Axcelis Technologies, Inc. (ACLS) Earnings Call Transcript & Summary

Welcome to the Axcelis Investor Day, The Next Wave of Growth. I'm Doug Lawson, EVP of Corporate Marketing and Strategy, and I'll be your host for the next couple of hours. Let me read the safe harbor act before we get started. This presentation and discussion contain forward-looking statements, including our expectations for future markets for our products, revenue, profits and other results that are forward-looking statements under the SEC 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 10-K annual report and other SEC filings. Our actual events and results may differ materially from our current expectations. We do not assume any obligation to update these forward-looking statements. This will be a focused Investor Day. Mary will provide a brief update on the industry and Axcelis. Then Kevin will introduce our new financial model. And finally, Bill will do a deep dive into the specialty markets. The total presentation is approximately 45 minutes and will be followed by a 30-minute Q&A session. With me today are all the executive officers; Mary Puma, President and CEO; Kevin Brewer, Executive Vice President and CFO; Bill Bintz, Executive Vice President of Product Development; Lynnette Fallon, Executive Vice President of HR, Legal and General Counsel; and Russell Low, Executive Vice President of Global Customer and Engineering Operations. Axcelis remains solely focused on the ion implantation business and is uniquely positioned with the capability, DNA and unwavering focus to solve customers' high-value, high-impact ion implantation challenges. This is what differentiates Axcelis to our customers. Now let me introduce our President and CEO, Mary Puma, to begin the discussion of Axcelis' next wave of growth. Mary?

Thank you, Doug. I'd also like to welcome all of you today, and thank you for tuning in to learn more about Axcelis and the exciting opportunities we believe lie ahead. As the warm-up act, I'm going to take a few minutes to provide an overview and update on Axcelis before I turn it over to Kevin and Bill as the star attractions. Next slide, please. So I don't want to steal their thunder, but I get to share the headlines or the highlights, as the case may be, of what you're going to hear today. First, as you know, the semiconductor market is very strong and as a result, is driving very high levels of wafer fab equipment spending. The markets driving this high level of spending, particularly the significant growth in the mature process technology segment has translated into approximately a 2x increase in the implant TAM over a very short period of time, bringing it to about $2 billion in size. Our Purion products are well positioned across key markets like power devices and CMOS image sensors. This has and will continue to drive Axcelis revenues to record levels over the next few years. Our new models, which we are unveiling today include $850 million of revenue in the next 1 to 2 years and $1 billion in approximately 3 years. And I just want to make sure that everyone realizes that these models are based on an implant only business. Next slide, please. I know many of you are familiar with the Axcelis story. But just in case there are a few who are joining us for the first time to learn more, I'm going to provide a brief company overview. You should feel free to call Doug Lawson, if you would like additional information. So Axcelis has been a leading supplier of ion implantation systems and services for over 40 years. We are the only company focused on just implant that supplies a full portfolio of products. We're a global company headquartered just north of Boston. We developed patented innovative implant technology and equipment. And we have an extensive aftermarket business, which you will hear us refer to as CS&I that supports a large installed base in 32 countries around the world. We have a broad, diverse range of customers across all key market segments, and Bill is going to share more details about a couple of these markets later this morning. Next slide, please. We're proud that we've received recognition from our customers and the community. And here are a couple of accolades we've received. I'd