Axcelis Technologies Inc Q4 FY2025 Earnings Call

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies call to discuss the company results for the fourth quarter and full year 2025. My name is Victor, and I'll be your coordinator for today. I would now like to turn the presentation over to your host for today's call, David Ryzhik, Senior Vice President of Investor Relations and Corporate Strategy. Please proceed.

Thank you, operator. This is David Ryzhik, Senior Vice President of Investor Relations and Corporate Strategy. And with me today is Russell Low, President and CEO; and Jamie Coogan, Executive Vice President and CFO. If you have not seen a copy of our press release issued earlier today, it is available on our website. In addition, we have prepared slides accompanying today's call, and you can find those on our website as well. 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. These 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 annual report on Form 10-K 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. Given the pending merger with Veeco, we will not be addressing questions related to the transaction. Please note that today's call is neither an offering of securities nor a solicitation of a proxy vote in connection with our previously announced transaction with Veeco. During this call, we will be discussing various non-GAAP financial measures. Please refer to our press release and accompanying materials for information regarding our non-GAAP financial results and a reconciliation to our GAAP measures. Now I'll turn the call over to President and CEO, Russell Low.

Thank you, David, and good afternoon, everyone, and thank you for joining us for the fourth quarter and full year 2025 earnings call. Beginning on Slide 4, we generated solid results in the fourth quarter with revenue of $238 million and non-GAAP earnings per diluted share of $1.49, both exceeding our outlook. Our better-than-expected results were primarily driven by stronger CS&I aftermarket revenue in the quarter, which had a favorable mix impact on our gross margins. Bookings in the fourth quarter improved significantly on a sequential basis, primarily led by power, general mature and memory, specifically DRAM. Before I provide more details on the trends we are seeing by market segment, I'd like to provide a brief update on our pending merger with Veeco. We continue to make meaningful progress towards securing all the approvals required to close the merger. We are pleased that shareholders of both companies voted in favor of the transaction at our special meetings on February 6. We have also received regulatory clearance in several important jurisdictions and are actively engaged with the regulatory authorities in China for the final approval needed to complete the merger. We continue to expect closing in the second half of 2026. In the meantime, we are working closely with Veeco on integration planning to help ensure the combined organization is fully aligned and ready to hit the ground running on day one. As we collaborate more deeply with our Veeco counterparts, we are increasingly impressed by the clear alignment in our cultures, values and our shared commitment to innovation and customer satisfaction. The integration planning process has reinforced our confidence in the potential of this merger and in our plans to come together as one company to unlock even greater value for all of our stakeholders. Turning to Slide 5. In the quarter, as well as the full year, sales to mature-node applications accounted for the majority of our system shipments, in particular, power and general mature. Now on Slide 6, let me review our trends by end market. Within our power business, shipments to silicon carbide moderated slightly on a sequential basis. Consistent with our commentary over the past several quarters, customers continue to take a disciplined approach to capacity investments following the significant build-out a few years ago with many customers now prioritizing the technology transitions. As an example, a key driver of our CS&I strength in the quarter was driven by system upgrades for a number of our silicon carbide tools at a customer location where a customer converted their tools from 150 millimeter to 200 millimeter and chose to do this with our recently introduced Purion Power Series+ platform while staying within the same footprint. We also continue to see select customers in China expanding their silicon carbide device capacity and capabilities, while customers in other regions are focused on the next-generation technology investments such as trench and superjunction. We are seeing growing interest for our newly developed high-energy channeling capabilities, which are essential and necessary for superjunction development. Broadly speaking, while near-term ion implant demand for silicon carbide applications is anticipated to remain muted as customers absorb their capacity, we expect strong long-term demand through the cycles, driven by clear secular trends such as the growing penetration rate of silicon carbide into electric vehicles, particularly as we see more 800-volt models released, growing content of silicon carbide within EVs, the growing overall volume of EVs on a global basis, and the growing adoption of silicon carbide outside of the automotive sector such as solid-state transformers, circuit breakers, solar battery inverters, HVAC systems, industrial motor drives, aerospace and defense, just to name a few applications. Adding this all up, we remain excited about the