Axcelis Technologies: At An Inflection Point, With Catalysts For Accelerated Earnings
Editor's notes: A leaner ACLS is on the verge of benefitting from a cyclical upswing. Fund manager Ben Axler sees 50% upside on a conservative basis as the company regains market attention
An old spin-out of Eaton Corp. (ETN), Axcelis Technologies (ACLS) designs, manufactures and services ion implantation, dry strip and other processing equipment used in the fabrication of semiconductor chips. The semiconductor capital equipment industry is very cyclical, and as a smaller player in the industry, ACLS has not been immune, and gone through protracted periods of losses. In the past few years, the company has taken numerous steps to reposition itself for the next cyclical upswing by listening to its customers and investing heavily in R&D to revamp its product line to expand its addressable market opportunity, right-sizing its cost structure to substantially lower its breakeven level, establishing new collaborative partnerships, and optimizing its balance sheet to unlock value. Now with signs of a cyclical upswing occurring, and being led by memory - Micron (MU) and SanDisk (SNDK), ACLS is poised for accelerating earnings potential beginning in Q4'2013 that could drive its stock price substantially higher. However, with a few nearer-term catalysts on the horizon, investors may not want to wait too long before purchasing shares. As an early indicator, investors should consider that insiders recently purchased the stock in the open market in August at current levels. These stock purchases coincide with the one year anniversary of ACLS's new Purion M product line entering an evaluation period with a major customer. Sell-side analysts are starting to take notice and listening in to the company's recent conference call, which at least opens the door to new broker initiations in the future. The downside risk appears mitigated by ACLS's strengthened balance sheet, and dramatically improved operating financial model that has stemmed further cash burn. As the company hits an inflection point with new customer contracts and proves its earnings cycle is under way, we expect ACLS's valuation discount to peers to narrow and the stock to appreciate substantially from its current price.
Imminent Customer Contract Announcement Would Open A New $35- $70m Annual Revenue Opportunity
Axcelis offers a complete implant product portfolio, and has invested in excess of $310 million in R&D since 2007 to build a platform of leading equipment used in the fabrication of semiconductor chips globally. Its single wafer, spot beam ion implanters cover all traditional and emerging applications at 32nm and below. The annual implant revenue opportunity is approximately $1 billion annually and split approximately 50%/35%/15% between the High Current, Medium Current, and High Energy segments, respectively. Axcelis has historically dominated the High Energy segment with the Purion XE product, but in order to serve its customers entire spectrum of needs and provide an element of commonality, it has developed a solution for the Medium Current market called Purion M. At the end of August 2012, the company announced its first shipment of Purion M to one of the world's leading chip manufacturers. The product has been in an evaluation period with this customer in Asia for a year, where it is undergoing qualification for DRAM and logic process flows. Two other evaluations have been announced in March and May 2013 by a chipmaker in memory and flash device manufacturing, and a foundry for advanced logic devices. The company has told investors it is confident in its ability to secure revenue opportunities based on the proceedings of these evaluations to date, and expects to provide an additional update to investors in Q3'2013. Validation of the Purion M product through a customer order announcement would be a significant milestone for Axcelis and open the company to an entirely new market segment worth an estimated $350-$400 million per year.
This medium current segment has traditionally been dominated by Varian Semiconductor, which was acquired by Applied Materials in 2011. Axcelis has hired former Varian employees in product engineering and sales to bolster its efforts to succ