Good day, ladies and gentlemen, and welcome to the Axcelis Technologies call to discuss the company's results for the second quarter 2020. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. I would now like to turn the presentation over to your host for today's call, Mary Puma, President and CEO of Axcelis Technologies. Please proceed, ma'am.

Thank you, Kevin. With me today is Kevin Brewer, Executive Vice President and CFO; and Doug Lawson, Executive Vice President of Corporate Marketing and Strategy. We are all participating in this call remotely, so I would like to apologize in advance for any technical difficulties. If you have not seen a copy of our press release issued last night, it is available on our website. Playback service will also be available on our website as described in our press release. Please note that comments made today about our expectations for future revenues, profits, and other results are forward-looking statements under the SEC's Safe Harbor provision. Forward-looking statements are based on management's current expectations and are subject to the risks inherent in our business. These risks are described in detail in our Form 10-K, annual report, and other SEC filings, which we urge you to review. Our actual results may differ materially from our current expectations. We do not assume any obligation to update these forward-looking statements. Good morning and thank you for joining us. We have successfully completed our second quarter while continuing to operate in the COVID-19 environment. We hope you and your families are healthy, especially as the virus has aggressively spread in many different regions of the world. At Axcelis, we are carefully managing the situation. Although we are dealing daily with this constantly changing environment, we remain laser-focused on the strategic objectives outlined at our Investor Day last September. During the second quarter, we realized two key milestones along the path to capturing market leadership in ion implantation and achieving our long-term business models. This involves shipping two new Purion product evaluations; our second Purion Dragon evaluation to a large memory customer for a DRAM application, and the first Purion XEmax evaluation to a large image sensor customer. In the second half of 2020 Axcelis expects to ship additional evaluation systems of both Purion extensions and Purion based products to customers for new applications. These evaluation systems will increase our footprint and enable our long-term business objectives. While during a time like this, it can be difficult to deliver short-term commitments and stay focused on the future, the dedication and determination of our employees have made this possible. Maintaining their health and safety continues to be our top priority. So once again, I would like to personally give a heartfelt thank you to our extraordinary employees in the factory, in global field locations, and those that are in the U.S. and around the world who are working diligently to meet our customer commitments. I also want to thank our suppliers and customers for their support as we strive to meet the continuing high level of customer interest in our Purion products. Our second quarter financial performance was very strong. Revenue for the second quarter was $123 million, with earnings per share of $0.39, gross margins of 42.2%, and a cash balance of $197 million at quarter-end. Our aftermarket business, or what we refer to as CS&I, contributed significantly to our revenue and gross margin in the quarter, exceeding our expectations. During the second quarter, memory accounted for 35% of our shipments, 16% DRAM, and 19% NAND. The remaining 65% of shipments went to mature foundry logic customers. The geographic mix of our system shipments in the second quarter was China 59%, Korea 36%, and Taiwan 5%. This mix highlights the strength of the mature foundry logic market in both China and Korea. China shipments will likely remain strong in the third quarter. While 2021 is expected to be a very strong year for the semiconductor equipment industry as the memory market recovers, uncertainty relative to the second half of 2020 still exists. The impact of COVID-19 continues to create supply chain installation and other logistics challenges. The current geopolitical climate has impacted the plans of some customers, with the stability of the global economy also contributing uncertainty to the mix. Despite all of this, the market demand for semiconductors overall continues to be very strong. Last quarter we did not provide guidance due to this uncertainty. This quarter, we will, but we caution that visibility remains limited. For the third quarter, we expect revenue of approximately $110 million, with gross margins of approximately 42.5%, operating income in the range of $10.5 million to $11.5 million, and earnings per share of approximately $0.24. Axcelis had a very strong first half due to robust customer demand, and our ability to successfully mitigate pandemic-related issues in the supply chain and factory. This allowed us to ship systems on time and to accommodate customer requests for earlier deliveries. While our Q3 guidance is down slightly as a result of our strong first half performance, through the first three quarters of 2020, we expect year-over-year revenue to be up 50%. While the COVID-19 pandemic has generated uncertainty and presented new challenges in 2020, it is important to understand that the semiconductor industry is critical in today's world and remains fundamentally strong. Investment in both technology and capacity will accelerate as we enter 2021. We expect to see individual customers and market segments continue to respond differently to COVID-19 challenges. Semiconductor products required for working from home are currently in high demand. This includes products for PCs, video streaming, and communications. At the same time, demand for products related to automotive and aviation, for example, have slowed. Our knowledge and expertise in ion implantation allows us to work closely with our customers across all of these market segments, regardless of their particular market dynamics, to provide them with the best ion implant solutions for their emerging manufacturing challenges. As a result of these relationships, we have developed new Purion products that provide both Axcelis and our customers a significant competitive advantage. This has been critical to developing our large and diverse customer base. Last September, we introduced four new Purion products targeting the high current segment, which represents greater than 50% of the ion implant TAM, and targeting the high energy segment, representing approximately 30% of the TAM. The two new products in the high current segment are the Purion Dragon for advanced logic and memory applications, and the Purion H200 for advanced power device applications. These new products combined with the latest versions of the Purion H base product are the key to our growth in high current, the large segment of the ion implant market. The two new high energy products are the Purion XE silicon carbide for advanced silicon carbide power devices and the Purion XEmax for its sensors. These new products along with the popular Purion DXE will extend Axcelis’ market and technology leadership in the growing high energy market. Today, three of the four new products have already shipped to customers and we expect shipment of the fourth, the Purion H200 during the third quarter. We also plan to place more evaluations of the new Purion product extensions and the base Purion products in the second half of this year as we set the table to achieve our $650 million target business model. Now, I'd like to turn it over to Kevin to discuss our financials and some operational details.

