Earnings Call Transcript - ACLS Q4 2024

Operator, Operator

Good day, ladies and gentlemen and welcome to the Axcelis Technologies’ Call to discuss the Company’s Results for the Fourth Quarter and Full Year 2024. My name is Deedee, and I will 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.

David Ryzhik, Senior Vice President of Investor Relations and Corporate Strategy

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 yesterday, 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 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. Now, I’ll turn the call over to our President and CEO, Russell Low. Russell?

Russell Low, President and CEO

Good morning and thank you for joining us for our fourth quarter and full year 2024 results earnings call. Beginning on Slide Number 3 we exited the year on a solid note with revenues for the fourth quarter at $252 million and earnings per diluted share of $1.54. Revenue was slightly better than our expectations and strong demand for our off-the-market CS&I sales partially offset the anticipated sequential declines in system sales. This strength in our CS&I business was the primary driver behind our better than expected margins and EPS in the quarter. Within our system sales, a sequential decline in Power and Image Sensors was offset by an improvement in General Mature and Memory sales. Our backlog declined during the quarter, but remained at healthy levels. We also saw bookings stabilize, which came in flat on a sequential basis. Turning to Slide 4, in the quarter as well as for the full year, sales in mature node applications remained a lion's share of our business, in particular, Power and General Mature. Now let me review shipped systems revenue by end market, and I will begin with mature nodes on Slide 5. Revenues from our power market was 51% of our mix down sequentially from 57% in Q3 2024. Shipments of Silicon Carbide applications moderated slightly in the fourth quarter. However, on a full year 2024 basis, our system sales of Silicon Carbide grew approximately 6% year-over-year. Over the past several years, Axcelis has established itself as a market and technology leader in ion implantation for Silicon Carbide, one of the defining process steps in device manufacturing. We were first identified as an emerging opportunity several years ago, and quickly leveraged our Purion platform to drive necessary innovation. This included the development of a differentiated medium current implanter, followed by an extension of capabilities to our high energy tools. Close collaboration with customers to understand their production needs, and finally we launched our high current implanter optimized for Silicon Carbide. This will translate into our system shipments with Silicon Carbide growing from approximately $8 million in 2020 to over $300 million in 2024. And while we expect revenue from Silicon Carbide to decline sequentially in the first quarter of 2025 as customers enter a digestion period, the fundamental long-term drivers remain intact as we expect adoption of Silicon Carbide to continue to increase, particularly as costs come down and new applications become economically viable. A case in point, we expect the EV industry's transition from 400 volts to 800 volts architecture to greatly improve charging times, and this will require Silicon Carbide. We're also closely monitoring power applications in the data center where the demand for energy is rising rapidly, and Silicon Carbides can be used to deliver more power more efficiently. But our engagement with customers is not just confined to addressing their capacity needs. We are deeply embedded with customers on their technology road maps, which include the transition from 150 millimeters to 200 millimeters, our weightless size, the transition from planar to trench MOSFETs, the transition from trench to superjunction, and some customers are even exploring weightless switching applications to improve yield and lower costs. In all of these cases, excellence is a key enabler, and we believe the need for higher performance devices with higher yield and lower cost will only unlock new opportunities for Silicon Carbide in power applications. We believe we're in the early stages of the Silicon Carbide market growth. Turning to silicon IGBT, system sales declined in the fourth quarter, and we anticipate this market to continue to soften in 2025 as our customers continue to work on managing capacity with the slow and expected industrial auto recovery. In General Mature revenue increased sequentially in the fourth quarter led by investments in China, while other regions remained muted. As a reminder, General Mature represents a broad array of semiconductor applications required at 28 nanometers or above. This includes RS, analog macro controllers, and other semiconductor applications. We continue to monitor key end markets, mainly auto, industrial, and consumer, which generally drive our General Mature segment. Given recent industry commentary of a slow and expected recovery in the auto and industrial market, along with an anticipated digestion of mature node capacity in China, we expect our General Mature revenue to decline sequentially in the first quarter. Over the long term, as inventory levels normalize and demand recovers in key end markets, we anticipate our