long-term demand profile for silicon carbide, and we believe we are well positioned in ion implant for this application. In our other power market segment, ship system revenue also moderated slightly on a sequential basis, primarily due to muted demand trends in silicon IGBTs. In general mature, revenue improved sequentially as customers made select investments, particularly in our high current tools. Overall, customers continue to manage capacity investments amid stabilizing auto industrial demand. However, we noticed a continued improvement in implant tool utilization rates across multiple customers in the fourth quarter. While we are not yet seeing signs of a cycle recovery in CapEx spending for general mature process technologies, we are encouraged with the improved utilization rates. Turning to Slide 7. In advanced logic, we generated revenue on a follow-on order from an existing customer and we continue to work closely with customers on next-generation technology needs, including implant for backside power contacts as well as other material modification implant applications. Moving to our memory market. Demand improved sequentially for DRAM and HBM applications, and we expect this momentum to extend into 2026 as customers expand capacity to address growing demand for AI-related applications. I'm also pleased to say that we secured an order for a high current system from a leading North American memory manufacturer, which is an important customer win that broadens our presence beyond our strong position in Korea. Interestingly, we received this new order prior to the completion of an existing system evaluation, which we view as an endorsement of our technology. In NAND, customers remain focused on higher layer counts, which does not drive incremental ion implantation demand. As a result, we continue to expect demand for NAND applications to remain muted in the near term. That said, recent improvements in NAND bit demand and pricing are encouraging, and we believe we are well positioned once our customers resume wafer capacity additions, which we expect is a matter of when, not if. On Slide 8, let me wrap up my thoughts on 2025. I am pleased with our team's focused execution given the changing macro environment throughout the year. We navigated the cyclical digestion period across our markets exceptionally well and focused aggressively on product development and customer engagement. Early this month, we announced the introduction of the Purion H6, our next-generation high current ion implanter. The Purion H6 incorporates a series of notable technology advancements across the beam line, source, particle control and dosimetry subsystems. The system delivers industry-leading dose repeatability as well as significant advancements in purity, precision and productivity, supporting high current applications across advanced logic, memory and mature process technology nodes. As devices scale and architectures become more challenging, customers are demanding tighter implant control, lower contamination, higher uptime and lower overall cost of ownership requirements that Purion H6 was engineered specifically to meet. In the fourth quarter, we delivered our strongest quarter of high current shipments in two years, and the introduction of Purion H6 builds on that momentum. We also delivered double-digit year-over-year growth in our CS&I aftermarket business, supported by our growing installed base and a deliberate strategic focus on upgrades and services both of which reached record levels in 2025. Despite overall revenue declining in 2025, our non-GAAP gross margins grew by 30 basis points. In combination with disciplined cost control, we delivered strong profitability and cash flow in 2025. Now on Slide 9, let me discuss our initial perspectives on 2026. We expect our memory business, led by DRAM to grow as customers invest in capacity to meet accelerating AI-driven demand. In the power and general mature markets, while utilization trends are improving, customers are continuing to manage existing capacity following a strong investment cycle over the past several years. As a result, we expect this to result in slightly lower year-over-year revenue in these end markets. However, over the long term, we anticipate power and general mature to be a key beneficiary of electrification and the increasing demand for efficient power generation delivery and use. Importantly, while the rapid growth of AI large language models has been a strong catalyst for advanced compute and memory demand, we expect the power semiconductor market to also benefit from the growing need for power associated with AI. And this includes silicon, silicon carbide and gallium nitride applications, distributing power all the way from the grid to the core. Moreover, we also anticipate the emergence of physical AI such as robotics, autonomous vehicles and many other devices on the edge to become yet another sector driver of power devices as well as general mature technologies such as MCUs, image sensors, analog and others. And finally, in advanced logic, we anticipate relatively similar revenue levels in 2025. We are making progress in our long-term strategy to penetrate this market, but it will take time before our evaluations translate into meaningful volume as we engage with customers on next-generation logic architectures. Taken together, we currently anticipate overall revenue to be relatively flat compared to 2025 levels. With that, let me turn the call over to Jamie for a closer look at our results and outlook. Jamie?

