Axcelis Technologies, Inc. (ACLS) Earnings Call Transcript

Good afternoon, everyone. Thanks for joining us at the 26th Needham Growth Conference. With me here on the stage is management team from Axcelis Technologies. We have -- I'm thrilled to have Russell Low, CEO; Jamie Coogan, CFO; Doug Lawson, EVP, Corporate Marketing and Strategy here with me. And gentlemen, thank you for joining me today.

Great to be here. Thank you.

Yes. I know Doug probably has been coming to this conference for many years, but we'd like to welcome Russell and Jamie here, and I look forward to hosting you here for years to come.

Yes. I appreciate that. Thank you.

Yes. So you guys made -- let me start with the preannouncement you guys released yesterday. Any -- can you guys kind of recap what you preannounced? And specifically, I want to ask you -- I mean, the numbers seems to show some upside relative to what you guided for the last quarter, where the upside came from.

Yes. As we think about the performance -- so we thought about -- our sales opportunity was above our guide of $295 million. We expect now to be greater than $300 million on the top line relative to sales performance, dropping through down to earnings per share in excess of the $2 we've previously guided. We think it's now going to be greater than $2.05. We think the performance really just came through, one, execution relative to what the prior plans were. We saw continued strength in the power device market during the fourth quarter. We'll have more commentary relative to that on our earnings call. So this is a little bit of a marketing ploy to get you to join our earnings call here in 2 weeks. So we look forward to having you there. But all in all, it was really strong execution, operational performance that drove the results in the period.

And just to add to that. So definitely, that was the kind of the Q4 announcement. We also want to affirm that we're very much on track to our $1.1 billion model for the year as well. So we've always had 2 business models out. So we had the $1.1 billion business model then $1.3 billion. And we said we're going to hit that in 2023, and we're pleased to say, yes, that's preliminarily well done.

Yes. And lastly, we also announced that we're on track to do the $1.3 billion in 2025. So...

Okay. Great. Maybe let's dive into the actual questions, right, for today's discussion. And I want to really start by looking a bit back into 2023, right? Now it's an even more remarkable year given your preannouncement for Axcelis. I mean the company's total revenue is expected to grow more than 20%, right, last year. And most of the U.S. semicap equipment companies see revenue flat, maybe down, I mean. So the countercyclical strength, right, is truly remarkable. But for semicap investors, right, who are kind of deeply ingrained with the idea of reversion to the mean, what do you tell investors about what may be the long-term secular driver of Axcelis for the growth in 2023, which may already be there. And what may have been a bit of a cyclical or transitional into last year's number? How do people interpret your numbers?

So I think -- so last year, power was very strong for us. And when I say power, I mean silicon carbide and silicon. So -- and that is kind of what I call a secular trend, right? We are going towards silicon carbide, EVs, industrial, anything that needs to work with power. The cyclical stuff, I think, as you know, memory has been very slow. And we've historically been very strong in memory. So we're actually looking forward to that recovering, and that's going to give us a boost. But I think the interesting thing is that there's multiple cycles now. So you've got the general mature, you've got the power, you've got the memory, you got the logic. And I think advanced logic was a little slow. Memory was a little slow. Image sensor, a little slow. General mature, maybe softening. Power, I think we've been saying it's about 60% of our revenue for the last year, and we're expecting to see the strength in power in May.

Interesting because this definitely has been a cycle, I mean, with many asynchronous mini cycles. But it looks like you guys have been in the right place to actually play into some of the countercyclical mini tailwinds you have been enjoying. But it turns out to be a pretty significant one for Axcelis.

And it was a long time in the making in some respects. When you think back in 2014, 2015, there really wasn't a market in particularly silicon carbide power. We worked very closely with a customer on an emerging need. And we've developed an entire suite of products that cover all applications. And we've got mindshare. We worked closely with their customers, and that's kind of where the growth came from. So it was a tailwind long in the making.

Yes. We're going to touch a little bit more on that part in a later discussion. So I want to bring back a little bit of the story here, right? 2019 was my first time coming to this conference. I was a researcher associate back then. I joined the Axcelis session, and back then -- Doug, of course, you're here. But Mary Puma, who was the CEO of Axcelis at the time, and of course, she is still the Chairperson. And I said one of the reasons Axcelis could thrive is because customers need not just one, but 2 strong ion implant equipment suppliers to drive innovation and to improve cost of ownership. Of course, back then, the perception was Axcelis was kind of in the shadow of Applied Materials because of this asymmetric -- the competition was probably a big overhang, I mean, when people discuss about Axcelis. But fast-forward to today, right, you grew your market share in ion implant, I believe, from high teens to high 20s. That's just -- that happened in a matter of 4 years, right, roughly 10 points is of the market share gains. I know, Russell, you've been at the company for a while. Jamie, you're relatively new. But if I ask both of you, right, what were the 1 or 2 things that Axcelis has done right to gain that market share in such a short period of time? And what are some of the things you're thinking about that should lead to the continued outperformance for the next few years? I know this is a long-term question, but I'm just going to throw it out there.

