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Item 2. Management’s Discussion and Analysis

2024-08-01 compared with 2024-05-02 · 99 added, 38 removed, 131 unchanged (51% of the section changed)

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Consolidation and partnering within the semiconductor manufacturing industry has resulted in a small number of customers representing a substantial portion of our business.

Our ten largest customers accounted for 54.8% of total revenue for the three months ended March 31, 2024.

The first three months of 2024 exhibited continued strong demand for our capital equipment.

The overall mature process segment represented 99% of our shipped systems revenue, with 1% of shipments to dynamic random-access memory (“DRAM”).

Our ten largest customers accounted for 47.4% of total revenue for the six months ended June 30, 2024.

The first six months of 2024 exhibited continued strong demand for our capital equipment.

The overall mature process segment represented 98% of our shipped systems revenue, with 1% of shipments to advanced logic and 1% of shipments to dynamic random-access memory (“DRAM”).

Power device shipments comprised 59% of total systems revenue with the general mature segment representing 36%, and image sensors at 4%.

Looking ahead, we expect that the general mature process technology markets may improve in the second half of 2024, and DRAM and “Not AND” memory segments are forecast to have a strong year in 2025.

Looking ahead, we expect demand from silicon carbide customers within the power segment to remain healthy in the second half, while in general mature, we may see some moderation in revenue in the second half, dependent on the macroeconomic environment and its impact on our customers’ spending patterns.

In addition, we expect DRAM customers to start adding capacity as we exit 2024 and into 2025, while “NAND” spending is expected to begin picking up in 2025.

Critical Accounting Estimates

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Total revenue

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Percentage of revenue

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Total revenue

Product revenue, which includes systems sales, sales of spare parts, product upgrades and used systems, was $243.4 million, or 96.5% of revenue, during the three months ended March 31, 2024, compared with $246.0 million, or 96.8% of revenue, for the three months ended March 31, 2023.

The $2.6 million decrease in product revenue for the three-month period ended March 31, 2024, in comparison to the same period in 2023, was primarily driven by a decrease in aftermarket sales.

Three months ended June 30, 2024 Compared with Three months ended June 30, 2023

Product revenue, which includes systems sales, sales of spare parts, product upgrades and used systems, was $245.4 million, or 95.7% of revenue, during the three months ended June 30, 2024, compared with $265.7 million, or 97.0% of revenue, for the three months ended June 30, 2023.

The $20.3 million decrease in product revenue for the three-

month period ended June 30, 2024, in comparison to the same period in 2023, was primarily driven by a decrease in system sales.

Deferred revenue includes payments received in advance of system sales as well as deferral of revenue from systems sales for installation and other future performance obligations.

The total amount of deferred revenue at March 31, 2024 and December 31, 2023 was $208.4 million and $210.9 million, respectively.

Services revenue, which includes the labor component of maintenance and service contracts and fees for service hours provided by on-site service personnel, was $9.0 million, or 3.5% of revenue, for the three months ended March 31, 2024, compared with $8.0 million, or 3.2% of revenue, for the three months ended March 31, 2023.

The total amount of deferred revenue at June 30, 2024 and December 31, 2023 was $174.0 million and $210.9 million, respectively.

Services revenue, which includes the labor component of maintenance and service contracts and fees for service hours provided by on-site service personnel, was $11.1 million, or 4.3% of revenue, for the three months ended June 30, 2024, compared with $8.3 million, or 3.0% of revenue, for the three months ended June 30, 2023.

Although services revenue typically increases with the expansion of the installed base of systems, it can fluctuate from period to period based on capacity utilization at customers’ manufacturing facilities, which affects the need for equipment service.

Six months ended June 30, 2024 Compared with Six months ended June 30, 2023

Product revenue was $488.8 million, or 96.1% of revenue, during the six months ended June 30, 2024, compared with $511.7 million, or 96.9% of revenue, for the six months ended June 30, 2023.

The $22.9 million decrease in product revenue for the six-month period ended June 30, 2024, in comparison to the same period in 2023, was primarily driven by a decrease in system sales.

Services revenue was $20.1 million, or 3.9% of revenue, for the six months ended June 30, 2024, compared with $16.3 million, or 3.1% of revenue, for the six months ended June 30, 2023.

Revenue Categories used by Management

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Aftermarket and Systems Revenue

Included in total revenue of $252.4 million during the three months ended March 31, 2024 is revenue from our Aftermarket business of $56.9 million, compared with $58.8 million of Aftermarket revenue for the three months ended March 31, 2023.

Three months ended June 30, 2024 Compared with Three months ended June 30, 2023

Included in total revenue of $256.5 million during the three months ended June 30, 2024 is revenue from our Aftermarket business of $57.9 million, compared with $58.8 million of Aftermarket revenue for the three months ended June 30, 2023.

