I thought I would post the Applied Materials and Axcelis earnings overviews before the paywall. I found the strength in ICAPS and Ion Implant driven by Silicon Carbide particularly interesting this year. In a year of down 20% WFE, Ion implantation is bucking the trend mostly due to Silicon carbide ramps.

In the case of Applied, it’s so meaningful that it’s bailing out the second largest semicap company in the world. That’s a big deal, and that’s because the Silicon Carbide spending is not stopping anytime soon. The transition to a more EV-dominant automotive market demands a lot of spending, in this case, Ion Implantation.

Applied Materials

This was one of the strongest beats this season, and I think it’s absurd that the upper end of their guidance implies a sequential acceleration if you back out the revenue charge. The stock market doesn’t believe their results, and shares were down on the report.

Applied, however, believes Ion Implant within ICAPS can double. I called out Applied in my year-end piece, particularly as a pair against Lam or KLAC. You can short ASML for the super bold. If you’re in the business of making a levered spread, I still think this trade is a good one.

Applied is still well-positioned relatively, as ICAPS bails out their short-term results, and their share gain in logic helps their long-term results. But let’s look at the results.

Applied Materials reports Q1 EPS $2.03 ex-items vs. FactSet $1.93

Reports Q1:
- Revenue $6.74B vs. FactSet $6.69B
Q2 Guidance:
- EPS $1.66-2.02 ex-items vs. FactSet $1.76
- Revenue $6.40B +/- $400M vs. FactSet $6.29B

The amazing part is that excluding the $250 million dollar cybersecurity revenue charge, they could grow sequentially in Q2 over Q1! They grew their backlog sequentially as well to an all-time high. This is ABSURD, and I cannot stress how good of a result that is.

We expect revenue to be nearly $6.4 billion, plus or minus $400 million or up over 2% year-over-year. We expect non-GAAP EPS of $1.84, plus or minus $0.18. This guidance includes a negative estimated adjustment of $250 million related to a cybersecurity event that was recently announced by one of our suppliers. Based on our current assessment of the situation, we expect to recover all of this revenue and the majority of it in Q3.

The theme for this quarter was ICAPS, and given Applied’s bullishness, it looks like Axcelis could be sandbagging its FY 2023 growth. Applied believes Ion Implantation could double in 23 over 22, compared to Axcelis’s 8% growth. That implies a massive share loss for Axcelis in Applied’s favor.

So again, that's something that we saw several years ago and made investments. So we have many ICAPS specific products. Implant is one area if we look at. There's many areas where we have strength and broad exposure in ICAPS. But in that particular area, we've introduced 10 new products focused on ICAPS in the last 5 years.

That is the largest segment of our implant business. And just in that one area, again, we've been very supply constrained. We expect that we can double our ICAPS revenue in '23 versus '22. (SiC) So again, just really across the board we have very, very strong positions. And pulling that organization together 4 years ago, really put us in a good position for what we're seeing today.

ICAPS acceleration was the driver to offset the leading logic and memory portfolio. Put differently, the trailing edge bailed out the second-largest semicap player in the world. Applied sells many deposition products, yet a small segment within ICAPS is driving the boat for backlog and revenue next quarter.

Mathematically, you're exactly right. The acceleration in ICAPS has more than offset the weakness we're seeing there and any slowdown we saw in leading-edge logic. So that's true. And then we've looked at the leading indicators on the memory side. We're still seeing pricing declines. We're still seeing inventory increases. So we don't think it's turning yet, at least from our perspective, but we're confident we're current with the customers, Vivek.

China is driving ICAPS growth, but so is the rest of the world. They won’t be as impacted by export controls as leading-edge logic, given that implant is not on the export list.

First of all, it's broad-based. I guess, would be my first answer on the ICAPS. We had significant growth last year that we highlighted when we did our year-end call, and it's actually accelerating into this year. So I'll come back to whether that's a concern or not. China is the largest region and the largest single country driving ICAPS. So it is a focus area. We're actually not concerned that it's going to be affected by trade regulations.

Meanwhile, they expect to pick up share whenever leading-edge logic recovers, especially as things move to Gate-All-Around.