Thank you, Mary. Good morning. Before I discuss our very strong second quarter performance, I'll provide an update on Axcelis’ management of the pandemic. At this point, all areas of our business and supply chain are operating well as a result of the extraordinary effort of our employees and suppliers, and continuing customer demand for our products. The health and well-being of our employees remains a top priority. We are doing our best to create a safe work environment for everyone at Axcelis. For those who must work in our factory, we continue to enforce safeguards like physical distancing and a required use of face masks. Everyone who can work from home is working from home and will continue to do so for now. Field-based teams are supporting our customers while following both government and customer-required safety protocols. We have added further flexibility for installation teams using skilled third party support and creative virtual solutions. We remain focused on our $550 million and $650 million target models and continue to make sizable investments in evaluation tools and new products. Cost-out initiatives and a growing percentage of revenue from these new products are driving gross margin improvement. Although the current environment has created challenges, the actions we have taken have allowed us to successfully navigate through this pandemic so far. Now turning to the second quarter results. Q2 revenue finished at $123 million, well above consensus, compared to $119 million in Q1. Q2 system sales were $76.8 million, compared to $82.3 million in Q1. Q2 CS&I revenue finished at $46.2 million compared to $36.7 million in Q1. CS&I was exceptionally strong this quarter with spares and consumables running higher than expected, driven by fab utilization and customers likely maintaining higher levels to minimize supply chain disruption. We also shipped several used tools in the quarter, which comprise approximately $7 million of our total CS&I revenues. We do not expect used tool shipments to report at that level, and as a result, Q3 CS&I revenues should be in the $36 million range. Q2 sales for our Top 10 customers accounted for 83.6% of total sales compared to 85.9% in Q1. Three customers were at 10% or above. Q2 system bookings were $56.2 million, compared to $115.1 million in Q1 with a Q2 book-to-bill ratio of 0.73 versus 1.37 in Q1. Backlog in Q2 including deferred revenue finished at $102.6 million, compared to $127 million in Q1. As noted in some of our prior calls, bookings and backlog can fluctuate quite a bit quarter-to-quarter due to customer specific ordering practices. For example, some of our largest customers often book within the same quarter. Q2 combined SG&A and R&D spending was $35.5 million or 28.9% of revenue, driven by higher evaluation tools in COVID-related expenses, compared to $31.8 million for 26.8% in Q1. SG&A in the quarter was $19.5 million with R&D at $16 million. We expect operating expenses to be approximately $36 million per quarter for the rest of the year to support numerous evaluation systems and additional costs associated with the pandemic. Q2 gross margin was 42.2%, compared to 38.3% in Q1. Q2 gross margin was driven by strong CS&I contribution, product mix, and ongoing cost-out efforts. Q3 gross margin is expected to be approximately 42.5% with full year gross margin now about 41%. We are forecasting pandemic-related expenses of approximately $1.8 million in Q3 spread across the P&L. Operating profit in Q2 finished at $16.4 million, compared to $13.7 million in Q1. Q2 net income was $13.3 million or $0.39 per share and above consensus, compared to $11.2 million or $0.33 per share in Q1. Inventory ended at $149.2 million, compared to $136.1 million in Q1 with the timing of shipments and additional inventory to support evaluation tools. Q2 inventory turns excluding evaluation tools finished at 2.1 compared to 2.2 in Q1. Q2 accounts payable were $30.3 million, compared to $26.1 million in Q1. Q2 receivables were $64.9 million, compared to $64.2 million in Q1. Q2 cash finished at $197 million, compared to $181.4 million in Q1. Cash from operations in the quarter was $16.9 million. Our stock repurchase program remains on hold as we continue to maintain a conservative cash strategy following investments in areas of the business that will drive customer satisfaction and growth in revenue and gross margin. In late May, we filed a Form F3 registration covering a future offering of common stock or other securities. In addition, last week, we established a new $40 million line of credit. These two financing vehicles offer additional flexibility for our cash strategy. Axcelis entered 2020 with solid momentum. Despite the challenges of the pandemic, we will continue to make the necessary investments in our products and the infrastructure required for our $550 million and $650 million target models. As Mary and I have both said, we remain laser-focused on achieving these models. Customers continue to have high expectations for our Purion products, which we intend to achieve. As the pandemic continues, I hope that all of you and your families stay well. Thank you, and I’ll now turn the call back to Mary for closing comments.