Thank you, Russell, and good afternoon, everyone. I'll first start with some additional detail on our fourth quarter and full year results before turning to our outlook for Q1. Starting on Slide 10. Fourth quarter revenue was $238 million, with systems revenue at $156 million and CS&I revenue reaching another quarterly record of $82 million, both above our expectations for the quarter. Our better-than-expected CS&I revenue was primarily driven by strong demand for upgrades as customers look to optimize their technology within the same footprint. In addition, the quarter also benefited from some pull-in activity given improving utilization rates. We are pleased with our execution in CS&I and our aftermarket offerings are resonating with customers. For the full year, CS&I revenue grew 14% on a year-over-year basis, led by strong growth in upgrades and services revenue. A key driver here is the deliberate strategic initiatives we've undertaken over the past few years to drive better adoption of upgrades and service contracts. Moving to consolidated revenue. From a geographic perspective, China decreased sequentially to 32% of total revenue, down from 46% in the prior quarter, which was consistent with our expectations as customers continue to digest the robust investments they've made in mature node capacity over the past few years. Turning to the other regions. We saw revenue in Europe at 15%, the U.S. at 14%, Korea at 13%, Japan at 9%, Taiwan at 3% and the rest of the world at 13%. For the full year 2025, our revenue from China was 42% of total revenue, while U.S. came in at 16% and Korea at 13%, Europe at 11%, Taiwan and Japan at 5% and the rest of the world at 7%. As Russell mentioned, bookings increased notably on a sequential basis to $128 million, and we exited the fourth quarter with a backlog of $457 million. Now turning to Slide 11. I'd like to share some additional detail on our GAAP and non-GAAP results. GAAP gross margin was 47% in the quarter. And on a non-GAAP basis, gross margin was 47.3%, above our outlook of 43%, primarily due to a higher mix of CS&I as well as a more favorable mix of upgrades within CS&I. GAAP operating expenses totaled $76 million. And on a non-GAAP basis, operating expenses were $62 million, above our outlook of $56 million, primarily due to higher variable compensation expenses associated with the better-than-expected fourth quarter performance. Our non-GAAP results exclude transaction-related expenses associated with the pending Veeco merger, along with other typical non-GAAP adjustments such as share-based compensation and restructuring charges. In this context, the fourth quarter reflects an expense from a one-time voluntary retirement program, and we recorded a portion of that expense in the period. As a result, our GAAP operating margin was 15.2%, while our non-GAAP operating margin was 21.1%. Moreover, in the fourth quarter, we delivered adjusted EBITDA of $55 million, reflecting an adjusted EBITDA margin of 22.9%. We generated approximately $4 million in other income with the sequential increase primarily due to foreign currency. Our tax rate was approximately 14% in the fourth quarter, both on a GAAP and non-GAAP basis. Our weighted average diluted share count in the quarter was 31.1 million shares. This all translates into GAAP diluted earnings per share of $1.10, which was higher than our outlook of $0.76. Non-GAAP diluted earnings per share was $1.49, also exceeding our outlook of $1.12. The higher-than-expected non-GAAP diluted earnings per share was primarily due to better-than-expected revenue and a favorable mix. For the full year, we delivered GAAP gross margin of 44.9% and non-GAAP gross margin of 45.2%, a 30 basis point increase year-over-year despite the lower revenue. This was due to favorable mix and a continued focus on cost control. For the full year, adjusted EBITDA was $177 million, reflecting an adjusted EBITDA margin of 21.1%. We generated approximately $19 million in other income this year, and our tax rate was approximately 13% for the full year on a GAAP and a non-GAAP basis. This all translates into GAAP diluted earnings per share of $3.80 or a non-GAAP diluted earnings per share of $4.88. Moving to our cash flow and balance sheet data shown on Slide 12. In the fourth quarter, free cash flow was negative $9 million, driven by the timing of our sales, which were