Aftermarket revenue fluctuates from period to period based on capacity utilization at customers’ manufacturing facilities, which affects the sale of spare parts and demand for equipment service.

Aftermarket revenue can also fluctuate from period to period based on the demand for system upgrades or used equipment.

The remaining $195.5 million of revenue for the three months ended March 31, 2024 was from system sales, compared with $195.2 million of systems revenue for the three months ended March 31, 2023.

The remaining $198.6 million of revenue for the three months ended June 30, 2024 was systems revenue, compared with $215.2 million of systems revenue for the three months ended June 30, 2023.

Systems revenue fluctuates from period to period based on our customers’ capital spending.

Six months ended June 30, 2024 Compared with Six months ended June 30, 2023

Included in total revenue of $508.9 million during the six months ended June 30, 2024 is revenue from our Aftermarket business of $114.8 million, compared with $117.6 million of Aftermarket revenue for the six months ended June 30, 2023.

The remaining $394.1 million of revenue for the six months ended June 30, 2024 was systems revenue, compared with $410.4 million of systems revenue for the six months ended June 30, 2023.

Gross Profit / Gross Margin

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Total gross profit

Gross margin from product revenue was 47.5% for the three months ended March 31, 2024, compared to 42.0% for the three months ended March 31, 2023.

Three months ended June 30, 2024 Compared with Three months ended June 30, 2023

Gross margin from product revenue was 45.1% for the three months ended June 30, 2024, compared to 44.8% for the three months ended June 30, 2023.

The increase in gross margin primarily resulted from a favorable mix of system revenue.

Gross margin from services revenue was 6.1% for the three months ended March 31, 2024, compared to 9.8% for the three months ended March 31, 2023.

The decrease in gross margin is attributable to changes in the mix of service contracts .

Gross margin from services revenue was 16.1% for the three months ended June 30, 2024, compared to 9.3% for the three months ended June 30, 2023.

The increase in gross margin is attributable to changes in the mix of service contracts .

Six months ended June 30, 2024 Compared with Six months ended June 30, 2023

Gross margin from product revenue was 46.3% for the six months ended June 30, 2024, compared to 43.4% for the six months ended June 30, 2023.

The increase in gross margin primarily resulted from a favorable mix of system revenue.

Gross margin from services revenue was 11.6% for the six months ended June 30, 2024, compared to 9.5% for the six months ended June 30, 2023.

The increase in gross margin is attributable to changes in the mix of service contracts .

Operating Expenses

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Research and development

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Percentage of revenue

Our operating expenses consist primarily of personnel costs, including salaries, commissions, incentive-based compensation, stock-based compensation and related benefits and taxes;

Our operating expenses consist primarily of personnel costs, including wages, commissions, incentive-based compensation, stock-based compensation and related benefits and taxes;

project material costs related to the design and development of new products and enhancement of existing products;

and professional fees, travel and depreciation expenses.

Personnel costs are our largest expense, representing $36.4 million, or 61.2%, of our total operating expenses for the three months ended March 31, 2024, compared to $30.7 million, or 58.2%, of our total operating expenses for the three months ended March 31, 2023.

The higher personnel costs for the three months ended March 31, 2024 are primarily due to increases in salary associated with an increase in headcount as well as bonus and stock compensation expenses.

Personnel costs are our largest expense, representing $35.3 million, or 59.2%, of our total operating expenses for the three months ended June 30, 2024, compared to $33.8 million, or 60.4%, of our total operating expenses for the three months ended June 30, 2023.

Personnel costs were $71.7 million, or 60.2%, of our total operating expenses for the six months ended June 30, 2024, compared to $64.5 million, or 59.3%, of our total operating expenses for the six months ended June 30, 2023.

The higher personnel costs for the three and six months ended June 30, 2024 are primarily due to increases in wages and headcount as well as stock compensation expense, partially offset by a decrease in bonus expense.

Research and Development

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Research and development

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Accordingly, based on our strategic plan, we establish annual research and development budgets to fund programs that we expect will solve customers’ high value, high impact, ion implantation challenges.

Research and development expense was $25.7 million during the three months ended March 31, 2024, an increase of $1.9 million, or 7.9%, compared with $23.8 million during the three months ended March 31, 2023.

Three months ended June 30, 2024 Compared with Three months ended June 30, 2023

Research and development expense was $25.8 million during the three months ended June 30, 2024, an increase of $1.7 million, or 6.9%, compared with $24.1 million during the three months ended June 30, 2023.

The increase is primarily due to higher personnel expenses associated with increases in wages and headcount.

Six months ended June 30, 2024 Compared with Six months ended June 30, 2023

Research and development expense was $51.4 million during the six months ended June 30, 2024, an increase of $3.5 million, or 7.4%, compared with $47.9 million during the six months ended June 30, 2023.

The increase is primarily due to higher personnel expenses associated with an increase in headcount.