General Mature business to benefit accordingly, as ion implant intensity is particularly high for process nodes of 28 millimeters and above. Turning to Image Sensors, as we anticipated, revenue moderated in the fourth quarter, following a large customer order in China in the third quarter. Image sensor production will continue to rely heavily on smartphone volumes, but also to a lesser extent on auto, as we see increased camera content in autos. As we think about the first quarter, we expect image sensor revenue to be flattish on a sequential basis. Turning to Slide 6, in Advanced Logic, we shipped a system to a new Advanced Logic customer in the fourth quarter, following a previously announced order received in the second quarter, and we have discussions for a follow-on order. We continue to work actively with customers, as well as with our leading European Advanced Logic research center, in understanding next generation Advanced Logic applications for ion implantation. Growing our footprint within the Advanced Logic market is a strategic goal, which is a multi-year initiative, and we are still in the relatively early stages. Moving to memory, as we anticipated, we saw a sequential improvement in sales in the memory market, specifically with DRAM. Looking ahead to the first quarter, we expect sales in memory to be relatively consistent on a sequential basis, primarily in DRAM. In NAND, we believe customers have ample capacity given current demand trends, and we expect this to remain the case in 2025. As we think about our memory business over the long term, we are quite excited about the opportunity, both in DRAM and NAND, given the following drivers. One, growth in AI and its structural impact on high bandwidth memory, which is absorbing DRAM capacity. In fact, not only are AI survey unit volumes expected to grow significantly, but HBM content for service also expects to grow, enabling a multiplier effect on HBM capacity. Two, AI's impact on new data creation, particularly with inference, whereby new data sets need to be manipulated and stored, which we believe will be a tailwind for DRAM and NAND. Three, widening memory and storage content in smartphones, servers, and PCs, as devices need to process and store more data. And four, device volume growth resulting from improved macro and potential refresh cycles. We believe that the confluence of these catalysts translates into an attractive long-term market for Axcelis. And while a market recovery is instrumental to any growth in our memory business, we are not standing still, focusing on penetrating new customer opportunities within memory where historically we had a low share, and I'm pleased to say we've had some initial progress in this regard. Turning to Slide 7, as we look back on 2024, I am proud of how our team executed amidst the dynamic demand environment. For four years, we saw continued growth in sales to Silicon Carbide, while Silicon IGBTs softened considerably. In memory, demand remains soft as customers navigate through lower utilizations. Despite this, we focused on what we can control, which included working closely with our customers to enable their technology production roadmaps, placing evaluation units in the field, seeding new opportunities, continuing to invest in our R&D to maintain our robust pace of innovation, and maintaining strong margins due to favorable mix and cost control. In fact, despite a year-over-year decline in revenue, we grew our gross margins by more than 100 basis points. On Slide 8, let me now discuss some of our initial perspectives on 2025. We anticipate overall revenue in 2025 to decline on a year-over-year basis. As we think about the transverse segment, we expect a digestion of capacity in the Power and General Mature markets primarily in China. In memory, we expect year-over-year growth in 2025, specifically targeting DRAM investments while NAND remains muted. And we expect modest revenue from our initiatives in Advanced Logic, consistent with our expectations of being in the early stages of a multi-year growth effort. In summary, while the near-term demand backdrop is muted, the fundamental long-term drivers of our business remain intact. Namely, long-term secular growth in Power, particularly Silicon Carbide, which we believe will continue to proliferate with existing and new applications given the world's sensational demand for more power and greater efficiency. Market recovery in memory and General Mature, share gain in Advanced Logic, and geographic expansion into Japan, which is a sizable market for ion implantation and where we have relatively low penetration. As a result, we are taking actions today to increase our technology engagement with customers to help accelerate their roadmaps. On that note, before I hand over to Jamie, as you can see in Slide 9, I am particularly proud of the Axcelis team and the recognition we've received from customers in 2024. We received 22 customer awards covering overall supplier excellence to support safety, health, and others, and this represents a significant increase compared to 2023. The core of our culture at Axcelis is customer first, then company, and then self. And this is a shining endorsement of how we operate. With that, let me turn the call over to Jamie for a closer look at our results and outlook. Jamie?