Thank you, Kevin. During this difficult time, we are fortunate to work in the semiconductor industry. Our technology is critical to support people's ability to work safely, stay informed, and be entertained. We are also at the beginning of an extended growth cycle driven by the new communications capability of 5G technology. The 5G infrastructure build is underway and will accelerate into 2021. New 5G capable phones that will be introduced this fall will lead to a strong memory cycle in 2021. Following this and beginning in 2022, there will be another cycle of industrial IoT applications even bigger than the last, which will drive strong growth in the mature process technology segment. One thing that emerges very clearly from this pandemic is that communication requirements and the technology to support them are more critical than ever, and that Axcelis is extremely well-positioned for strong growth tied to the upcoming 5G driven cycle. We are pleased with our strong second quarter financial performance and excited by recent and upcoming evaluation shipments of both new Purion product extensions and enhanced Purion based products that will keep Axcelis on track to achieve our target business models. Axcelis has a competitive Purion product line, a broad and diverse customer base, a strong balance sheet, and a dedicated team of employees. These are the strengths that will carry us through these uncertain times and ultimately drive growth and market leadership in ion implantation. With that, I'd like to open it up for questions.

Our first question comes from Craig Ellis with B. Riley.

Well, thanks for taking the question and congratulations on the very strong execution in the second quarter. I wanted to start with a clarification. Kevin, I'm sorry if I missed it, but did you call out the number of evaluation tools, if any, in the second quarter? And what is incorporated in your view for third quarter evaluation tool sync gross margin?

Yeah, so we didn't call out the specific numbers, but in terms of moving forward, Craig, there’s a significant wrap-up in the evaluation tools coming at us that we plan to place throughout Q3 and Q4 and there are outstanding tools right now at the end of Q2, but we did not close anything within the quarter that we normally announce.

Got it.

Craig. This is Mary. Craig, we have three outstanding evaluations right now. Two are for mature process technology applications for image sensors specifically. And one is at a memory customer for getting qualified for a DRAM application?

Got it. And then I probably have a few Mary. First in the near-term, can you just help us with what you see as you look at the market for the second half of the year, not looking for specific guidance for the fourth quarter, but just your color on puts and takes as you're looking at things you should enter the back half of the year?