skewed more to the month of December. In turn, this increased our days sales outstanding. In addition, our cash flow was negatively impacted by approximately $5 million in cash transaction expenses associated with the pending Veeco merger. For the full year 2025, however, we generated robust free cash flow of $107 million. And despite the decline in our revenue, this reflects strong cash generation of our business. Turning to share repurchases. In the fourth quarter, we repurchased approximately $25 million in shares and have $110 million remaining under the share repurchase program previously authorized by the Axcelis Board of Directors. For the full year, we repurchased approximately $121 million of shares. We exited the fourth quarter with a strong balance sheet, consisting of $557 million of cash, cash equivalents and marketable securities on hand. It's important to note that this includes $182 million of long-term securities. With that, let me discuss our first quarter outlook on Slide 13. All measures will be non-GAAP with the exception of revenue. We expect revenue in the first quarter of approximately $195 million. The sequential decline is expected to be across both systems and CS&I. In systems, we have seen a few pushouts due to the timing of available cleanroom space. And in CS&I, there's some seasonality at play, which typically results in higher volume in the fourth quarter given customers like to manage their budgets into year-end. In addition, as Russell noted, we saw a large customer upgrade in the fourth quarter that we do not expect to recur in the first quarter. And finally, a portion of the CS&I upside we saw in the fourth quarter was pulled forward from the first quarter. We expect non-GAAP gross margins of approximately 41%. The sequential decline is primarily due to less favorable mix and lower volume relative to the fourth quarter. More specifically, we anticipate a higher volume of sales into the memory market, which typically carry lower gross margins due to the nature of the systems they are buying. In addition, we anticipate a sequential decline in CS&I revenue, combined with a lower mix of upgrades, which typically carry higher gross margins. And finally, to a lesser extent, we anticipate a modest incremental impact from tariffs as a greater mix of our inventory includes the tariff impact and older inventory is cycled out. We expect non-GAAP operating expenses of approximately $59 million in the first quarter. Adjusted EBITDA in the first quarter is expected to be approximately $26 million. And finally, we estimate non-GAAP diluted earnings per share in the first quarter of approximately $0.71. As Russell indicated, we anticipate full year 2026 revenue to be approximately flat compared to 2025 levels. We expect revenue to be second half weighted. We anticipate growth in our memory market to offset a decline in our power and general mature markets. We currently estimate full year 2026 non-GAAP gross margins of approximately low to mid-40%. The year-over-year decline is primarily due to the anticipated stronger mix of memory business in 2026 relative to our other markets. In addition, as I referenced earlier, we anticipate a modest year-over-year impact from tariffs, which we estimate at less than 100 basis points. As we think about operating expenses for the year, we expect to continue to balance investments in product innovation to drive organic growth in our business while remaining disciplined on cost. As a result, we expect quarterly non-GAAP operating expenses for the balance of the year to remain relatively similar to anticipated first quarter levels. And finally, we anticipate our tax rate to be approximately 15% for the full year. In summary, we're pleased with how we performed in 2025 despite a softer demand backdrop in our power and general mature markets. While systems revenue declined on a year-over-year basis, we delivered strong growth in our CS&I business. We grew our gross margins, and we delivered robust free cash flow while opportunistically increasing our pace of share buyback. We enter 2026 in a solid financial position and are excited to close our pending merger with Veeco, which we believe will enable us to unlock the full potential of the combined company and drive long-term value creation for our shareholders. With that, let me hand the call back to Russell for closing remarks.