Jamie Coogan, Executive Vice President and CFO

Thank you, Russell. And good morning, 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 $252.4 million with systems revenue at $187.4 million and CS&I at $65 million. This was above our outlook, largely driven by better than expected CS&I sales. As a reminder, CS&I is driven by our installed base and represents consumables, spares, services, and upgrades. In the quarter, we saw stronger upgrade activity as customers are looking for ways to enhance their technology within the same factory footprint. We also executed well on service contracts. From a geographic perspective, China remained our strongest region at 49% of total shipped system sales with a sequential decline quarter-over-quarter, primarily due to an anticipated decline in Image Sensor following a large order in the third quarter, as well as a moderation in sales to the Power market. On the other hand, we saw system sales to Korea improve to 11% in the fourth quarter compared to only 1% in the third quarter, mainly due to improved shipments in memory. Bookings in the fourth quarter were $84.5 million or flat on a sequential basis, while backlog exiting the year was $646 million. On a full year basis, 2024 revenue totaled $1.02 billion, consisting of $783 million in systems revenue and $235 million in CS&I revenue. Turning to Slide 11 for additional detail on the fourth quarter and full year results, gross margins in the fourth quarter was 46%, which exceeded our outlook of 42.5%, driven primarily by stronger than expected CS&I revenue, which carries higher than corporate average margins. Operating expenses totaled $61.7 million, slightly above our outlook of $60 million, partly due to higher variable compensation associated with our stronger performance. As a result, operating profit was $54.5 million, reflecting a 21.6% operating margin. We generated approximately $4.1 million in other income, a sequential decline due to an FX gain we saw in the third quarter. And our tax rate in Q4 was 15%, in line with our outlook. Our weighted average diluted share count in the quarter was 32.5 million shares. This all translates into diluted earnings per share of $1.54, which exceeded our outlook of $1.25. The higher than expected EPS was primarily due to better than expected revenue and gross margins. For the full year, we delivered gross margins of 44.7%, a 120 basis point increase year-over-year, despite lower revenue volume. This was due to favorable mix and the continued focus on cost control. Operating expenses for the full year of 2024 were $244 million, and operating income was $211 million, translating into an operating margin of 20.7%. Our full year tax rate was 13%, and our full year diluted earnings per share were $6.15. Moving to our cash flow and balance sheet, we generated $8 million of free cash flow in the quarter. The lower cash flow in the quarter was primarily due to the timing of cash receipts associated with deliveries in the fourth quarter. In the quarter, we repurchased $15 million of shares and exited the fourth quarter with $130 million remaining in share repurchase authorization. For the full year, we repurchased $60 million in shares, which amounted to 47% of our free cash flow. We exited the year with a strong balance sheet consisting of $571 million of cash, cash equivalents, and short-term investments on hand with no debt. This provides a solid foundation for our capital allocation strategy, which falls into three main categories. First, continued organic investment. Our strong cash position allows us to continue to invest in product innovation, despite the near-term digestion in some of our end markets. While the semiconductor industry has had many cycles in its history, the overarching trend is one of strong secular growth, and the current environment presents a great opportunity to increase our engagement with our customers on their technology roadmaps as we work to best position the company as and when markets return to growth. Second, our strong cash position enables us to continue to execute on our buyback program, which more than offsets the dilution from equity compensation. For historical context, over the past five years, we've repurchased more than $200 million in shares. Third, we continue to evaluate opportunities for inorganic growth. We remain disciplined in our approach and consider opportunities only if they deliver sustainable long-term shareholder value creation. Before I move to our outlook, I'd like to discuss a few reporting changes, beginning with our first quarter 2025 report. Following a thorough review of our peers, we've decided to add non-GAAP measures as part of our quarterly reporting process. We believe this enhanced layer of disclosure will improve transparency on the underlying performance of the business. This will also help us align with the practices of our peer group, which can result in an easier benchmarking process by our analysts and investors. Second, starting in the first quarter, we will begin including Image Sensor revenue as part of our General Mature category. Given the relatively small size of the Image Sensor business, we believe it's a logical fit within our General Mature category, which already consists of a broad array of applications. We believe this further simplifies our disclosures. With that, let me discuss our first quarter outlook on Slide 14. We expect revenue in the first quarter of approximately $185 million. The sequential decline is primarily a result of lower systems revenue from China customers for the Power and General Mature applications, as well as a seasonal decline in our CS&I revenue. As we think about the balance of the year, we expect revenue in the second quarter to be relatively consistent with the first quarter. And based on our discussions with customers and our view into our current backlog, we anticipate that revenue will improve slightly in the second half compared to the first. Turning to gross margins, we expect first quarter gross margins to be approximately 40%. The primary driver of lower gross margin is lower overall volumes, as well as the anticipated mix. While gross margin in any one quarter can be dictated by a variety of factors, we expect gross margin in the first quarter to be the low point of the year. We anticipate a gradual sequential improvement resulting from mix and our continued cost controls flowing through over the balance of the year. We expect first quarter operating expenses of approximately $63 million, with the slight sequential increase resulting from the seasonal increase in payroll taxes. For the full year, we anticipate operating expenses to be relatively flat on a year-over-year basis as we continue to manage our cost structure with discipline while ensuring we are making the necessary investments to capture the long-term growth opportunities that lie ahead. We expect our tax rate for the first quarter and the full year to be approximately 15%. This all translates into an estimated diluted earnings per share in the first quarter of approximately $0.38. Finally, on January 10th, we filed an 8K discussing our preliminary review of the new restrictions put in place by the U.S. government on December 2, 2024. At that time, we estimated an approximately $20 million to $50 million impact to our revenue in China in 2025. We now estimate the full year impact to be closer towards the low end of that range. This is factored into our outlook. In summary, we are pleased with our performance in 2024. Despite a decline in revenue, we were able to deliver higher gross margins, generate solid free cash flow, return capital to shareholders via our existing $200 million stock buyback program, and exit the year with a stronger balance sheet than we did coming into it. With that, let me hand the call back to Russell for closing remarks. Russell?

Russell Low, President and CEO

Thank you, Jamie. We exit 2024 on a strong note with a focus on capturing the growth opportunities that lie ahead. We're investing in innovation, managing our costs, and working closely with customers on their technology roadmaps, which we believe will strengthen our position for the next upturn. In closing, I want to thank our customers, employees, shareholders, and partners for their continued support and trust in Axcelis. With that, operator, we are ready to take your questions.

Operator, Operator

Thank you. Our first question comes from Charles Shi of Needham & Company. Your line is open.

Charles Shi, Analyst

Thanks. Hi, good morning. Maybe the first question, I want to get a sense of your assessment of the slightly better second half for the year. I heard you are guiding, I mean, roughly speaking, flattish into Q2, but what are some of the factors you are seeing that could get your second half slightly higher than the first half? That's the first question. Thank you.

Russell Low, President and CEO

Yeah, hi, Charles. It's Russell. Thank you for your question. So, I think why do we believe the second half is going to be stronger than the first half? So this view is based on our backlog, our conversations with customers, and our own internal work. So, obviously we're continuing to monitor bookings for the course of the year. They seem to have stabilized, and I'd say at this stage of the quarter, we're actually ahead of bookings compared to say Q4. So that's giving us some encouragement there. Each and every one of the tools in the forecast now actually belongs to a project, a customer project. So with the turn of the year, customers have put their budgets in place. They begin to formalize and stabilize their plans for the year, and that's allowing us to work with the customers to make sure we understand their shipping plans. So, I would say that we have fairly good confidence that the second half is going to be better than the first half.

James Coogan, Executive Vice President and CFO

Yeah, and just to add into that, although we're not giving specific revenue figures for 2025, Charles, and as I said in the prepared remarks, we do expect a slight uptick in the second half of 2025, but again, all the factors Russell just mentioned, our backlog, the customer conversations, it doesn't take a whole lot of incremental systems for us to sort of be in and around that $800 million number for the full year period.

