American semiconductor company Axcelis Technologies (ACLS +2.78%) reported better-than-expected earnings last quarter. And it has a record-high $1.1 billion systems backlog. This is remarkable considering its $2.6 billion market cap.
Are things about to heat up for this facilitator of microchip manufacturing? Let's look at Axcelis' third-quarter performance and whether this semiconductor stock is poised for a move upward.
Axcelis Technologies' strong Q3 results
Axcelis enjoyed a third-quarter revenue jump of nearly 30% year over year, and profit for the quarter rose 35% over the equivalent three month period last year. Total sales reached $229.2 million, beating the company's own expectations and registering a 3.6% sequential increase over the second quarter's $221.2 million. Net income for the quarter ended at $40.3 million, or $1.21 per share.
President and CEO Mary Puma cited robust demand in the mature-process technology segment, which accounts for more than 80% of Axcelis' system revenue. Products like image sensors, cars, appliances, and communication equipment all use chips made with mature manufacturing processes.
Puma sounded particularly excited about the automotive market during the third-quarter earnings call, saying the electric vehicle (EV) revolution has created "extremely strong" demand for microchips.
The company's backlog hit a record $1.1 billion in the third quarter. Bookings for new fabrication plants and the expansion of existing facilities have pushed Axcelis' lead times beyond a year, well into 2024 at this point.
Third-quarter gross margin exceeded Axcelis' own guidance and reached 45.1%, driven by strong aftermarket sales and a successful product mix during the quarter. As a result of the third quarter's high gross profit margin, management raised its full-year guidance from 42.5% to 43%.
Shrinking margins in the fourth quarter
While third-quarter margins soared, profitability expectations for the fourth quarter appear less rosy. Axcelis lowered its fourth quarter's gross margin guidance to a range of 40% to 41% due to the timing of "unfavorable supply chain costs." Along with the rest of the semiconductor industry, the company says it faces significant challenges from supply chain disruptions.
A fragile supply chain has battered Axcelis with longer lead times and higher raw materials costs. While heightened costs and delivery times are expected to continue in the current quarter, Chief Financial Officer Kevin Brewer expects sustained improvements starting next year.
Besides supply chain concerns, newly imposed U.S. government regulations on Chinese customers are also expected to narrow margins in the fourth quarter, although minimally. And due to the strength of the U.S. dollar, adverse foreign exchange rates are also expected to pull fourth-quarter margins down.
NASDAQ: ACLS
Key Data Points
The fourth quarter and beyond
Despite headwinds, Brewer said that the company was adapting well and keeping margins within an acceptable range. Axcelis expects to see continued strength in the fourth quarter, with a gross profit margin of 40% to 41% and revenue in the $232 million to $240 million range.
While the company hasn't provided any concrete guidance for 2023, Brewer suggested that based on 2022's performance and bookings, momentum will continue for the foreseeable future. Customers have already begun ordering tools from Axcelis as far out as 2024, and that lead time will soon creep into 2025.
Even though the company's expected $885 million in revenue this year marks a 33% improvement over 2021, Axcelis remains ambitious. Puma emphasized during the third-quarter earnings call that her team is "very focused on achieving our $1 billion model," although that benchmark is still a couple of years out.
With certain categories of the semiconductor industry anticipating substantial declines in 2023, Axcelis' well-established niche is not expected to be hit as hard. Therefore, compared to peers in the semiconductor space, it finds itself in a unique position looking into 2023 and beyond.
Is now really the time to buy?
Since the stock is trading at or near its all-time highs, investors might be curious if now is really the time to initiate a position in Axcelis stock. After all, Intel -- one of the leaders in the semiconductor space -- is down more than 50% from its 2021 highs, indicating a weak semiconductor industry.
However, if Axcelis can effectively manage its $1-billion-plus backlog while keeping margins in check, then the stock should follow the company's success.
Although supply chain and foreign exchange struggles continue to challenge Axcelis, I believe these setbacks are temporary and they should ease in the coming months in accordance with the company's forward-looking expectations. Finally, Axcelis' specialty in mature-process technologies should keep the company resilient in an uncertain semiconductor space.
Considering the company's recent progress, record order backlog, and aggressive sales goals, we should expect a nice rebound in the stock. With that in mind, I consider Axcelis stock buy-worthy at its current price levels.