Well, so, you know, as we discussed our revenues over the first three quarters of 2020 were pretty strong, and if you look at them and average them out, you know, they average about $117 million per quarter, which is a very good run rate for Axcelis. You know, as I mentioned there’s about a 50% increase over three quarters this year versus last year. At this point, we really don't have enough visibility to determine if this is going to continue for the rest of the year, but what we can say, and we've already just talked about, is that customer interest in our Purion products remains high. I mentioned that there’s strong demo activity. Kevin just talked about how we're very excited that we're going to have a significant number of evaluations going out in the second half of the year. We've got a very broad customer base. So, we're hoping that there will be some puts and takes in some of the segments that perhaps are weak. Some of that may be offset by what's going on in some of the segments where there's a little bit of a stronger demand. So, again, our visibility at this point is not really good, but we feel very good about achieving our long-term business model. We think our market positioning is good. We know that our execution has really been excellent, and you know, we're pretty excited about how the whole Purion rollout is taking place.

Excellent execution indeed. The follow-up to those comments and some of the prepared remarks is with regards to next year, from the secular commentary, you had Mary, I think with memory capacity next year and industrial IoT within calendar 2022, does that mean the company is really looking at a mixed shift towards memory and then backwards mature foundry in 2021 and 2022? Or is it just much too early to call out or to have a view on how the segment mixed dynamics might play out on the system side over the next few years?

Well, it's a little bit more difficult, but let me go back to what we consider to be, I'll call it a more normal mix for Axcelis when both mature process technology is strong and memory is strong, we typically have a 50/50 systems mix. At the beginning of this year, we talked about memory probably for the full year being about 35% of our systems mix. So, you know, we knew that we were starting to see some recovery from memory, but really remain focused on the fact that in 2021 that memory business will in fact come back and be stronger, and I think it's our expectation again, that we'll see a more balanced mix. So, I mean, I'm not giving that as a forecast, I’m just trying to give you, you know, some parameters that you can think about as both of the segments really are hitting on all cylinders.

Got it. Very helpful. Good luck team.

Thanks, Craig.

Next question comes from Patrick Ho, Stifel.

Thank you very much, and congrats on a nice quarter. Maybe to Mary or Kevin, in terms of the aftermarket business you actually had a very strong quarter, and I know there are different pieces within that business. So, what I wanted to look at was the services portion and see how you've adjusted to the current pandemic environment, and your ability to continue to support the customers. Obviously, the revenue base tells me that you're doing a good job on that. What are some of the actions you've taken to ensure that your customers continue to get not only the spare parts and upgrades, but also the services that are needed?

Yeah. So, Patrick it’s Kevin. So, we've definitely seen an uptick in the spares and consumable business, and you know, I'm sure a chunk of that right now is customers making sure they have parts on the shelf and mitigating any possible supply chain disruption that the virus may cause but in particular what we’ve done in the business has been across the board for all of our systems and CS&I businesses in supply chain. Very early on, we, you know, like a lot of our peers, I mean it was definitely a struggle in the supply chain, but very early on, we got ahead of it with where we had dual source capability. We quickly added, you know, additional capabilities. We got advanced buys out with critical components, and probably most importantly, we’ve got into our MRP system and adjusted our lead time offsets, so we could pull material in more quickly. So, I guess what I'm saying is, we got in line early, because everybody is kind of running to the door trying to get material delivered. We coordinated with all of our suppliers on logistics because logistics is going to hang up for a lot of people, and you know, I'm not going to say it wasn't a struggle for us, but we got ultimate action taken to speed things up. We got away from, you know, we used to do bulk shipments, but we quickly got away from that because we knew that wasn't going to happen quickly. So, I would say the biggest thing is on the supply chain and, you know, our manufacturing processes remain strong throughout this virus. We've done a great job in the facility keeping people healthy to date, and we focus on that daily. We have daily COVID meetings. So, I think it's just been a lot of planning, Patrick, and you know, increasing capacity or capability and, you know, where we saw maybe some choke points coming up.