Russell Low, President and CEO

And then Charles, as you know, the secular drivers are still very much intact. This is a cycle, we've been through many, many cycles. So, we do expect the cycle to disappear and start to see growth again. And we'd like to think that 2026 will be a growth year for us as well. So we'd like to see the second half of 2025 be better than the first half, and we'd like to see some of that strength continue into 2026.

Charles Shi, Analyst

Thanks for walking us through a few of the market assumptions behind the outlook. Maybe another question, or maybe this is not a big part of the business. I do want to ask about memory. Sounds like you guys still think the vast majority of the memory revenue in 2025 is going to come from DRAM, but over the course of the last couple of weeks, we did hear a little bit more positive commentary from some of your peers on NAND spending, but it sounds like you're not expecting a pickup in NAND. I wonder if this is still a difference between Greenfield versus Node upgrade, or perhaps there's some hope or maybe at some point you're going to see some upside in NAND, I just want to get your thoughts on that?

Russell Low, President and CEO

Right. So we do believe that NAND is still going to be very muted in 2025. So yes, you're correct. What we're seeing in 2025, which we are seeing an improved memory situation in 2025 relative to 2024, albeit 2024 is a low base. Thinking specifically about NAND, we only sell more implanters to memory in general, both DRAM and NAND when they expand the number of wafers out. So if they change the technology node, and in terms of NAND they put more and more layers on, that might be great for depth and edge. It's not really helping the number of wafers out. So right now I'd say that, customers in the quiet times use that time to do node changes, and those node changes may drive some revenue to our peers. But until we start to see more capacity, and bear in mind, a lot of these customers do have actually capacity planned, but until they start filling those new factories, we won't start to see the benefits of that.

Charles Shi, Analyst

Got it. Maybe a last question about export control. I recognize some of the expected China weakness probably has very little to do with export control, but you are actually seeing potentially the impact that could be at the low end of your previously guided range. I wonder what the reason for that is, and what do you see, why you feel like you are able to actually ship some of the products or services, but that you are able to sell a little bit more than you thought?

James Coogan, Executive Vice President and CFO

Thank you for the question, Charles. In the 8K we prepared, we provided a preliminary estimate based on our review of the rules. To be cautious, we included some system shipments in that number to reach the high end. The low end represented the CS&I impact, while the high end included some additional systems that could be at risk due to rule interpretations. Since then, we've gained more information and data that increase our confidence in delivering those system shipments. As a result, we now expect the impact to be closer to the low end of that range, which has already been factored into our guidance for the full year.

Charles Shi, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from Craig Ellis with B. Riley Securities. Your line is open.

Craig Ellis, Analyst

Yeah, thanks for taking the question, and congratulations on 2024's gross margin performance, guys. I wanted to start, just focused on some of the near-term dynamics. So, what are the things that you're seeing in the business that might indicate that the first quarter would be a bottom for the digestion that's occurring and alternatively, what might be indicating that that may play out more in the second quarter? And related to digestion, since Power and General Mature, digestion is mostly in China. Does that mean there are some more positive things going on in other geos, or just an easier base coming off the second half of last year?

Russell Low, President and CEO

Hey Craig, thanks for the question. So, I think we've said that we believe the first half will be lower than the second half. We haven't broken it down into quarters at this point. We do think that, obviously there's a lot of digestion in Mature Technologies in China. That digestion isn't necessarily just oversupply; in some cases, it's getting to grips with the technology, ramping, and making sure the yield holds together. So as you know, China certainly has ambitions to be very self-sufficient, they're not close to that at this stage. I think right now really it's all about kind of getting the technology under control before ramping. And outside of China, I'd say that we've been resilient. Let's say, I'd say that we do see a business outside of China still actually holding together for 2025, and obviously you've heard about automotive, and in general IGBTs have been very soft, but I'd say in general, we're actually seeing positive spots from the U.S., from Europe, from Korea, and other locations.

James Coogan, Executive Vice President and CFO

Yeah, just to add into that right, I guess each of the based on our customer conversations and what we're hearing right, each of them are at a different point in their investment cycle, Craig, and so we get some who are continuing to push ahead, and we think about this in the vein of Silicon Carbide, right, that we still have customers outside of China who are pushing ahead with their investments and building out capacity. We have others who are being a little bit more cautious in the spend of those CAPEX dollars in 2025. But that mix, as you noted, relative to where we were in 2024, 2025 outside of China is still going to be relatively resilient as Russell noted. We are seeing a bit of weakness in that Silicon IGBT market, and so I think that the level of digestion there is a little bit greater in the Silicon IGBT space. A smaller portion of the business for us coming into 2025 relative to where we had been historically. And then generally speaking, memory is again, looks like there's some continued uptick relative to where we were in 2024. We do expect memory, specifically in DRAM to be good for us.

Russell Low, President and CEO

Yeah, and just kind of build on that. So we mentioned IGBT power is down, so when we look at the Power business, in 2024 we were up in Silicon Carbide relative to 2023. Even into 2025, we believe that it's still going to be a resilient market for us. So, it's the Silicon IGBT bit that is soft, the Silicon Carbide part seems to be remaining resilient for us.

Craig Ellis, Analyst

That's really helpful color, guys. And then Jamie, I wanted to follow up with some of the full year color that was provided on the shape of potential revenues to see if you could provide some color, not precise guidance, but some color on what the contours of gross margin and OPEX would look like, especially on the former. Does it look like 2025 can be a year where the business realizes another material gain in gross margin year-on-year? Thank you.