like to point out that this is the second year in a row that Axcelis has been named to the Forbes America's Best Small Company list. Next slide, please. I'd like to add a bit more color to what is driving growth in the semiconductor market. Earlier, I mentioned significant growth in the mature process technology segment, but really all market segments are growing. This is causing high fab utilization at all customers and resulting in strong system sales and service as they expand their capacity. We're in a cycle right now where this growth has led to significantly more CapEx spending as customers work hard to chase demand. And there are a couple of things driving this strong demand. The first is the fact that the fundamentals remain in place for long-term growth, and we've talked for a very long time about communications and big data driving demand for multiple types of devices. More recently, as a result of cars becoming computers on wheels, as Pat Gelsinger recently referred to them, demand for power devices and image sensors has accelerated. In addition, we are all aware of a few unique environmental factors, the current chip shortage and what I'll call the arms race that multiple governments are in to attract and build fabs in their respective countries, particularly leading edge logic fabs. Next slide, please. In a high-technology business, it's all about having the right products to meet customer needs and of course, providing excellent service and support. Axcelis developed the right products. Our Purion products, which we began introducing in 2012, have been the engine driving our growth. About 5 years ago, we began investing in product line extensions that built on our base Purion products, the Purion H, the Purion XE and the Purion M. These new products maintained our common Purion platform while bringing customers new products targeted at high-value applications and market segments. Customers embrace both the innovation and the competition that Purion brought them. It was a win-win, providing customers with solutions to their emerging manufacturing challenges and bringing Axcelis significant profitable growth. Next slide, please. Axcelis experienced strong systems growth in 2021, and we see this repeating in 2022. This year, we expect the mature process technology market to represent 82% of our systems revenue. And you can see this highlighted in dark blue on the accompanying chart, along with the breakdown of the 3 key segments comprising this market. There's general mature technology, about 31%; power device is about 28%; and image sensors, 24%. Memory was comprised of an almost equal split between NAND and DRAM, representing about 17% of the total, with advanced logic at about 1%. Memory will recover in 2022, and advanced logic will grow over time, but both will be dwarfed by the strength of the overall mature process technology segment. As a result, we expect this segment to again represent over 70% of our systems revenue in 2022. So the bottom line is that 5 years ago, we placed the right bets on the right products. And this has paid off handsomely already and will continue to do so into the future. Next slide, please. We are engaged in multiple efforts to continue to accelerate and expand our Purion footprint. We've talked numerous times about the opportunity that a large, diverse growing Chinese market represents. And we've also talked a lot about Japan, a market we only reentered a few years ago, but whose customers are very interested in our Purion technology, particularly for power devices, image sensors and NAND. We are also working hard to take share at existing accounts by selling multiple types of Purion products and expanding the number of applications and recipes that are run on our Purion tools. We've increased our focus on implant and implant-related innovation through collaborations with customers and peers. And we're adding infrastructure, including manufacturing capacity closer to our customers. All of these things will allow us to drive and support our new business models. I'll now turn it over to Kevin to expand on the new business models and on the actions we are taking to achieve the operational excellence required to achieve them. Kevin?