Great, that's helpful. Maybe as my follow-up question for Mary in terms of the customer mix, trailing edge foundry continues to be a high portion of it, with China being a key region, have you seen any puts and takes, you know, given the geopolitical situation? Have you seen customers potentially taking tools somewhat earlier than you expected, or is there timing still pretty much where you expected them to take tools?

I think for the most part, timing is where we expected them to take tools. That said, we just talked about the fact that given, you know, some of the pandemic related issues, not trade-related issues, we have had instances where because of logistics concerns, we have certainly, you know, we've had the capability and we have pulled some tools in to the first and second quarter to just ensure that we would get the tools to the customers when they wanted them. So, we don't really see any kind of geopolitical implications in China because of this. You know, the area that China remains very, very strong, it's a large percentage of Axcelis revenues on average. You know, we typically say it's 30%. Based on what we know today, it will likely be a higher percentage of our revenues for the full year. And you know, the mature process technology segment does continue to be, you know, very strong and even though usually, our systems activity in China typically comes from the global semiconductor companies, but it's really the domestic customers right now, in combination with some of the multi-nationals that are actually doing quite a bit of investment.

Great, thank you very much.

Thanks, Patrick. Thank you.

Thanks, Pat.

Our next question comes from Christian Schwab with Craig-Hallum.

Hi, this is Tyler on for Christian. Thanks for letting us ask a couple of questions. First question...

Sure.

Hi guys. First question on gross margins, I was wondering if you could give a little more color? Your guidance of Q3 for 42.5% is already the midpoint of your $550 million target; you expect revenue to be down sequentially, expect fares to be down sequentially, you commented on the number of eval tools coming in Q3 in the second half, so I was wondering if you could just comment on the puts and takes on the strong gross margin guys?

Yeah, so to your point, I mean, our target model for $550 million has 42% to 43%, and I think where you're hitting that is that we're, you know, we're guiding that range right now. The things that really drive the margin from quarter to quarter are the mix of CS&I, the mix within the product. As we all know from our entire IR presentation, high energy mix drives stronger margins, although, you know, we continue to work at the high current product line in meeting expectations. You can kind of see the trends that we've been improving the gross margins on both of those product lines. Cost out continues. I mean, we're taking advantage of cost out efforts that have been working for a number of years now. I think we've mentioned this before, the product extensions tend to carry higher margins with them. It is more of a premium pricing because I guess there's a little bit more of a specialty tool, but we're seeing a larger mix of these products, the product extensions right now, which is helping the margins. So, those are all things that are moving us to that. You know, what I will point out, the growth in the $550 million model is going to come from the system side of the business predominantly. You know, we still expect CS&I to grow. Every time we put a new tool out, there's revenue that comes back with spare parts and service and things, but you know, the systems are going to drive the growth of $550 million and $650 million. And, you know, we know that systems aren't as accretive as CS&I. So, we're going to be growing a business with, you know, the not so accretive side of the two pieces of the equation. So, that's what tempering the 42 to 43 of $550 million because we know a big chunk of that revenue is going to be systems, and we know a big chunk of that revenue is going to come from high currents, in terms of systems, and right now, those are lower gross margins or standard margins. We continue to work on that. So, 42 to 43 is where we think we'll be at $550 million, and we'll have some quarters that, you know, we’re ahead of time, but I think, you know, on a full-year basis of that revenue model, that's where we can expect it to see; and then, you know on the $650 million model we've jumped up, you know another one or two points on the gross margins.

That's great. Very helpful. Thank you. Second question then, just, you know, large competitive maintenance. So, I guess I was wondering if your guidance may be a little bit conservative, just given the current environment and some uncertainty there, or is it just a difference of end-market, your exposure to mature foundry versus more leading edge, or the high spares in the quarter, any commentary on that would be great?

I think at this point, our guidance is our guidance, you know, Tyler. We took a hard look at it. We gave our best estimate based on a number of things in terms of what's going on in the market; challenges from COVID, you know, talking to our customers. So, at this point in time, I mean, that's basically what we're, you know where we are at this.