James Coogan, Executive Vice President and CFO

Yes. As we enter the quarter, we anticipate gross margins to reach their lowest point in Q1. We have some cost absorption occurring, along with a mix during this period, and slightly lower CS&I as we experienced good volumes in CS&I during the fourth quarter, particularly in the upgrade space, where customers improved their throughput efficiencies and made better use of their factory spaces. It's common for us to see a slight increase in the fourth quarter as customers adjust their budgets for the year, clearing out some of their budgets and stocking up. Therefore, we will experience a slight offset in Q1 due to a lower CS&I mix. We expect memory costs to increase slightly in Q1 as well, contributing to some gross margin pressure. However, the team excels at managing costs in relation to volume. As these plans take effect and continue, we believe margins will improve throughout the year due to the mix and volume expected in the latter half. Regarding OPEX, we've emphasized our capital allocation strategy, reiterating that our top priority is organic growth and positioning the business to align with long-term technology trends that our customers anticipate. We will utilize 2025 to further those investments, resulting in slightly higher OPEX as our research development and engineering expenses will likely increase as a percentage of sales compared to 2024. We are committed to investing in this area to ensure we are ready for upcoming customer ramp cycles, especially considering the current market's transitory nature. A relevant example is from 2018 to 2019; although 2019 was a down year for us, we maintained OPEX levels consistent with 2018. While we aren't forecasting the same growth, we did achieve nearly 300% revenue growth following that downturn, thanks to our strategic positioning. That is our approach to OPEX. We will continue to manage costs, and if this situation extends longer than expected, we will evaluate our cost structure and adjust accordingly as needed.

Craig Ellis, Analyst

Thanks for the granularity on those, guys.

Operator, Operator

Thank you. Our next question comes from Jed Dorsheimer of William Blair. Your line is open.

Jed Dorsheimer, Analyst

Hi, thank you for taking my questions. First, regarding the Silicon Carbide business, last year you had around 60 tools. As you look ahead, is China still about half of that? I'm trying to understand the overall exposure as we approach 2025. I know you've mentioned some details in the 8-K related to trade, but I'm interested in knowing the absolute terms of that exposure. I have a follow-up as well.

Russell Low, President and CEO

Yeah, hey Jed, it's Russell. So just to kind of recap on Silicon Carbide. So we were up in 2024 relative to 2023. And we're basically saying we won't be down slightly in 2025, but it's like we say, it's still a robust business for us. I would say that we have exposure to every Silicon Carbide project globally. China is a piece of it. Obviously, it's a very important piece to it. But we don't necessarily break out our Silicon Carbide out of Power by region. What I would say is that when you talk about the export compliance issues, the most recent export compliance issues that were released on the 2nd of December, we have had the opportunity to have kind of a Q&A with the BIS guys to help clarify. And coming away from that, it is very apparent that it's very similar to the previous administration and the continuation of the trend, which is 300-millimeter equipment going into advanced memory and Advanced Logic. So the Silicon Carbide business at this stage, we do not believe will be impacted by that. So the Silicon Carbide business, like I've said, varies from customer to customer. We've talked about the low penetration of Silicon Carbide into EVs and the low penetration of EVs into the automotive industry. The Chinese definitely want to be self-sufficient. They do have some capacity. There's not a huge amount of capacity, and I think a lot of them are at the moment trying to optimize the architecture of the devices, they are looking to improve their yields. And I think you're going to see the digestion in Silicon Carbide that would occur in China is not necessarily because of oversupply; it might be the fact they haven't got the quality applications they're looking for qualified, like automotive, or they may not have got the yield and the processes fully run out.

Jed Dorsheimer, Analyst

That's helpful, Russell. Then just a two-part follow-up if you will. I guess and maybe for Jamie. What percentage of your backlog is secured by customer deposits? And then Russell, just as you mentioned on some of the DRAM and Advanced Logic, is there a technology trend that you've developed that we should be aware of in medium current and in high current that positions Axcelis vis-a-vis the competition of what we saw with high energy for Silicon Carbide? Thanks.

James Coogan, Executive Vice President and CFO

Yes, thanks for the question, Jed. I would say that most of our backlog comes from new entrants in the market and new geographies. That's where you'll find our customer deposits as we manage the associated collection risks. For more traditional semiconductor customers, whether they are domestic or European-based, we are less likely to secure customer deposits, due to the long-standing relationships we have and their strong balance sheets. We haven't specifically broken out that number to provide a reference, but overall, I would say that the backlog itself is a smaller portion than you might expect, all things considered.

Russell Low, President and CEO

Hi Jed, so just to clarify, so you were talking about do we have a differentiation in our high current and medium current products that we believe will allow us to take market share in memory and logic, was that the crux of your question?

Jed Dorsheimer, Analyst

Yes. Your market share in high energy is materially different than medium current and high current. So I'm just wondering, as you start focusing on these applications for medium and high current, has there been a recent development in the use of the linear accelerator, for example, something that differentiates you vis-a-vis the competition for those other applications?

