 2024? Or maybe another way to ask it is, what is the current quarterly capacity availability?

It's Kevin. Yes, so I mean, I think I said it a little bit earlier, but there's plenty of capacity right now for the order rate that we're seeing in shipments that are required. And once this new logistics center comes online, that's going to help and we also have, as I mentioned, there's additional manufacturing Kaizen that are ongoing right now. It's part of our normal process, we're a little bit more heavy with them right now as the logistics center is getting filled up with material. So yes, we've got lead times, we're booking orders in the 2025, but our lead times are much shorter than that. In the past, what I would say is that we've always said that with the ship from cell process, assuming material is on hand, we can turn tools within the quarter if we need to. And we have -- that is the other piece of thing supply chain. So I'll give a quick update on that. I mean our supply chain has -- continue to improve. I think you don't hear about it a lot right now within our peer group because we're still ramping and I think a lot of our peer group has not been ramping. So I'm not going to say things are perfect with supply chain, but our suppliers are keeping up with us and are allowing us to ramp and we're adding more capacity almost daily with our supply chain. So our lead times are not a problem I should say with customers right now. I think for the most part, that's not preventing us from getting orders. And frankly, I think our lead time is probably still -- it may be helping us because we've been able to, I think, execute pretty well for the last few years, even when the pandemic was kind of fully coming at us. So lots of things have been done over the last couple of years to add capacity and we're really -- we're really almost over that big [Technical Difficulty] now its going to come down of hiring people and bringing up additional off-shift capacity. We run second and third shifts, they're nowhere near, this fully utilizes first shift. So we can hire. The hiring process has been -- it's been going okay for us. The market was really tougher while hiring, it's probably gotten a little bit better. And certainly, that Korea facility in Korea when we brought that online, actually we were able to hire for capacity [indiscernible]. So again, I think at the end of the day, our lead times are assuming everything is there, we can get a -- for material we can get to a lot in a quarter, but it's not something that's an issue right now.

Final question for me is regarding gross margin, I think I asked this question on the last conference call to hit the 44% target for the year, Q4 gross margins are going to spike up, I guess, 250 or 300 basis points, let's say, right around 47%. And I guess, if they're exiting the year at 47%, why would they drop back down to 45%?

Yes, well, first thing I would say is, we won't exit at 47% because part of that spike got taken out with Q2 coming at 43.7%. So -- but you're absolutely right, David, when we were talking 42% in Q2, the math, to get you there had a pretty big step-up in the second half and we'll still have a step up. We're going to have 44% in Q3, which suggest we still need a stronger Q4 and the new math may bring it close to 45%. So the thing that moves margins around is the mix, that's a big piece of it. And the other thing is, as we continue to bring in -- complete these gross margin initiatives, that's been one of the things driving gross margins over the years. So it's -- you know I always talk about full year gross margins because quarter-to-quarter, things can move around. But if you look at or kind of our progress over the last many years for gross margins on a full year basis, we've been continuing to notch these things up and based on expecting end at 44% this year, that notches it up a little bit more where we have quarters of above 45%, yes when we do our models, we're talking full year averages. So when you look at the $1.3 billion model, that's not 1 or 2 quarters of greatness, that's a full year when you look at something like that. So yes, hopefully, I answered your question.

Kevin, let me just jump in with one thing just you said mix, but I want to make sure it's clear, there's 2 mixes we worry about or we look at. One is the type of systems, the product extends high energy have better margins than some of the standard products. And then the second is the systems versus CS&I because we move to $1.3 billion, a big piece of that growth comes in systems. And so that does put a little pressure on the margins because the percentage wise, it's still roughly the same for CS&I, but it's a much higher revenue gain in terms of the systems.

Yes, that is a good point. I probably should remember to mention that. I mean we always say that CS&I is accretive. But if you look at what takes us from the current run rate to $1.3 billion, the majority of the increase is coming in [Technical Difficulty]. And so that suggest that we are making progress on systems because if we weren't, our margins will be going backwards. So the fact that we're still making progress and we're putting a much bigger mix of systems in, which come in at lower margins of CS&I, that mix view does impact things. So again, we're right, we're where we want to be. The other piece of it, too, which I probably should have mentioned as well is, I mean, the product extension is a big piece of it as well. I mean, that's helped quite a bit with the margins and that's part of the mix, too. It's not just high energy versus high current, there's mix within the product segment. So there's a lot of moving pieces, but everything is moving in a positive direction. That's the goal to keep it going that way and we have the initiatives with very detailed road maps in place that gets us to where we want to be.

Our next question comes from Mark Miller with the Benchmark Company.

One of the companies I cover in the laser business was indicated they were seeing some slowing in the EV market in China. I'm just wondering what you're seeing?

Well, I think, Mark, the -- from the device standpoint, we're not seeing any slowing. So we're not -- we're a couple -- we're a couple of steps away from the actual cars. And so far the silicon carbide demand is still very high and still supply constrained. So we're not necessarily seeing that or being impacted by that.

You mentioned a number of e-mails underway both for silicon carbide and memory, I'm just wondering if you could quantify that?

Yes. So Mark, this is Russell. Right now, we have 9 evalves in the field, I would say they're across all market segments and product. So we've got evalves in memory, image sensors, mature foundry and power. So 3 of the evalves out there, I think we made a press release on this the H200 silicon carbide tools in the power. We have an XEmax for image sensors. We have a straight M, shouldn't forget we also have a twin dragon at an advanced logic R&D center, where we're looking to basically get designed in from the start. So yes, we have all market segments and all products and we're looking, obviously, to work very close to that customers for continuing to grow our business in those areas.

Just one housekeeping question. What was CapEx?

I'm sorry, I was muted, it was $3 million mark in the quarter.

This concludes our Q&A portion of the call. I will now turn the call back over to Doug Lawson, who will make some closing remarks.

Thank you for joining us today. We have a very busy investor calendar in the coming months. We'll be at the Fourth Annual Needham Virtual Semiconductor and Semi Cap One-on-One Conference on August 22nd, the Jefferies conference -- the Jefferies Semiconductor, IT, Hardware and Communications Technology Summit on August 29 in Chicago and the Benchmark 10th Annual Tech/Media Telecom Conference on September 13 in New York City. We hope to see you at one of these events. Thank you.

This concludes the presentation. Thank you for your participation in today's conference and you may now disconnect. Have a good day.