Fair enough. Understood. That's all from me, guys. Thanks.

Thank you.

Our next question comes from Tom Diffely with D.A. Davidson.

Yeah. Good morning. First question...

Hi, Tom.

Hello. Kevin, I was wondering, when you look at the bookings, soft bookings in the quarter, do you chalk that up to just kind of normal lumpiness in your business or has there been a COVID-driven impact with less face-to-face meetings that have made it more difficult to close a booking?

Yeah, so I don't think there's been any impasse on the sales execution side of business. I think, you know, even though face-to-face hasn't been the preferred method of meeting, we still have country managers in each of the regions. So, and they have been able to meet new customers. So, you know, it's probably more at the executive team level where the meetings were impacted, but certainly the country managers have been in meetings. And we're using where we can video meetings, even to the extent possible. I think, you know, you hit it; there's always lumpiness for the quarter. There's no doubt that the numbers suggest things slowed down a little bit, but as I pointed out, we do have customers with different ordering practices, and frankly, we have one very large customer who always issues a PO and takes shipments in the same quarter, and sometimes those are within weeks or days of occurrence. So, that can move it around. So, it's hard. It’s always hard on our book-to-bill. You know, numbers are really to see what's going on. I mean, I think more importantly, the backlog number is still up over $100 million, which is pretty strong for us, even though we’ve gone a little bit from last quarter; it's still over $100 million in this quarter.

Okay, so when you look at the business activity that your customers kind of talked to you about before they placed the hard orders, the activity you see for the years is what you expected? No delays.

While it is actually, we, I think our quoting activity is a lot stronger in the first half than we expected. So, I think as Mary said, you know, we've tried to accommodate customers and pull in where we could, because, you know, the biggest fear everybody's having is not going to get the tools, and certainly, you know, a lot of companies struggled in this environment. So, we’re fortunate that we were able to accommodate customers who wanted to see an earlier delivery, and our supply chain, you know, is still holding up, and as I said, our factories, you know, both supply chain and the factory have done a phenomenal job executing. So, yeah, so I – you know, I think, if anything, I’d say was probably a little stronger where we saw; I mean, at first, that was probably defies logic when I say that, but that's just the fact of the matter; that’s how it was.

Okay.

Yeah, I mean, if you're looking for any areas where perhaps there was a little bit of softness, I think you're trying to get it, you know, what's potentially moved around. We have had some softness and seen some customers delay their investment, particularly in the mature process technology area related to automotive and, you know, certain industrial kinds of products, and I don't think that that's a surprise to anybody. I'm sure our peers and competitors are seeing the same thing.

Great. And then Mary, maybe the follow-up, are there any updates to Japan? I know you have system orders last quarter, just wondering how that's going and how you look at the Japanese market as a new leg of growth for you?

Yeah, things are, you know, things continue to go well. We did ship that first Purion system to Japan in the third quarter, and it's a Purion XE for a power device application. So, you know, that was very exciting. And that was a result of our, you know, a couple of year great distribution agreement; it has now ended, but it was a great experience. They really introduced us to the Japanese market. We got to know the key Japanese customers, learned, you know, details on the Japanese implant market, and one of the big takeaways is that because of the complexity of the tool in the sales process, the Japanese customers actually want to buy directly from Axcelis. So, you know, we had a small team in place. We have added resources to that team, including hiring a country manager. So, we're building our own infrastructure in Japan to support the customers there, and the market opportunity is actually very exciting. We've talked about how the Japanese market on average is about 15% of the total available market for implants. So, about $150 million. So, it's a very lucrative opportunity for us. And we feel really good about the seeds that we’re planting to be able to take advantage of that opportunity.

Great. Thanks for your time this morning.

Thank you.

Thank you.

Our next question comes from Charles Shi of Needham.