Russell Low, President and CEO

Right, absolutely. So as far as logic, for example, you're absolutely right, it doesn't use high energy. It really is high current and medium current. The real opportunities are in high current. That's where a lot of the sales are. I would say that the front end has some established competitors there. So really, when we look at Advanced Logic, we're looking at new applications in the middle of the line and the end of the line. So think about the kind of applications that would have been in the old back end metallization, for example, backside power. So that's where we're looking to go, and a lot of that is material modification. So we are always looking to get very close to our customers to make sure we innovate with and solve their valuable problems, and that's exactly what we're doing. In addition, I should point out that not only are we working with our customers on Advanced Logic problems, but we're also working with a very advanced institute in Europe to work out what are going to be the next set of issues as the architectures change. So we're always looking to see an inflection point where we can take advantage of that. And we've said in the past, we do have architectural differentiation in our products. In some cases, we've been able to take a really good advantage of that, like in our music technology, where that really is architecturally enabled. Regarding memory, I think it's fair to say that the tool has been battle-hardened for memory. What you see for memory is a bunch of specific applications. In many cases, what looks like dedication of species and our tool has been optimized to really perform well under those situations. So basically, since it’s been battle-tested and fielded, high current and actually medium current, but specifically high current, we're now looking to fan that out to other customers who are in that same memory segment.

Jed Dorsheimer, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from Jack Egan of Charter Equity Research. Your line is open.

Jack Egan, Analyst

Great, thanks for taking the questions. I was hoping you could go over the big increase in CS&I. I mean, 17% sequential growth is pretty big for that business. So, you mentioned that it was stronger upgrade activity and execution on some of your service contracts. Was that strength particularly pronounced in any end market or region?

James Coogan, Executive Vice President and CFO

It was generally broad-based in the fourth quarter, with multiple customers across various regions demonstrating strength. Customers appeared to take advantage of opportunities, particularly as they began to slow down, seeking ways to enhance efficiency, yield, and throughput of their devices while optimizing their current fab space. Over the past few years, we have significantly increased the number of Purion products in the field. This established base allows us to capitalize on these cycles, and our team focuses on targeted upgrades as they become available. We prioritize ensuring that our research, development, and engineering teams work on differentiated upgrades that enhance efficiencies for our customers in their fab spaces. This was evident in the fourth quarter, as well as in the budgeting discussions we had previously mentioned, where some of our fab partners and customers explored their budget opportunities for the period. Looking ahead to 2025, we anticipate a relative number of upgrades throughout the year, although we are not currently expecting the same level of upgrade activity in the first quarter, which contributes to a slight moderation in margin. Upgrades typically yield our highest margins compared to the consolidated average due to their significant value to customers.

Russell Low, President and CEO

Yes, just kind of follow on to that. This is a very focused strategy. We have been investing heavily in upgrades because it's a great opportunity for us. The good thing about an upgrade is you get to sell it to the entire industry base. So, and then obviously, we've been making progress on contracts as well as we try to look to kind of create an annuity stream of aftermarket.

Jack Egan, Analyst

Great. Yes, that's super helpful. And then on Silicon Carbide, we're seeing more weakness crop up there, specifically like in the financial results of the device manufacturers. But you mentioned that Silicon Carbide is still generally pretty resilient and that I think you said it'd only be down a bit in 2025. But with that lower EV adoption and industrial demand kind of starting to flow through the financials for that industry, could that be kind of a risk to your guidance for the second half to be slightly better than the first half or is that largely contemplated in your guidance as it is today?

James Coogan, Executive Vice President and CFO

Yes, as we discuss our expectations based on customer conversations, current backlog, and bookings activity we've observed in the first quarter, there are some encouraging signs regarding bookings. At this point, we are ahead of our bookings rate compared to the same time last year. When considering Silicon Carbide, we notice a variety of customer engagement levels with the product. Some customers are aligned with public comments on their investment plans for 2025, while others are working on a strategy to allocate CAPEX funds and build capacity. This diversity among our customers helps us manage our expectations for 2025. We are not heavily dependent on any single customer to achieve our financial goals for the year, which sets our performance expectations apart from those based solely on one customer's outlook.

Russell Low, President and CEO

I think that's exactly right. Each customer is slightly different. So you've got some that want to build ahead of demand, some that are optimizing their yield because they want to get into opportunities, some that are looking to gain market share, but it's difficult given the time it takes to get qualified. Some are taking the opportunity to transition to 200-millimeter, going to 400 to 800-volt architectures, which would be tranche and super junction. So a lot of customers are doing different things. So I would say that it is very customer specific.

Jack Egan, Analyst

Great, that’s super helpful. Thanks, guys.

Operator, Operator

Thank you. Our next question comes from David Duley of Steelhead Securities. Your line is open.

David Duley, Analyst

Yeah, thanks for taking my questions. I guess, first, just a clarification. Can you help us with what Silicon Carbide revenue was in Q4 and for calendar 2024 dollar or percentage? And then as a follow-up...

David Ryzhik, Senior Vice President of Investor Relations and Corporate Strategy

As a percentage, this is Dave Ryzhik. Yes, it should be in the slide presentation, I think we can pull that up.

James Coogan, Executive Vice President and CFO

36% for the quarter and 41% for the full year for Silicon Carbide.

Russell Low, President and CEO

6% up year-over-year. Did that help you, Dave?

David Duley, Analyst

Yes, very much so. Do you expect the Silicon Carbide business to contribute to the improvement in the second half, and could you clarify which geographic regions or whether silicon carbide is projected to increase in the second half of the calendar year?

James Coogan, Executive Vice President and CFO

Yes. So geography-wise, as we talked about, right, again we're very broad-based across the board in Silicon Carbide, Dave. And so again, we are seeing digesting. We expect China to be a lower portion of our revenue base across the entirety of the portfolio in 2025. There are strengths, and there are other geographies that are having strength in the product offer to offset some of that. But we haven't given specific details on geographical expectations or anything like that.