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Sales and marketing

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Our sales and marketing expenses result primarily from the sale of our equipment and services through our direct sales force.

Sales and marketing expense was $17.4 million during the three months ended March 31, 2024, an increase of $3.3 million, or 23.3%, compared with $14.1 million during the three months ended March 31, 2023.

The increase is primarily due to higher personnel expenses associated with an increase in headcount.

Three months ended June 30, 2024 Compared with Three months ended June 30, 2023

Sales and marketing expense was $17.2 million during the three months ended June 30, 2024, an increase of $1.7 million, or 10.9%, compared with $15.5 million during the three months ended June 30, 2023.

The increase is primarily due to higher personnel expenses associated with increases in wages and headcount.

Six months ended June 30, 2024 Compared with Six months ended June 30, 2023

Sales and marketing expense was $34.7 million during the six months ended June 30, 2024, an increase of $5.0 million, or 16.8%, compared with $29.7 million during the six months ended June 30, 2023.

The increase is primarily due to higher personnel expenses associated with increases in wages and headcount.

General and Administrative

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General and administrative

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Our general and administrative expenses result primarily from the costs associated with our executive, finance, information technology, legal and human resource functions.

General and administrative expense was $16.4 million during the three months ended March 31, 2024, an increase of $1.7 million, or 11.3%, compared with $14.7 million during the three months ended March 31, 2023.

Three months ended June 30, 2024 Compared with Three months ended June 30, 2023

General and administrative expense was $16.6 million during the three months ended June 30, 2024, an increase of $0.3 million, or 1.6%, compared with $16.3 million during the three months ended June 30, 2023.

The increase is primarily due to higher personnel expenses associated with an increase in headcount offset by a decrease in bonus expense.

Six months ended June 30, 2024 Compared with Six months ended June 30, 2023

General and administrative expense was $33.0 million during the six months ended June 30, 2024, an increase of $1.9 million, or 6.2%, compared with $31.1 million during the six months ended June 30, 2023.

The increase is primarily due to higher personnel expenses associated with an increase in headcount.

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Other income (expense):

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dollar against local currencies of the countries in which we operate and forward currency exchange contracts.

Other income was $2.5 million for the three months ended March 31, 2024, compared with other income of $1.5 million for the three months ended March 31, 2023.

The $0.9 million change in other income (expense) compared to the same prior year period was primarily due to an increase in interest income of $1.6 million and an increase in foreign exchange losses of $2.2 million partially offset by foreign exchange gains of $1.5 million from forward currency exchange contracts.

Other income was $4.5 million for the three months ended June 30, 2024, compared with other income of $0.9 million for the three months ended June 30, 2023.

The $3.5 million increase in other income (expense) compared to the same prior year period was primarily due to an increase in interest income of $1.7 million and foreign exchange gains of $2.3 million from forward currency exchange contracts partially offset by foreign exchange losses of $2.5 million.

Other income was $6.9 million for the six months ended June 30, 2024, compared with other income of $2.5 million for the six months ended June 30, 2023.

The $4.5 million increase in other income (expense) compared to the same prior year period was primarily due to an increase in interest income of $3.3 million and foreign exchange gains of $3.8 million from forward currency exchange contracts partially offset by foreign exchange losses of $5.9 million.

Income Tax Provision

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Income tax expense was $7.4 million for the three months ended March 31, 2024, compared to $5.2 million for the three months ended March 31, 2023.

The $2.2 million increase was primarily due to an increase in pre-tax income and a decrease in stock compensation deduction partially offset by the tax deduction related to foreign sales taxed at a lower rate.

The effective tax rate for the three months ended March 31, 2024 was less than the U.S.

Income tax expense was $6.4 million for the three months ended June 30, 2024, compared to $3.0 million for the three months ended June 30, 2023.

The $3.4 million increase was primarily due to a decrease in stock compensation deduction.

Income tax expense was $13.8 million for the six months ended June 30, 2024, compared to $8.2 million for the six months ended June 30, 2023.

The increase was primarily due to a decrease in stock compensation deduction.

The effective tax rate for the three and six months ended June 30, 2024 was less than the U.S.

statutory rate of 21% due to a forecasted Foreign Derived Intangible Income deduction, Federal research and development tax credits and a favorable discrete item related to equity compensation that reduces the annual tax rate.

The deferred income taxes of $54.5 million and $53.4 million as of March 31, 2024 and December 31, 2023, respectively, reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards.

As of March 31, 2024, we have recorded a $10.8 million valuation allowance in the U.S.

against certain tax credits and state net operating losses due to the uncertainty of their realization.

The deferred income taxes of $55.4 million and $53.4 million as of June 30, 2024 and December 31, 2023, respectively, reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards.

As of June 30, 2024, we have recorded a $11.3 million valuation allowance in the U.S.

against certain tax credits due to the uncertainty of their realization.