Thank you, Mary. Good morning, and I probably should say good afternoon and good evening to others as you tune into this webcast. So I'm very happy today to have the opportunity to share with you two new target business models that we believe provide some very attractive financials. It is truly an exciting time for Axcelis in our industry with key drivers that will drive growth in our business, a strong market and multiple initiatives that accelerate Purion growth across all markets. In my presentation today, I will spend time reviewing the details of these 2 new target business models. And I'll then turn the presentation over to Bill Bintz, who will provide an update on the specialty device market. Doug, if you could move to Slide 16, please. I think it makes sense to go over Q3 quickly before we dive into the models and provide a little bit guidance on Q4 as well. In Q3, revenue finished at $176.7 million compared to $147.3 million in Q2, which represented an increase of 20%. Systems revenue accounted for $126.2 million, which set a new record for Axcelis. And CS&I revenue finished at $50.5 million, also representing a solid revenue contribution. Earnings per share in Q3 was $0.81 per share compared to $0.55 in Q2, driven by strong gross margin and top line performance. We ended the quarter with record backlog at $406.6 million and cash at $271.8 million, which included several prepayments from customers. For Q4, we guided revenues of approximately $190 million with earnings per share at approximately $0.84. Gross margin, we said would be approximately 41.5%, which included the planned closure of multiple evaluation systems which creates some drag on margins. Even though these tools pressure gross margins, it's great to convert them to revenue, which sets the stage for future orders. Full year gross margin should finish around 42.5%, which would imply a year-over-year improvement of 70 basis points. Slide 17, please. Okay. So I feel like this is the long awaited slide and probably the only slide I need, but I do have a few others to share as well. So starting on the far left of this slide and moving right, you can see some financial history back to 2017. Our full year forecast for 2021 just right of the center and our 2 new target business models to the far right. I want you to focus on the 2 new models. In our $850 million model, we assume approximately $225 million of revenue from CS&I. In the $1 billion model, we assume approximately $250 million of revenue from CS&I. Looking at the gross margin line, both new target models drive strong gross margin performance with margins reaching 45% to 46% at $1 billion in revenue. Operating expense as a percent of revenue moves lower as we realize leverage across the business. Operating profit gets a significant boost, driven by strong gross margin performance, lower spending as a percent of revenue and revenue growth. And free cash flow is strong at greater than 20% of revenue at $850 million and greater than 22% at $1 billion. At the midpoint of our operating profit, using our current share count, you should expect to see approximately $4.25 of earnings per share in our $850 million model and approximately $5.60 per share in our $1 billion model and strong cash generation in both of these models. Before diving into the details of the models, I would like to take a few minutes to update on our manufacturing capacity and our supply chain. Slide 18, please. First, I am pleased to say that our new factory in South Korea is fully operational. Purion system shipments are planned from the factory starting in Q1. You can see from the picture in the bottom left-hand corner of this slide, our brand-new facility. We have manufacturing clean room space, warehouse space and offices to accommodate support staff and customer visits. Products built in this factory can be configured for any Axcelis customer. We also have completed a number of capital improvement projects at our Beverly site over the last 18 months to add manufacturing capacity. Kaizen events completed over the same time frame have also increased revenue output per square foot in several key areas of manufacturing. There are projects underway to further boost manufacturing capacity and support our new target models and beyond. Investment in our next phase of lean manufacturing has begun. And we plan to use varying levels of augmented reality and AI to boost efficiency in shortened cycle times. Slide 19, please. On the supply chain side of things, it remains a challenging environment and similar to what we have been dealing with over the past several quarters. Many of the proactive steps we have taken to minimize supply chain disruption have helped us achieve customer requirements and financial commitments. One of the most beneficial things we did early in the pandemic was to get aggressive with adding buffer inventory. Rather than pulling back or what I'd like to call getting outlined, we continue to drive material. We are continuing to review and adjust MRP lead time offsets, which helps buffer manufacturing start dates and provide some additional visibility to our suppliers. Close collaboration with supply chain partners and bringing on new capacity in bottleneck areas is an ongoing effort. Freight costs remain very high or what I should say, through the roof. We have added resources to our logistics team. We're doing what we can to help minimize the impact of higher cost and delivery. Our new factory in South Korea should help improve material flow a bit from additional sources of supply. Supply chain actions taken to date have certainly helped us keep up with a very strong demand. But as some of you have heard me say before, our success has been a combination of solid execution and a bit of luck. Slide 20, please. Okay. Moving back to the details of our new financial models. This slide shows the high-level gross margin initiatives that will move us to the 45% to 46% range. The good news is many of these initiatives are not new for us. So we know what needs to happen and how to do it. Higher revenue contribution from Purion product extensions in CS&I will