The demand for 3-nanometer is very strong, and that looks like that's going to be a very big investment for our customers. And again, for us, the positions there, we've covered that in a lot of the Master Classes, we expect our share of gate-all-around to rise versus FinFET, about 5 points. And we have the majority of the spending in that inflection. I've talked about those wiring inflections where the dollar per wafer goes up significantly from one technology node to the next. And again, we've covered those in the Master Classes. So our position at 3-nanometer is very strong. Our position gets stronger even in 2-nanometer as customers are driving improvements in power and performance. So our position there is very good. And again, what we're hearing from customers is significant demand for 3-nanometer and the timing, we'll let them comment on the timing.

Applied showed a master class in outperformance this quarter. Forward estimates are likely too low, as ICAPS will bail them out during the cyclically low Q1 and Q2 of 2023; as the market recovers, they should pick up share within logic.

All while Applied is meaningfully underweight the worst part of WFE spend, memory. Applied is the best positioned of the larger semicap players ex-ASML and isn’t priced for it. I am a buyer of Applied on these results.

Moreover, the market doesn’t believe this is real, and shares were lower, despite the terrific result. This looks like a huge relative opportunity, especially in the tactical short term. The spread between Applied and Lam should be wider.

Applied is actually cheaper on an EV/EBITDA basis as well.

Axcelis

Axcelis Technologies reports Q4 EPS $1.71 vs. FactSet $1.42

Reports Q4:
- Revenue $266.1M vs. FactSet $248.6M
- Gross margin 41.2% vs. guidance 40-41%
- Year-ending record backlog of greater than $1.1B
Q1 Guidance:
- EPS $1.25 vs. FactSet $1.26
- Revenue $240M vs. FactSet $235.1M
FY Guidance (Dec 2023):
- Revenue greater than $1B vs. FactSet $952.9M

Speaking of Ion Implantation, Axcelis put out pretty legendary guidance of positive revenue growth in a down year. This will likely be one of the few semicap companies (ex-AEHR) that grows this year.

For the first quarter of 2023, we expect revenue of approximately $240 million, gross margin of roughly 41.5% and operating profit of around $48 million and earnings per share of approximately $1.25. For the full year 2023, Axcelis revenues are expected to exceed $1 billion. This represents revenue growth of over 8% in a year in which overall wafer fab equipment is expected to decrease by over 20%.

Additionally, they put out a new long-term guide of $1.3 billion in 2-3 years. Silicon carbide is the big driver, representing 25% of revenue. Implantation is an important step in SiC, so this makes sense.

We expect over 55% of our system revenue in 2023 to come from this segment with greater than 50% of the overall power device system revenue coming from silicon carbide applications. Silicon carbide provides many performance advantages over silicon for electric vehicle applications and is expected to grow significantly over the next several years. Currently, we estimate that silicon carbide wafer starts will double every 3 years, driven by a 30% annual growth rate in this device market, which is dominated by automotive.

Their recovery is growth in Q2 over Q1, then flattish for the rest of the year. This seems either conservative, given Applied’s guidance, or the lagging edge will be at a smoother demand curve than the leading edge. My gut is that this is conservative, given that almost every other company is expecting some form of back-half recovery.

What I would expect is we've obviously got to come above the Q1 run rate to hit greater than $1 billion this year. The way I'm looking at the year now, I think it steps back up in Q2, and it's probably mostly flat throughout the year. So I feel it comes back up in Q2 and kind of stays flattish throughout the year based on what I'm looking at right now.

Anyways let’s look at the new long-term guidance. I’m assuming $1.3 billion in 2025.

Silicon carbide is the big driver, growing TAM and bailing them out.

Rolling it up, Axcelis looks fair valued at a 10% discount rate. I am pretty bullish and would be a buyer when shares pull back. I think there is a clear value at prices sub $120. They might be losing share to Applied, but I think they are sandbagging, and there’s a chance their revenue growth for the year ends up being much better than 8% positive growth.

They are being conservative, given the lack of visibility. Both outcomes imply a bright future for Axcelis.

The fact that this conservative valuation works at a 10% discount looks great to me and explains why the shares are up 50% for the year. I would gladly buy on a pullback. For the other earnings overviews, please subscribe to the newsletter.

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