Hi, thank you for taking my question. First off, congratulations on the very good results for June quarter. So, I have a question regarding the end market mix; it looks to me that for the first quarter, you had a very strong quarter for memory; second quarter, it looks like the system revenue may be down a little bit and with a mix shifting to mature foundry logic nodes a little bit strong; and in the third quarter you're expecting China continues to be strong, which I assume a majority of that will be mature nodes. And my question is, it looks to me there is a memory, your memory system sales seems to be sequentially going down through the year, but I think I heard you think that the memory sales for the full year is probably holding up at least 35%. If I heard it wrong, please correct me, but if that's the case, it looks to me you're expecting some sort of the memory rebound in the fourth quarter. And just want to make sure whether I'm thinking about this correctly?

So, I think the first part of what you said is true, in terms of the mix and the memory mix shifting a little bit over the last few quarters. So, I'm looking here at, memory was about 39% of shipments in the fourth quarter, which was up from 14% in the first quarter to 52% in the third quarter and 35%. The first quarter is 35%. We don't forecast. We really don't provide a forecast by segment moving into the third and fourth quarter. So, you know, we have not implied anything really about the memory market, other than to say; we really don't have a lot of visibility at this point in time. We do expect memory to pick back up, particularly in the 2021 timeframe. So, I think you'll have to connect the dots on your own, but again, we have not given any explicit guidance about that.

Okay, understood. So must follow-up question. The second question on that is around gross margins. So, it looks to me that for the third quarter, the CS&I revenue on an absolute dollar basis looks to be going down a little bit. That means the systems as a part of the total revenue will go up, yet you're guiding a very strong gross margin, implying to me that system gross margins will have meaningful improvement for the third quarter. I wonder what's driving that and how much of that is from maybe you are expecting some of the eval turns in the third quarter, which essentially carry higher margin for example, the Purion XEmax, those relatively newer products or higher percentage of the product extension?

Yes. So, let's say as the product mix is driving the margins in the third quarter and the cost out efforts that we continue to work through the system. We’ve got, on any given week, any given month, there’s new cost out initiatives that are kicking in, and parts coming in at lower cost through different strategies that have lowered labor costs. So, your point is well taken. We have, you know, we're basically saying we're not going to have this real accretive CS&I as the majority of the revenue in Q3. So, systems must be coming up, and they are, and like I said, it's the mix; it’s the cost out that's driving it.

Okay, thank you very much. That's all my questions, and congratulations again.

Yes. Thank you.

Our next question comes from Mark Miller with The Benchmark Company.

Congrats on your results. I have a question. Taiwanese sales were very late this quarter from the previous quarters; what's going on there?

You know, I mean, again, it's just a function of what the customers buy from us in any geography and the timing of their investment. So, we have not lost any business; it's just an investment timing issue.

Okay. How would you characterize recent quoted activity? Is it picking up? You were counting on 5G, and we are hearing from other people 5G is starting to pick up in their business? Are you seeing anything correlate with 5G and what was the overall quoting level during the quarter?

We don't typically talk about quoting level other than to say that, you know, in the first quarter, it was very high. We can't base any forward-looking kinds of revenues on that quoting activity. I think basically at this point in time, it's fair to say that we're quoting on, you know, most of the major projects that are up there that you know about that our customers are pursuing.

And the inventory rise in the June quarter from the prior quarter, is that because of the expected higher system sales?

Yeah, that means there’s a little bit of buildup in the work-in-progress and finished goods because of the timing of some of the shipments for Q3. So, the inventory was still there at the end of the quarter. And then, Mark, we have, we are building up on evaluation systems. As I mentioned, there's going to be a pretty sizable ramp-up in the number of evaluations that we're putting out over the next few quarters. And those don't, until those evaluations are recognized, they stay in inventory. So, we have three out there that I may have mentioned right now, but there are numerous more going.

Thank you.

Yeah. Thank you.

Thanks, Mark.

You do not have any further questions at this time. This concludes the Q&A portion of the call. I will now turn the call back over to Mary Puma, who will make a few closing remarks.

Thank you, Kevin. I'd like to thank everyone for joining us today. We hope to talk with you virtually at several upcoming investor events. We will be participating in the Needham Virtual SemiCap and EDA Conference next week. And we expect to conduct several virtual NVRs during the quarter as well. We thank you for your continued support and please stay healthy.

This concludes the presentation. Thank you for your participation in today's conference. You may now disconnect. Good day.