continue to lift margins. Volume and time-based value engineering projects will continue to drive material costs lower. In planned Kaizen events, coupled with quality improvements, will further reduce labor and rework costs. Slide 21, please. On this slide, you can see more detail on some of our gross margin initiatives over time. Starting at the far left side of the chart, we leverage the Purion common platform in 2 ways. First, we took advantage of parts commonality to capture supply chain savings through volume negotiations and moving parts to low-cost global partners. The second benefit of commonality was the faster learning for our factory and service teams, which lowered costs. We also completed a significant number of Kaizen events during the same time period to improve labor efficiency and cycle time. As we move to the center of the chart, showing actions taken from 2019 to present value engineering, supply chain optimization and Kaizen events continue to provide cost savings. A renewed commitment to quality across the business and a more mature Purion platform is also helping lower our costs. In a higher mix of margin accretive CS&I and Purion product extensions is pushing gross margins higher. Looking at 2022 and beyond, we expect gross margin to move upwards as we achieve our $850 million and $1 billion revenue models. Capturing and saving some higher part volume and evolving manufacturing techniques using augmented reality and AI will be key drivers. We're also planning on a higher mix of Purion product extensions and CS&I, which will favorably impact gross margin. And finally, as we achieved to achieve quality leadership, we'll capture savings from lower rework costs. Slide 22, please. This slide provides a little more details on the impact of better quality for our customers and on gross margin performance. Higher uptime from improved tool reliability is something customers value. And as our sales team likes to say, happy customers buy more stuff. We are also realizing lower warranty install and manufacturing costs as the Purion product line matures and quality improves. As we push the business towards certifying to the new international task force spec of [ 16949 ] we anticipate further benefits for our customers and additional cost savings across the business. Slide 23, please. The key takeaway in this slide is we are making good progress, closing the margin gap across our Purion products. We have initiatives underway, which will continue to push to high current and medium current margins higher so they move more closely to the high energy products. By doing this, we will also reduce some of the quarter-to-quarter variability in gross margin that product mix can cause. And I should note that we also have initiatives planned to move high energy margins upwards. Slide 24, please. This is the final slide on gross margin. We typically have not spent a lot of time discussing CS&I with you other than to make the comment that it is margin accretive. CS&I stands for customer satisfaction and innovation and it encompasses our break fix business, which is labor, repair parts and service contracts, a robust spares and consumable business, field upgrades, which typically improve yield or throughput for our customers and a used tool business, which consists of older tools repurchased on the open market, refurbish and then resell to a different customer. We like to say CS&I is Axcelis' face to the customer. It is an area of the business that we are investing in with R&D and sales support. R&D spending provides design services for new upgrades and supports development of innovative solutions like our digital toolbox that provides remote diagnostics, advanced software features, data analytics, support, self-testing and predictive maintenance. We have also made strategic hires to strengthen the team and add focus to customer satisfaction and revenue growth. Slide 25, please. I would like to briefly touch on operating expenses. I mentioned earlier that expenses as a percent of revenue are modeled lower to reflect the leverage we will realize in the business. Our target models assume R&D spending to be 9% to 10% of revenue, which is right about where we'll finish 2021. We plan to continue to focus R&D spending on Purion product development and CIP, field upgrades to support our customers and CS&I revenue growth. And we'll also be investing in new technologies that could provide a future benefit to the company. Most of our planned expense reductions will come from SG&A, while we still make the necessary investments in the business. We will continue to update our enterprise systems to support business growth, invest in our employees with training and compensation and strategic hiring and fund general business needs. And as always, I plan to carefully monitor spending. Slide 26, please. And finally, I'd like to discuss our capital allocation strategy. The first point I will make is that we plan to maintain a strong and healthy balance sheet while investing in the business in ways to support growth. Our $850 million model and $1 billion target model generate strong cash flows, which will continue to strengthen the business and our balance sheet. If needed, we have access to additional liquidity through an unused $40 million line of credit and S-3 self registration as a WKSI filer. We have returned over $62 million to our shareholders since 2019 through share repurchase programs and at the end of Q3, still had additional approved spending available under the current program. Additional options for returning cash will be discussed with our Board in Q1 and we expect to be able to share more details with you after that review is complete. As far as M&A goes, any near-term actions would likely be along the lines of helping us to grow our implant business. We plan to begin exploring M&A to grow beyond our $1 billion in revenue implant-driven target model during the upcoming year. This concludes my part of the presentation. I want to thank you for your time today. And now I'll turn the call over to Bill Bintz to provide an update on the specialty device market. Bill?