I think we are a nimble company that is very innovative and customer focused. So I think that's who we are. And I think that is some of the things that have really helped us grow our market share. And again, you can kind of think about red ocean versus blue ocean, if you like. We've gone into power, which was a blue ocean. It wasn't us fighting against Applied Materials. There's a new opportunity that was very small and has grown. And the fact we really are innovative and creative and worked with our customers -- we worked with a customer. And you don't always know what's going to come into a full-blown market, right? But it was really exciting to see power grow into what it is today. And a similar thing happened with image sensors. We realized quite early on, there's an opportunity to segment those markets to make them more productive and drive down manufacturers' costs by having specific products. So we have a whole family of high energy implanters, specifically for image sensors, then we have a whole portfolio of products solely for Power Series. And I think that is an outcome of being very customer-focused and innovative. And like we've said, there are 2 companies that are innovative, and we would like to think that we can differentiate ourselves being very customer-focused and innovative.

Yes. And to build on that, as I was kind of making the decision to come to Axcelis, one of the things I looked at was, honestly, the positioning within the marketplace, right? So you've seen the phenomenal growth of the organization over the last 3, 4, 5 years here now. And in doing so, they positioned themselves through that innovation, right, to be able to take advantage of the market opportunity, growing through the downturn, yet still well positioned in those mature technology, right, the memory markets and others, which on recovery, will provide a secondary and third leg almost to the growth story and narrative on a go-forward basis. So on top of that, right, it's an organization that delivers on its promises, right? And so as we look at the historical track record here, we've been relatively conservative in our estimation process as we go and make assumptions. We want to make sure that we can deliver on those targets on a go-forward basis. And that's the type of environment and ethos that I wanted to be a part of, right? And then joining Russell and the team, as I've gotten closer to the technologies, understanding sort of the remarkable nature at which we satisfy those customer requirements through technological innovation has just been really phenomenal. And that runs through the entire organization, right, that it pushes its way all the way down where the customer does come first relative to trying to determine what those solutions are, how we position that in the marketplace and how we attack that at the end of the day.

Got it. Got it. So I think one of the few things, I mean, what you guys in the past has mentioned and now you also mentioned it this time is about segmenting the market, innovating, developing that market-specific products. I mean that may have been one of the reasons Axcelis has been successful over the past few years. Now if I look at your numbers today, right, the focus on power, silicon carbide has definitely paid off handsomely, right, over the past few years. But I think the top of the mind of many investors here, right, what is your expectation going forward for power and silicon carbide market, I mean, as there has been quite a lot of noise in the recent months or weeks? I mean in the automotive semiconductor market, I mean, EV and some of your customers or maybe they're not your direct customers, they have some not very positive preannouncements. So how should investors think about where this market is going, power and silicon carbide?

All right. I'll take that one. Yes. I'm not one to sit quiet for a whole day. So I think the first thing to note about Axcelis' position in the power market is we have a very broad customer base. So it's global. It goes from top-tier power companies down to the small startups. And Axcelis has been working on this market, as Russell mentioned when we talked about the segmentation, since the 2014, '15 time frame. So we've developed a very full complete product set across the high energy, high current and medium current space targeted at this market. So what it's meant is we've been able to move out of our original customers as tool of record and be the tool that customers, when they were starting in power, wanted to use because they had confidence in the product. So that's probably the first thing. And that buffers us a little bit from individual customer issues that come up in everyday life and has really helped. The other thing, if we look at the EV market and the power market as a whole, is the power market, if you look at what everybody was talking about at CES in the power market is it's not just EVs, right? There's big applications in industrial areas and energy, always has been. But as the cost of silicon carbide comes down, it's able to penetrate those kind of markets and create growth. And you would have heard many of our customers talking about those areas. And the last area that I think is important as an equipment supplier, ion implant, first of all, is the most critical process tool within a power device. It's the equivalent of what lithography is to advanced logic. And so -- and if you're lucky enough to score a tour of an advanced logic fab, they'll take you to see their EUV tool. If you go into a power device fab, they will take you to see the implant bay. And so that tells you just how important implant is. So they're continuing to invest, regardless of what goes on -- what the car companies might be saying of their current plans because they have to continue to get the cost down, the yields up and the performance of their devices. We also like to remind people that when you look at automotive, whether it's a hybrid or a full EV, if it's got a battery and it's got an electric motor, it's got an inverter. It might be silicon carbide. It might be silicon IGBT. All of those require significant amount of ion implant to create them. So those are things that allow Axcelis to feel confident in the continued strength of the power market as we go through this year.

Great. Great. So I mean regardless what's happening in terms of the near-term noises, it doesn't seem to change that the silicon carbide remains a secular growth market over the long term, right? So when we think about -- try to think about the long-term upside for Axcelis -- because you guys have been successful. One of the problems with being too successful is you're going to be trending closely with the market. You're going to suffer the ups and downs of the market. But when I think about your silicon carbide upside in terms of market share, share gains, are there still any major opportunities there for you to get the next step-up in silicon carbide in terms of market share.

So I think we -- if you're looking at silicon carbide, I think we already have a high market share. I think we're in, as Doug mentioned, all of the top tier 1 manufacturers. And we certainly have a long tail of companies, down to the startups. I do think that as people ramp their production, they're going to require the full suite of products, which plays even more to our strengths. And those tools we're now seeing being sold in roughly equal numbers now. You need a high current machine, you need a high energy machine as you go planar, you go trench. So we're seeing that. So high market share, strong position, lots of breadth in our customer base geographically as well. So I think just as this market grows -- and you can put different numbers on this market, right, at what rate it's growing at, but like we're looking to continue to grow with the market.

Yes. Let me just add. So Russell mentioned 2 terms, planar and trench. Those are types of transistors. And for a power device, whether it's silicon or silicon carbide, there's 25 to 30 implant passes from the time it enters the fab until it exits. So it's a lot of implant steps compared to just about any other process area. As you move to -- from planar to a trench type of device, it requires much deeper implants. And that means that it requires more high energy implants, and that's a place where Axcelis has a tremendous competitive advantage. And the second thing to look at is trends in the industry, moving from 800 volts to 1,200 volts in terms of the device operating voltage, which improves -- significantly improves the charging of vehicles. That requires much higher dose implants, which our Purion H200 is designed around. So that's a key part of our overall strategy in power is to make sure that we're able to provide that product set to be able to deal not only with the customers' ramp but with their device evolution and design.

Got it. So maybe I want to ask about China, right? This is a question I'm asking, I guess, to most of the management team. By the way -- how should we think about your local competition in China? I know China is a very important market for Axcelis. But do you think you can maintain that market share given that Axcelis is a U.S. company, right, and China is trying a lot of things to achieve self-sufficiency, including developing local alternatives whenever they can substitute the U.S. incumbent? So any thoughts here?

So just to kind of calibrate people, so let's say, Applied Materials is from the 50s. We're in the 30s, and then the other 20% mostly is in Japan, there's 2 companies in Japan, and one in Taiwan. That really is the implant market share. There have been and there remain to be a couple of companies in China. One came out of kind of like [ National Labs ], another one is actually much more of a private endeavor. And they've been around for probably 20 years. And I think they've got a working product. It's at the very lowest level. So I do think that they are developing it, but it's very slow moving. Then I can say that -- what I think about ion implantation, I think the technical barriers to implantation -- I'm not talking about intellectual property here from patent stuff. Just once you've got a machine that's working, the continued operation and innovation of that technology, the barriers are really high. It's not really surprising that the 2 main ion implant companies in the world are about 20 miles apart from each other on 128. It's a certain skill set. It takes a huge amount of research and development to continue to develop those technology. So I do think there's a large barrier. And then kind of a side comment would be -- and if I was going to go after -- so when I think about this, there's the really heavy metal tools like an implanter. I mean it's really just a beautiful physics machine. And then you think about the little chamber-based tools, the chamber-based tools are very simple tools...

You mean the other type of process tools.

Yes. So like a CVD tool or an edge tool. They're very small. They're very simple technology, but the magic happens in the recipe. For us, the magic happens in the hardware, and the recipe is almost trivial, right? You dial up the dose, the energy, the [ spaces ]. It's very straightforward. So they're quite separate. So I think, one, you've got to really have an appetite for hard-core physics when you want to take on an implanter, and you've also got to realize that there are much, much bigger markets to go after as well. So in China, you can see that the CVD companies are actually doing quite well because one, it's simple hardware; and two, it's a much bigger market they're going after. So we're not really seeing a significant progress of local manufacturers in ion implantation. Again, that's not a short-term thing.

Yes. The other thing I'd just like to add on is -- Russell addressed the hardware -- Russell has designed implanters from the ground up. So -- but the thing I'd like to highlight is -- we refer to it as dosimetry. But the software that powers these implanters that allows the recipes to be simple is very complex. And it's -- we've been in business 45 years. It's 45 years' worth of iterative development of those algorithms to do that. And that doesn't -- that's not written down in the public anywhere. That's not something you can buy a tool from us and get. That's something -- you have to have the gray matter in the company that knows how to do that.

There's a huge number of algorithms that are coded into software, and you can't just take those off the shelf.

Got it. So I think that sounds to me that, that's another similarity between ion implant and lithography, right?

Yes.