Thank you, Jamie. As we look ahead, we remain focused on disciplined execution and advancing our technology road maps that differentiate Axcelis across our end markets. The progress we made in 2025 from product innovations to acceleration in our CS&I business to operational excellence positions us well as we enter an important year for the company. With respect to our pending merger with Veeco, we anticipate significant long-term opportunities as a combined company. Together, we expect to be even better positioned to capitalize on the secular tailwinds driven by AI and electrification, and expect to leverage the complementary strengths across our portfolios and our people to deliver greater value for all stakeholders. I want to thank our customers, employees, partners and shareholders for their continued support and trust in Axcelis. With that, operator, we are ready to take questions.

Our first question will come from the line of Jed Dorsheimer from William Blair.

Congrats on Q4. I guess a question for me is just in the memory market, congratulations on getting the high current into the U.S. memory manufacturer. I'm wondering if you might be able to provide a bit more color as to whether or not this was more of a second sourcing opportunity? Or I just look at the Q4 to Q1 transition, and I know you said that memory is going to be stronger. Do you anticipate that, that new customer is ramping up on that capacity expansion? Or how to think about that? And then I have a follow-up question.

Jed, it's Russell. So when I think about memory, obviously, I'm talking about DRAM specifically, and the demand is going up and up, pretty much driven by AI. What we're seeing right now is that basically, it is cleanroom space limited. So we're seeing many, many customers trying to slide an extra couple of tools in to increase their capacity, but you won't really see large numbers of tools until you actually open up the new fabs that are coming through. So I think you've seen them in the press. Each one of the really large DRAM manufacturers have plans to open new factories in the near term. So I think what you'll see is that we'll see DRAM significantly up in 2026 compared to 2025, although somewhat of a lower base in '25. But we're looking to see that momentum continue into 2027 as basically the bottleneck, which is cleanroom space starts to dissipate and there'll be more tools coming out. And that will be across all the DRAM manufacturers.

That's helpful. And then just on this CS&I and specifically the silicon carbide, if you look at your base that's out there, what percentage has converted from the 150 mm to 200 mm already? And where I'm going with this is just to try and understand sort of that conversion premium in the CS&I business that you saw in Q4, what's left out there to kind of run through or capture?

That's a great question, Jed. So I guess the question is, what is the market potential for a 6-inch to 8-inch transition in terms of upgrades? So I would say that only a very small part of our installed base has gone up to 200-millimeter. It's still very much in that transition phase and kind of the leaders are trying to get there. And I'd say the leaders typically outside of China are trying to get there first. I think that's where they're going to have the biggest cost advantage. So I think there's ample opportunity to continue to provide these really high-value upgrades. I think I should just clarify that, yes, there was a large customer going from 6-inch to 8-inch, but they also upgraded the system as well to our Purion Power Plus Series, which was kind of an upgrade on top of an upgrade. So that really did reduce the cost of ownership. And like Jamie said in his prepared remarks, that was within the same footprint of the tool. So this really is a field-upgradable system that gives continues to give value.

So regarding the strong bookings that you guys are seeing, can you tell us maybe a little bit more about which 2 or 3 segments are driving this growth?

I would say our revenue history and the performance of our segments show that our bookings have closely aligned with previous periods. There's nothing unusual about this trend. While we are experiencing an increase in memory, it's important to note that memory usually books and ships within the same quarter, so we don't see much memory in our backlog. There is a slight amount depending on the quarter's end, but generally, mature and power segments remain the primary contributors to our bookings.

Understood. And given the outlook for approximately flat revenue year-over-year for 2026 versus 2025, and given the strength that we're seeing in DRAM from both HBM and DDR5, can we assume that both general mature and both segments within power are showing some weakness throughout the year?