Thank you, Kevin. Hello to everyone. What I plan to cover today are some of the key foundational elements of our new business models, specifically related to the specialty device market and more specifically, the power and image sensor segments of that market. Next slide, please. As Mary mentioned earlier, IC demand is driving dramatically increased capital spending in what is forecast to be a new plateau. And unlike the growth of the previous plateau, this time around, the implant TAM is benefiting in a much more significant way. The implant TAM is now expected to be about $2 billion with over 50% of that TAM associated with the mature process technology segments. The IoT, mobile and automotive markets are driving particularly high growth in the power and image sensor device segments of the overall mature process technology market. So for this reason, my update is focused on the power and image sensor markets and Axcelis' position within them. Next slide, please. Starting with the power market, increasing automotive power device content is driving major growth. The silicon carbide power device market forecast to grow at a 30% rate over the next 5 years. Within the overall power market, silicon carbide MOSFETS and silicon IGBTs represent the largest components of growth. Next slide. So connecting all of this to the implant TAM, growth in the power market is driving large increases in wafer starts and the related need for new implement capacity. Beyond the increased wafer starts factor, silicon IGBT and silicon carbide MOSFET process flows require high implant capital intensity. For example, a typical silicon carbide MOSFET process flow requires about 20 implant steps. Also, some of the device design trends are driving the need for deeper high-dose implants as well as greater use of high energy implant technology, resulting in additional growth in implant capital intensity. Next slide, please. Axcelis is heavily focused on the power market for the past 7-plus years and as a result, we are very well positioned in this market. Our Purion power series product portfolio covers the full range of both silicon and silicon carbide implant requirements current and emerging device designs. As shown on one of Mary's earlier slides, we are already realizing the benefits of this focus with over 27% of our 2021 systems revenue forecast coming from this market. Next slide. Adding some additional color to the strength of our power series product portfolio, this chart shows all the implant requirements for silicon and silicon carbide devices in terms of implant dose and energy. So basically, each one of the dots on this chart represents an implant recipe. Next slide. As I mentioned on an earlier slide, some of the emerging devices are trending to the use of higher energy, high dose implants as well as higher energy low to mid dose implants. And that trend is indicated by the 2 trend arrows on this chart. So whereas in the past, the majority of power devices could be built with the combination of Purion H high current and Purion M medium-current implanters is now a need for new implant capabilities. Next slide, please. To address the needs of the higher energy application trend, our power series portfolio now includes the Purion XE, Purion XE Silicon carbide, Purion EXE and the EXE silicon carbide products. Next slide. And to address the needs of higher energy high-dose applications, the portfolio now includes the Purion H200 and the Purion H200 silicon carbide products built off of our Purion H architecture. All of these new products incorporate a unique combination of technologies to address our customers' present and emerging manufacturing requirements. Next slide. So it's a key takeaway from a power market standpoint, Axcelis' Purion power series represents a winning product portfolio in a rapidly growing power market. So we'll go to the next slide. Moving on to the CMOS image sensor market, also sometimes referred to as CIS, it is forecast to grow at better than a 7% rate over the next 5 years. Mobile will remain the dominant segment of the market with automotive forecast to become the second largest segment. Next slide. Relative to what this translates to for the implant TAM, growth in the image sensor market is driving significant increases in wafer starts and the related need for new implant capacity. And beyond increased wafer start impact on the TAM, CIS device fabrication requires high implant capital intensity. For example, formation of the photodiode region of the image sensor, that region alone can involve 8 to 10 implant steps. Also device design trends are driving the need for deeper photodiodes to address pixel scaling and other image quality issues. This translates to additional implant steps and the need for higher energy implant capabilities, both resulting in additional growth in implant capital intensity. Next slide. Axcelis is heavily focused on the image sensor market for the past 10-plus years. And as a result, we are also very well positioned in this growing market. Our Purion image sensor series product portfolio covers the full range of implant requirements for current and emerging device designs. As shown on one of Mary's earlier slides, we are already realizing the benefits of this focus with over 23% of our 2021 systems revenue forecast coming from this market. Next slide. And my last slide summarizes some of the key elements of our customers' image sensor road maps and our evolving image sensor series product portfolio. As you can see in the road map, pixel size for image sensors will continue to shrink. Implant energy will continue to increase and middle contamination levels will need to continue to be reduced. Each of our image sensor series products offer a unique combination of technologies to address these road map requirements in a differentiated way. And so this leads to my final key takeaways and that they are that Axcelis' image sensor series represents a winning product portfolio in the growing image sensor market. And in combination with our power series portfolio represents key foundational elements of the new business models that Mary and Kevin introduced. So on that note, I'll now turn things back over to Mary. Thank you.