Realization of our net deferred tax assets is dependent on future taxable income.

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Liquidity and Capital Resources

At March 31, 2024, we had $134.0 million in unrestricted cash and cash equivalents and $396.2 million in short-term investments, in addition to $6.7 million in restricted cash.

At June 30, 2024, we had $145.2 million in unrestricted cash and cash equivalents and $403.1 million in short-term investments, in addition to $6.7 million in restricted cash.

Management believes that maintaining a strong cash balance is necessary to fund a continuing ramp in our business which can require significant cash investment to meet sudden demand.

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Stock repurchases, as discussed below, also reduce our cash balances.

During the three months ended March 31, 2024 and 2023, we generated $42.2 million and $34.6 million, respectively, of cash related to operating activities.

Investing activities for the three months ended March 31, 2024 resulted in cash outflows of $55.7 million, $1.6 million of which was used for capital expenditures and $145.1 million of which was used to purchase short-term investments, offset by $91.1 million related to maturities of short-term investments.

Investing activities for the three months ended March 31, 2023 resulted in cash outflows of $33.0 million, $2.2 million of which was used for capital expenditures and $61.8 million of which was used to purchase short-term investments, offset by $31.0 million related to maturities of short-term investments.

Financing activities for the three months ended March 31, 2024 resulted in a cash usage of $18.1 million.

During the first three months of 2024, $15.0 million in cash was used to repurchase our common stock and $2.7 million was used for payments to government tax authorities for income tax withholding on employee compensation arising from the vesting of RSUs, where units are withheld by us to cover taxes, as well as $0.4 million relating to the reduction of the liability under the finance lease of our corporate headquarters.

In comparison, financing activities for the three months ended March 31, 2023 resulted in cash usage of $16.7 million, $12.5 million of which related to the repurchase of our common stock and $3.9 million of which related to payments made to government tax authorities for income tax withholding on employee compensation arising from the vesting of RSUs, as well as $0.3 million relating to the reduction of our financing lease liability.

As of March 31, 2024, we had a security deposit of $5.9 million related to this lease in the form of a cash collateralized letter of credit issued with UBS Bank USA, which is classified as long-term restricted cash on our balance sheet.

During the six months ended June 30, 2024 and 2023, we generated $82.3 million and $67.3 million, respectively, of cash related to operating activities.

Investing activities for the six months ended June 30, 2024 resulted in cash outflows of $61.3 million, $3.6 million of which was used for capital expenditures and $249.0 million of which was used to purchase short-term investments, offset by $191.3 million related to maturities of short-term investments.

Investing activities for the six months ended June 30, 2023 resulted in cash outflows of $73.2 million, $5.2 million of which was used for capital expenditures and $188.9 million of which was used to purchase short-term investments, offset by $120.9 million related to maturities of short-term investments.

Financing activities for the six months ended June 30, 2024 resulted in a cash usage of $40.7 million.

During the first six months of 2024, $30.0 million in cash was used to repurchase our common stock and $11.2 million was used for payments to government tax authorities for income tax withholding on employee compensation arising from the vesting of RSUs, where units are withheld by us to cover taxes, as well as $0.7 million relating to the reduction of the liability under the finance lease of our corporate headquarters.

These amounts were partially offset by $1.2 million of proceeds related to the purchase of shares under our 2020 ESPP during the first six months of 2024.

In comparison, financing activities for the six months ended June 30, 2023 resulted in cash usage of $40.1 million, $25.0 million of which related to the repurchase of our common stock and $15.5 million of which related to payments made to government tax authorities for income tax withholding on employee compensation arising from the vesting of RSUs, as well as $0.6 million relating to the reduction of our financing lease liability.

These amounts were partially offset by $1.0 million of proceeds related to the purchase of shares under our 2020 ESPP and exercise of stock options during the first six months of 2023.

As of June 30, 2024, we had a security deposit of $5.9 million related to the lease of our corporate headquarters in the form of a cash collateralized letter of credit issued with UBS Bank USA, which is classified as long-term restricted cash on our balance sheet.

We believe that based on our current market, revenue, expense and cash flow forecasts, our existing cash and cash equivalents will be sufficient to satisfy our anticipated cash requirements for the short- and long-term.

Commitments and Contingencies

Significant commitments and contingencies at March 31, 2024 are consistent with those discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 16 to the consolidated financial statements included in our 2023 Form 10-K.

Significant commitments and contingencies at June 30, 2024 are consistent with those discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 16 to the consolidated financial statements included in our 2023 Form 10-K.

Quantitative and Qualitative Disclosures about Market Risk.

As of March 31, 2024, there have been no material changes to the quantitative information about market risk disclosed in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” included in our 2023 Form 10-K.

As of June 30, 2024, there have been no material changes to the quantitative information about market risk disclosed in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” included in our 2023 Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis