Axcelis Technologies, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the same 2016 periods. Axcelis makes ion implantation and other semiconductor-processing equipment and provides related aftermarket services.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $104.5 million | $65.7 million | $294.2 million | $197.6 million |
| Gross profit / margin | $39.8 million / 38.0% | $24.1 million / 36.7% | $113.5 million / 38.5% | $72.7 million / 36.8% |
| Operating income / margin | $13.8 million / 13.2% | $3.6 million / 5.6% | $37.1 million / 12.5% | $10.8 million / 5.5% |
| Net income | $11.8 million | $2.2 million | $35.3 million | $7.0 million |
| Diluted EPS | $0.35 | $0.07 | $1.07 | $0.23 |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $40.3 million | $(13.0) million |
- Q3 product revenue increased 65.5% to $98.2 million, primarily on increased Purion system sales; services revenue was essentially flat at $6.3 million. New-system revenue was $69.2 million versus $30.9 million. Nine-month new-system revenue rose to $186.9 million from $101.6 million.
- Product gross margin improved to 40.9% for Q3 and 41.3% year to date, attributed to improved Purion system margins. Services gross margin fell to negative 5.6% in Q3 and negative 3.5% year to date, primarily due to higher service-contract costs.
- Operating expenses rose 26.6% in Q3 and 23.5% year to date, but declined as a share of revenue. Higher incentive-plan expense was the principal driver; R&D also increased to support new Purion products.
- The nine-month 2017 income tax benefit was $1.6 million, including approximately $2.0 million of excess tax benefits from equity awards. Q3 recorded a $1.0 million tax provision.
Liquidity, cash flow and obligations
- At September 30, 2017, cash and cash equivalents were $113.9 million, with an additional $6.8 million of restricted cash. Total current assets were $314.6 million and current liabilities were $73.7 million.
- Nine-month operating cash flow of $40.3 million reflected net income and a $21.3 million increase in accounts payable and other liabilities, partly offset by an $18.4 million increase in receivables. Capital expenditures and capitalized software were $6.9 million; financing activities provided $10.3 million, primarily from stock-option exercises.
- The balance sheet reports a $47.7 million sale-leaseback financing obligation for the headquarters, associated with a 22-year lease. The company said it had no credit facility, but believed existing cash would meet anticipated short- and long-term requirements and that borrowing on reasonable terms would be possible if needed.
Changes, outlook and risks
- Management attributed the strong revenue increase to greater customer selection of Purion ion implanters and spending in memory and mature-process segments. No specific revenue or earnings guidance was provided. Management said cash was expected to be sufficient for anticipated requirements, while noting operating results and cash flows depend on product sales, global economic conditions and the semiconductor-equipment industry.
- Customer concentration is significant: the ten largest customers represented 78.1% of nine-month revenue. Two customers accounted for 41.8% of Q3 revenue; four customers accounted for 65.5% of nine-month revenue.
- Deferred revenue increased to $16.4 million from $11.0 million, primarily due to more system sales. The company expected that, under Topic 606, recognition of system-sale retention payments would generally occur earlier; its assessment was not complete, and adoption was planned for January 1, 2018.
- Axcelis reported no litigation it believed would have a material adverse effect, no material changes to previously disclosed risk factors or market-risk information, and effective disclosure controls. A $0.3 million tax reserve and $0.2 million accrued interest were reversed after certain tax statutes of limitation expired.
Important facts for investors to verify
- Whether Purion system demand and the strong growth in new-system sales are sustainable, given the industry’s cyclicality and customer concentration.
- Whether service-contract costs can be controlled and service gross margins return to positive levels.
- The effects of Topic 606 adoption on revenue timing, deferred revenue and reported results.
- Cash conversion and working-capital movements, particularly receivables, inventories and payables, as sales volumes change.
- The obligations and cash-flow implications of the headquarters sale-leaseback, and the company’s liquidity if demand weakens or external financing is needed.