Thank you, Bill. So to wrap up, Axcelis has the right products, the right people, the right processes, the right infrastructure and a strong balance sheet to continue to drive profitable growth. Having a strong semiconductor market and growing implant TAM adds to the excitement and probability that we can achieve our new business models, and grow the business to $1 billion in revenue. I want to thank you all for your time today and for the support you've given us over the years. We look forward to achieving these new models and sharing our success with you. Now I'll turn it over to Doug to moderate the Q&A. Doug?

Thank you, Mary, Kevin and Bill. Now we're going to go live. In case you hadn't realized, this was a recording. And we'll bring the full executive team on for about a 30-minute Q&A session. Thank you. Okay. Welcome, everyone. We're now live in various locations. I come to you from the luxurious Marriott Marquis in San Francisco. So we wish we could be face to face, but we'll try to do the Q&A here through the chat. And so we'll get started. First question came in is from [ Quinn Bolton ]. Question is, in the new business models, how much revenue do you expect to generate from the Japanese market? I'll pass that one over to Mary.

So Quinn, I think given that the $850 million model is near term, we expect to hit that quarterly run rate sometime in 2022 that the contribution from Japan is not going to be what I would call significant. I think as we move towards the $1 billion model, which is about 3 years out, you will see that percentage definitely grow. And as we always do, basically, what we're going to do is provide you with information on new customers that we secure. And I expect that most of these new customers will be focused on applications for power devices and image sensors given that that's where most of the interest that we're seeing from the Japanese market is focused.

Mary, maybe I can add a little bit of additional color. As Mary said, we're not counting on much from the Japan market in support of the $850 million, but it does represent about 15% of the implant TAM. We have a lot of activities underway, engaging with customers, particularly as Mary said, in the image sensor and power device segments. And so longer term, as we move out towards the $1 billion model and beyond in time, we expect Japan to be an increasing part of our business and a more significant total percent.

All right. Thank you. Next question comes from [ Thomas Langendorf ]. Can you provide color around plans for returning capital to shareholders in the $850 million and $1 billion models? Kevin, can you comment on that?

Sure. So specifically, those are things that we'll address as we get into these models. But what I can say is, to date, we've had a couple of share repurchase programs in place. We currently have one that we're executing to in 2021 and have had prior programs. And as I mentioned, we returned a little over $62 million so far through those programs. So as we move forward, first thing we're going to do is invest in the business, as we always have, right, and keep a very strong and healthy balance sheet while investing. But I think if we follow the similar track to what we've done in the past, I think you could expect to see capital return to the shareholders through most likely some form of share repurchase program. There are other things that could be entertained. I think we all know what they are. There's dividends, onetime dividends, there's many, many. But so far, what we have decided to do is use a share repurchase program. So again, to your specific question, I think as we get into these models, we will define on a yearly basis because typically, we've addressed this yearly with the Board, we'll address on a yearly basis what we plan to do with returning capital at that point in time.

Great. Thanks, Kevin. Next question comes from [ Craig Ellis ]. Strong models and helpful information. Thank you, Craig. Question is, please provide more color on the composition of mature process technologies calendar '22 mix. And to what extent is advanced logic growth and Japan penetration in the $1 billion model. Mary, do you want to take this one?

Sure. At this point, Craig, we expect all 3 subsegments of mature process technology to be represented in our revenues for next year. So that would be general mature process technology, image sensors and power devices. And I think it's fair to say that power devices at this point in time is probably the fastest-growing market. So we'll just have to watch and see how it plays out during 2022 in terms of the split. And we do report that every quarter. So we'll keep you posted on the growth rates, what we're actually seeing in terms of revenues. I just answered the question on Japan. And I think the answer for the advanced logic is pretty similar to the answer on Japan. Again, given the short time frame to the $850 million model, we're not going to see significant contributions from advanced logic. We did just earlier this week, announce the successful closure of an evaluation at a large customer for advanced logic applications. We do expect to see orders from that customer in 2022 and into 2023. So there will be an increase in contribution from that segment. And we hope that at this point, we're planning on this point for that contribution to continue to increase as we move towards the $1 billion model.

Okay. Thank you, Mary. I apologize everybody for the echo. The engineer is trying to figure that out. The next question comes from Quinn Bolton. As the company looks to expand beyond ion implant through M&A, can you discuss what WFE segments you might find most attractive or synergistic with ion implant. Mary, want to take this one, too?

Sure. So as far as M&A goes, any near-term actions would really be focused on implant only. As Kevin mentioned, we do plan to begin exploring M&A to grow beyond our $1 billion implant only driven target model during the upcoming year. So in 2022, we will definitely focus some time and attention on that. So it's not -- there's nothing really specific for us to share with you right now. But again, as we get deeper into this, we will certainly do that.

All right. Thank you, Mary. Okay. Next question comes from [ Patrick Ho ]. Thank you for today's event. Thank you, Patrick. As noted in the CS&I is accretive to gross margins, and you detailed some of the initiatives and opportunities you are working on in this business. As part of the margin expansion opportunities, how do you drive more value engineering in spares and even upgrades to ensure that there are no knockoffs by third-party parts providers. And how do you ensure customers utilize your parts and upgrades. We'll start with Kevin. And then Russell can add in on that.