So I think we've kind of said that general mature is slightly down but we are seeing the utilization rates coming up. So obviously, our customers are seeing hopefully a rebound in revenue but that's because they're now getting to utilize the tools they already have. Once those tools are up to high utilization rates, that's when they'll start to buy more tools. So certainly a very positive sign is just that we are further down the supply chain. So I would say that we're slightly down year-over-year with raising utilization rates. Regarding power, I'd say power is slightly down, although it's still a large part of our revenue and is still doing, I'd say, relatively well. And when I look at power, I think about the long-term secular trends, electrification, for example, all the way from generating efficient energy, transporting efficient energy and using less of it, I really do think that there's a great opportunity in the long-term secular trends for power. So while they're taking a bit of a pause, and I say sort of slight down, you're seeing the slack being picked up by memory. And like I said before, memory, right now, the bottleneck is the cleanroom space.

Understood and...

Go ahead, Denis.

I was just going to say, is there any way you could provide a little bit more color on like whether power SiC or other power is looking a little bit stronger over the next few quarters or even throughout 2026?

Yes. I would say our current view is it's like what we're really talking about is a handful of systems, Denis, right, in probably both of those segments, right, lower than the year-over-year prior year. And as we look out, what we're trying to just be cautious on is calling the timing of a recovery, right? We're seeing those encouraging signs, as Russell said, in utilization rates. That's helping to contribute to some of the incremental CS&I volume that we are seeing as well. So we are getting some beneficial financial performance from those improved utilization rates. And similar to our approach last year with calling a memory recovery, we wanted to kind of see it in the data before we were willing to put that out there. What I'd suggest is we're seeing those encouraging signs, but we're not yet seeing those order rates pick up at that rate just yet for us to call that a slight recovery in the cycle for those markets.

I just want to get back to memory for a second. So your largest customer in Korea is taking some capacity off of NAND for DRAM for high-bandwidth memory plus we really need a substantial increase of wafer starts in DRAM specifically, not NAND, given layer count increases in order to get supply and demand more in balance. So are you suggesting that you think others in the space are talking about a super memory CapEx cycle since you really only have one competitor and are leading supplier to the largest. Are you suggesting that you don't have the orders in hand for the second half of '26 yet? Or are you suggesting that '27 should be a fantastic year?

So a couple of things there, Christian. So I think what we're saying is that typically, we build to forecast, which is why we often get the PO, i.e., the booking in the same quarter, the tools ships. So just to kind of clarify where we are with 2026. We believe that we're going to have significant improvements in our DRAM business in 2026, and that's based upon staying very close to our customers and understanding what their needs are. However, I think it's also clear that while they're kind of begging and borrowing space, they have made public announcements of really significant increases in their capacity. So if you think about the Yongin cluster, for example, with SK hynix, it's going to be 4 mega fabs of 200,000 wafer starts a week and that's where they've been investing a lot of money for quite some time. So they've got the CapEx going into building the fabs and then they'll be looking in, I think, early 2027, for example, for taking systems to then start ramping up that factory. And I think you've seen in the public disclosures multiple companies saying they're looking to build more capacity. But right now, that's what you're seeing with DRAM is that the prices are spiking because the supply is very constrained.

Can you remind us how much ion implant equipment is needed for every 100,000 wafer starts?

Yes, certainly. NAND and DRAM have similar requirements, but the composition within that figure varies between high energy, high current, and medium current. For DRAM, it typically requires about $150 million to $200 million in capital for implants for every 100,000 wafer starts that are initiated. There is some high energy involved, but a significant portion is high current. When discussing growth in memory, we feel confident in our strong position in high energy and are aiming to enhance our position in high current as well. This is why we have a positive outlook on high current.

Important note, Christian, is that all this commentary really is around DRAM at this point in time, right? And our expectations are for NAND to continue to be relatively muted as we go through '26. That could free up as we go into '27, depending on how those NAND producers need to increase their capacity. So...

Guys, I was hoping to get a better understanding of what you're seeing in the mature foundry business with some insight geographically. We're hearing from companies that they're seeing foundry utilization approaching 90% in China in the 80% area in Southeast Asia, I suspect it's much lower than that in mature in the U.S. and Europe. But as you're engaged with your many customers in mature, can you help us understand where we're getting closer to levels where they need to really start adding more capacity versus areas where there may be less very near-term pressure?