Russell Low, President and CEO

What we can tell you, Dave, is that now that customers have developed their plans for the coming years, we are collaborating very closely with them. We're analyzing our bookings and our forecasts, so we have a clear understanding of where we expect these tools to be deployed on a project-by-project basis. We have confirmed that the fabrication facilities will be prepared for the tools. I would also emphasize that we've mentioned the first half will involve some adjustment in China, while our performance in Silicon Carbide has been quite broad-based. Additionally, outside of China, we are seeing a relatively strong resilience.

James Coogan, Executive Vice President and CFO

Yes. And just again, it's broadly speaking, it's going to be down year-on-year, but not as much as other parts of the mature book of business for us, Dave.

David Duley, Analyst

Did you expect Silicon Carbide to be up in the second half of the year, even though there is a digestion in the first half?

James Coogan, Executive Vice President and CFO

Yes. We're not going to get into that level of granularity just yet, Dave.

David Duley, Analyst

Okay, thanks.

Operator, Operator

Thank you. Our next question comes from Tom Diffely of D.A. Davidson Company. Your line is open.

Tom Diffely, Analyst

Yes, good morning. And thanks for the question. Russell, I was hoping you could give us a little bit of an update on your plans to expand more into Japan in that geographic region?

Russell Low, President and CEO

Hey Tom, thanks for the question, and good morning. So yes, Japan represents about $450 million in any given year. Our percentage of that is, as you know, sub-5%. So it's a really good opportunity for us. We've managed to make a bit of a beachhead there in Power and actually in some other areas as well, but like Power has been a great opportunity. The local vendors of our implantation have often had the lion's share of the business; they haven't innovated and moved forward as quickly. So as Japan got into Power Silicon and Silicon Carbide, they were looking for the right equipment that you need to get into high volume, which is the whole portfolio. You can't just have a medium current machine, you need the high current and the high energy, and that's what we've been able to form in. Now we're working with those customers, we are working on their roadmaps and making sure we continue to expand in those applications of power. But obviously, it's not just power. I think it's interesting, we've just shipped a - so I think in Q2, we mentioned we've got a system shipping into Japan for Advanced Logic. So that's all shipped in Q4, and we're now in discussions for actual follow-on businesses there as well. So naturally, we wanted to build our footprint through our strongest product. But as you know, once we get in with a product, we want to fan out the applications and bring the rest of our product portfolio through with us. So I think year-over-year, we're going to see a modest improvement in revenue in Japan, and this is what I consider to be the seeds. You want to get into these projects early in where it's a mini line. When those mini lines start to ramp up, you want to ensure you get the volume there. So hopefully, that gives you a little bit more clarity there, Tom.

Tom Diffely, Analyst

Yes. So is it safe to assume that both Japan and Advanced Logic are more of a 2026-2027 story?

Russell Low, President and CEO

I think when we built a $1.6 billion model back in the summer, we anticipated seeing secular growth in Silicon Carbide. We want to see recovery in Memory and General Mature as well. In terms of Advanced Logic in Japan, we included modest figures in our model for that in 2027. Therefore, you can expect to see a modest improvement year-over-year, leading towards a small component in our $1.6 billion business. It's important to note that we expect about $400 million of that to come from aftermarket sales. So, we are looking to have a minimal amount of equipment in Advanced Logic, where we are selling seeds in Japan as part of that.

James Coogan, Executive Vice President and CFO

So again, it's going to be important for us to continue to work through those early stages to ensure we can ramp from those modest improvements to bigger numbers as we build.

Operator, Operator

Thank you. Our next question comes from Mark Miller of The Benchmark Company. Your line is open.

Mark Miller, Analyst

Thank you for the questions. I just had a question. You're projecting significantly lower sales in the first quarter and OPEX is going to be somewhat higher. I'm just wondering if you can kind of break that down in terms of SG&A and R&D, what's going on there?

James Coogan, Executive Vice President and CFO

Yes. Regarding our expectations for the first quarter, we anticipate that performance will be relatively flat with a slight increase, influenced by the seasonal adjustments of our expenses, which affect all line items consistently. As we move through the year, we plan to find opportunities to invest more in our research, development, and engineering expenses. As a percentage of sales, these expenses are likely to increase compared to 2024. We’re committed to making these investments to ensure we can meet the anticipated customer ramp cycles, considering the current short-term cyclical nature of the market. A relevant example is our performance in 2018 and 2019, where despite 2019 being a down year, we maintained our operating expenses at levels similar to 2018. Although we do not forecast the same growth, in the period following 2019, we saw nearly 300% revenue growth because we prepared the business to seize market opportunities. Our approach to operating expenses will remain cautious; we will manage costs carefully and reevaluate our cost structure as necessary, especially if the current situation persists longer than expected.

Russell Low, President and CEO

Yes, Mark, I think it's clear that we believe investing in our products and services, working close to our customers is one of the best returns we can have. So we actually see the downturn slightly as an opportunity in the sense that customers have more bandwidth. We can work with them, develop new products, get those products qualified. So then when the upturn arrives, we have new products and services to offer, and that's where we take advantage. So yes, we are definitely, as Jamie mentioned, focused on products and services working with our customers.

James Coogan, Executive Vice President and CFO

Yes. And through this transitory cyclical digestive period, right, we do expect to kind of resume growth in 2026. We want to make sure that we're positioned for that, Mark.

Mark Miller, Analyst

Yes. Okay. So basically, for the first quarter, both SG&A and R&D is flat to slightly up, is that correct?