Utilization rates certainly differ among customers. High utilization often leads to increased capital expenditures, and we've heard some customers indicate their spending may be lower this year. They've got to make full use of their current capacity, which may be somewhat less than desired before ramping up their spending again. Regarding China, there is a strong focus on increasing domestic chip production for self-sufficiency. They have significant goals they are currently behind on, leading to continued investments in equipment and factory expansions. Given the complexity of the technologies involved, achieving their targets may take time as they work on improving yields and reducing costs. In China, we do see high utilization rates and ongoing demand for growth. Our Chinese customers are similar to our other customers; they seek the best technology and world-class services. We have built strong relationships in China, investing over $100 million in research and development last year. Our Chinese customers, like others, are looking for cutting-edge technology to help them thrive in their businesses.

Russell, that's really helpful. And just sticking with the China theme versus the 32% of revenues in the fourth quarter or if we want to baseline off of the 42% for 2025. And I know the company is not giving full year guidance, but can you help us understand where you feel the demand intensity would be from that region in 2026, given in part that we've heard a number of companies suggest trends could be flattish rather than down year-on-year. I know you have over 20 customers, but as you look at what's possible in China, what does it look like for 2026?

Yes. We see it to be relatively flat to down slightly, right? And I kind of maybe stress the word slightly there, Craig, to some extent. When we start to think about the ASPs and the number of units we ship, right, you're not talking about a massive number of, I'll call it, quantity-wise down. We do expect China to continue to remain a really durable part of the overall market and business for us as they build out that capacity. As Russell said, they're still really far away from their self-sufficiency goals and targets and the conversations that the team is having over there with those customers continue to sort of stress the expansion that they continue to plan with more fabs coming online in order to meet those self-sufficiency goals and targets. So we're prepared to continue to support that ramp in the market. And as they work through that, we call this digestion of capacity, we really have seen that more as a mixed bag outside of China, more so than really inside of China.

Very helpful. And if I could sneak in one more. Jamie, with regard to the 41% gross margin guide for the first quarter, clearly, CS&I less of a tailwind than that spectacular fourth quarter gross margin number. But are there any one-offs impacting gross margin is coming in a little bit lower than I would have otherwise expected?

Yes, it's a good question. We've looked into the anticipated dip. The strong margin in Q4 was mainly due to record levels of CS&I volume and the increased mix of upgrades. Therefore, the margin decrease from Q4 to Q1 isn't as significant as it may appear. We expect a higher proportion of memory systems in the volume, along with a moderation in CS&I, particularly due to seasonal effects as customers utilize their budgets for additional CS&I. Additionally, there is a slight tariff impact in Q1 because of inventory procured last year, which is now at a higher cost. We expect this impact to be less than 100 basis points for the year, but it will be more pronounced in Q1, and we anticipate it will stabilize as we align with our Q4 cost of goods sold.

I have a question about the Q1 guidance of $195 million in sales. This seems to be about a $20 million change from what was mentioned last quarter. I understand you mentioned some pull-ins, but you also indicated that memory bookings have significantly improved, particularly in the more mature and power sectors. I'm interested in understanding the factors that contribute to the $195 million guidance. Specifically, how much of it is due to pull-ins and how much reflects actual end demand?

Yes, it's actually a combination of factors. Thank you for the question. It's important to clarify this. We did notice some additional volume in the fourth quarter for CS&I that likely would have carried into Q1 if not for the circumstances. While it’s not overly significant, it did adjust our expectations for Q1. Additionally, we experienced some delays in system deliveries from Q1 to later in the year due to our customers' fab readiness, which was not focused on any particular market. These situations can occur. Looking ahead, the timing of system deliveries is something we manage closely with our customers. We prefer not to have our systems waiting in parking lots or warehouses; we want the fabs to be prepared, and our installation teams to follow suit. Therefore, we observed a combination of system delays along with some modest pull-in activity on the CS&I side.

Got it. That sort of leads into my second question, which is on your 2026 outlook of being flattish. When you say it's going to be second half weighted this year, is that mostly coming from memory? Or is it also more broad-based? And what's giving you really the confidence into that visibility?

So I think...go ahead for it Jamie.

Go ahead, Russell.

No, it is really...

Yes. Both of those things are occurring, right here for us. At the end of the day, we're seeing some incremental memory volume at a higher rate than we expected coming in the back half of the year. So that when we talk about those encouraging signs relative to memory and some of our ability to see the recovery occur, it is that memory volume coming in that we anticipate going higher. We are also anticipating just based on the timing of customer needs, we're seeing systems volume weighted towards the back half of the year. And then we are forecasting sort of similarly a little bit of CS&I uptick over the course of the year as we introduce upgrades and upgrade activity that can occur as customers take those things on.

I guess, first off, if I listen to you carefully about your memory business, it sounds like you're going to have higher growth in memory in 2027 than you're going to have in 2026, driven by the cleanroom space constraint. But in 2026, do you think this business can get to like 12% or 15% of revenue? I'm just kind of curious how much growth you think there will be in '26?

Yes. So we're not giving a specific number, Dave, just yet on that. But I would say, again, we're coming off a fairly low base in 2025, and we do expect the volumetrically to see an increase here to kind of keep the revenues, call it, flattish as we see some downward trajectory in the power and general mature space overall. We do anticipate acceleration of memory activity as we move into 2027. And obviously, the growth rate from '25 to '26 to '27 is all going to predicate on the volume that we're able to deliver within 2026. But as of right now, I would say the growth rate in '26 is a healthy number.

Sorry, let me clarify. Dave, if you look back at historical records, it's probably more useful to focus on absolute dollar figures rather than market share because our company has made significant progress. When I joined a decade ago, we were mainly selling tools to Korea. Since then, we've ventured into silicon carbide power and silicon power, and we've developed a strong business in general mature image sensors. So it's really about the absolute numbers. Our peak memory revenue was around $120 million, which included NAND and DRAM. To understand our highest revenue specifically from DRAM alone, you would need to break it down to get a clearer picture of our targets. As always, I’m optimistic and looking to capture more market share. Additionally, we need to consider the size of the market; I haven't seen the DRAM market experience this level of supply before. We expect substantial supply to enter the market. We understand how cycles function, and we’re aiming to capitalize on this opportunity. We're also pleased with the extension of our memory products into a major North American manufacturer, which enhances our footprint and future opportunities.

I think what's really important is that the last DRAM high was $90 million, and that was before these systems were introduced to the North American memory manufacturer. As we consider the number of wafer starts that supported the $90 million build-out, I believe the projections for that are higher. However, we will remain cautious because we need to see those wafer starts happen, customers expand their fabs, and the orders and forecasts come in. Nevertheless, all current signs are encouraging that we will see an acceleration from 2026 into 2027.

Okay. And then final thing for me is, I think you've already answered, but I just want to make sure, I think you said you had record demand for high current systems or tools in the quarter. Is that just because the memory business is turning on? Or maybe you could elaborate a little bit about that.

We are seeing improvements in our memory business, but it's starting from a low base in 2025. Our strategy has always been to engage with critical applications that provide value, gradually expanding our presence with existing customers while also attracting new ones, similar to our work with the North American memory manufacturer. We are experiencing a wider adoption in memory and an overall growth in our mature and power sectors. This underscores the value our tools offer to customers. Consequently, we are noticing an increase in our market share for high current systems.

So we will see as we look over the last two years, this was a record for high current product.

And this concludes the question-and-answer session. I would now like to turn it back over to David for closing remarks.

Thank you, operator. I want to thank everyone for joining the call and your interest in Axcelis. Operator, you can close the call.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.