James Coogan, Executive Vice President and CFO

Yes.

Operator, Operator

Thank you. Our next question comes from Christian Schwab of Craig-Hallum Capital. Your line is open.

Christian Schwab, Analyst

Great, just on the mix of business if we look at it by end market, call it auto and industrial, is it as simple as taking Silicon Carbide and IGBT versus General Mature to get the mix of business between end market shipments to say, auto and industrial?

Russell Low, President and CEO

So again, I don't fully follow the question, but I would say, Christian, that basically our General Mature nodes are very driven by consumer, industrial, automotive. The biggest use of Silicon Carbide is number one, the biggest market is automotive. But the second market that's growing actually really quite quickly is the industrial part.

James Coogan, Executive Vice President and CFO

Similar dynamic.

Christian Schwab, Analyst

So that was my question. I'm just trying to get end market exposure. So in 2024, what percentage of your revenue do you believe went to automotive and what percentage went to industrial/consumer applications?

Russell Low, President and CEO

Yes, that's not how we track it. So we don't know. It's very hard for us to know what our customers ship their products into.

James Coogan, Executive Vice President and CFO

Correct. We don't get discrete data like that from the customers on where they're ultimately putting. So we're using the same sort of general data on the utilization of Silicon IGBT and Silicon Carbide in general assumptions. We don't have specific end product applications necessarily.

Christian Schwab, Analyst

Great. And then a follow-up to that. On your automotive exposure, what percentage of that do you think services the domestic Chinese market versus global players?

James Coogan, Executive Vice President and CFO

On Silicon Carbide products we sell right, I would say our European customers are largely the ones putting those Silicon Carbide devices into the automotive.

Russell Low, President and CEO

It is reasonable to conclude that domestic Chinese manufacturers, including companies like BYD, are not yet capable of integrating their own devices into electric vehicles due to reliability standards. There may be one company in China that is ahead in this area, but in general, any use of Silicon Carbide in electric vehicles is likely to come from manufacturers in North America, Europe, and Japan.

Christian Schwab, Analyst

Perfect, thank you for that clarity. And then…

Russell Low, President and CEO

Bear in mind, that's for the all-important MOSFET in the drive system. Remember, there's an awful lot of diodes that go into these cars as well. I think the Chinese do manufacture a large part of those components, Silicon Carbide diodes.

Christian Schwab, Analyst

Correct. Yes. Got it. And then we talked about an investment year for customer ramps. I guess I'm kind of confused on what technology investments you're investing for. Is this for new upgrades, the machines, and if you could provide greater clarity of what that exactly means? Is there a transition in what you're providing as far as a box structure for different applications, current energy, etcetera for 400 to 800 gig volt changing transition? I'm trying to understand the investments that you're making to drive future growth, what's changing that you're sustaining the investment?

James Coogan, Executive Vice President and CFO

Yes. So part of it, it's a little bit of all of the above at the end of the day. Part of it is incremental upgrade opportunities that then flow into new product development and technology. As we think about our power customers very broadly, our team is working through solving some of their critical challenges to improve throughput efficiency, reliability of the devices at the end of the day. We're making investments to ensure that, one, we can go back and upgrade the suite of tools that we have available for those and continue to transition our products to sort of the next generation of the technology. There's examples of investments we're making in memory tools and technologies to meet our customer road maps in that space.

Russell Low, President and CEO

Yes, I think it's fair to say, even though we might call these like Mature Technologies, the equipment that goes into them is anything but. If you think about what we've been going through with Silicon Carbide, we started off with a medium current machine, but we knew that as people move to trench shares and super junctures, they needed a high energy. In fact, the energy has actually been creeping up and up and up. That's an example of where we have to develop the right equipment, and that's where we're putting our resources. The other thing is, I mean, we haven't talked much about it, but proton implantation for IGBTs. Those energies have gone up significantly, and that takes a lot of innovation to be able to support our customers with a highly productive tool that can achieve the energy. So our stated strategy of driving with the secular growth in Silicon Carbide, making sure we have a recovery in Memory and General Mature, and that still takes work, while actually expanding into Advanced Logic and Japan, all of that strategy is very well aligned with our spending on our products and services.

James Coogan, Executive Vice President and CFO

Those are multiyear projects that we're committed to.

Christian Schwab, Analyst

Right. And then my last question. Your implied guidance for revenue in 2025, call it $800 million plus or minus, is substantially below your 2027 goal of $1.6 billion. I'm having a tough time reconciling what would have to happen in end markets for that to still be an attainable objective?

Russell Low, President and CEO

Right. So that was the model we provided back in July. We showed a very clear path from where we were to where we need to get to. Yes, it's fair to say that things have changed. But that was a very thoughtful model. What I would say about that model is, like, one, we're not looking to update it every quarter. The strategy remains exactly the same. We actually feel fairly comfortable with the $1.6 billion target if the timing is a little bit uncertain. We are focused on the long-term secular growth in power, market recovery in Memory and General Mature share gain in Advanced Logic, and geographic expansion in Japan. We believe that will get us to $1.6 billion. The timing is unclear right now.

Christian Schwab, Analyst

Great, no, I have no further questions. Thank you, guys.

Operator, Operator

Thank you. This concludes our question-and-answer session. I would like to turn it back to David Ryzhik at this time for closing remarks.

David Ryzhik, Senior Vice President of Investor Relations and Corporate Strategy

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

Operator, Operator

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