Okay. Thanks. Yes. Good question. So the knockoffs, that has certainly been something we've had to deal with for a lot of years, right? I think, Patrick, you're well aware of, and I think most people are, that there's third parties out there. They like to get a hold of these parts, reverse engineer them, sell them to our customers. So I don't expect that to get any worse. And frankly, we've actually went back some of that business over the year. So one way you beat the third parties is you provide a higher quality part. The other thing you can also do is we could -- as we looked at kind of our more innovative contract solutions, you can sell uptime, which it bundles your parts in there, so customers would have to use your parts. You can also get time of equipment sale, you can try to bundle some spares in. So there's certainly things you can do right up front with the customers. The thing that I always push engineering on, and I'm not sure Russ is going to give an answer right now. But certainly, if we could design features into these parts that made it difficult to knock off these parts by third parties, it would be great. We all know we have our keys for our cars, and we still have a key. There's a computer chip. So we haven't got to the point where we can put a tick in a graphite split that goes into source. But those are things we talk about. Those are the things we think about as we're designing. Is there something in here that's proprietary that's probably not obvious on the surface when you're trying to reverse engineer something. So again, that's something we continue to look at.

Yes. I think you hit really the key points there, Kevin. I mean clearly, we want to out-innovate anybody trying to rip off the technology. That's a key. If we can come up with something faster, that's very valuable. We're also looking at licensed features, which makes it very difficult to copy. And we're also looking to move beyond just transactions. We have multiple things in our toolbox that we can put together to give a kind of a more value-added solution to the customer that will be effective at locking out some of these third parties.

To add to that, Doug, just one more thing, too. On the upgrades piece, Patrick, the good thing on the upgrades is those are typically things that only Axcelis can do. It's very difficult for third parties who don't have all the knowledge of the tools to design these high-value upgrades that we come out with. So that market is really driven by the speed at which we can innovate with these upgrades. So that is one area that is difficult for third parties to come into.

All right. Thank you. [ Eric Sterling ] asked the next question, which we've answered a little bit. So the question is, what are the expectations for leading-edge foundry penetrations in the new model. So Mary discussed this in the overall question about Japan and advanced. So we expect it to begin slowly over the next couple of years in advanced logic with initial production buys in 2022 and then ramp up and be a bigger piece of the $1 billion model. The next question comes from [ Wayne Jervis ]. What's your lead times on CIS and silicon carbide implant. Kevin, do you want to discuss lead times, maybe specific there, but in general?

Yes. So I think this is probably a 2-part question to part of how much of a lead do we have in SIC. But in terms of build lead times, we're pretty much -- all products are at a standard lead time. We don't take any longer to develop or manufacture, yes, a SiC tool or CIS tool than for any other market or customers. So our lead times right now, we have been keeping up with customer needs. There has been several people that have talked about lead times extending well beyond the year. We're not at that point. Certainly, our lead times are longer than they were pre-pandemic. But the fact that we did get very proactive on the supply chain side with inventory, as I mentioned in the presentation, has certainly helped us keep the lead times a little bit on the shorter side compared to what they would have been without that buffer inventory. So we're also continuing even though we've got the same issues, everybody's got logistics and supply chain challenges that people are dealing with. We're continuing to work our, I guess, I want to say the things we can control. So if you look at our factory cycle financial work we've done through our lean program, we've continued to run Kaizen events. We take the best of what we learn those Kaizen events and try to shorten cycle times. So overall, it hasn't all been growth in the lead time. We've been continuing to knock off some improvements. I think on the second part of the question, which I think is in here, it might be probably how far are we ahead of the competition in this market because I think it's been well said by us that we definitely jumped on the silicon carbide market early on, and I think, to our surprise, well, this market has turned out to be a lot bigger than what we thought it was when we went into it. But we definitely have -- and Bill maybe has addressed this, but we definitely got a year-plus lead on the competition, maybe longer. And Bill, I think I'll let you grab the rest of that.

Yes. I think that the key to how we got to the strong position we're in right now was you engage very early. Example, in the silicon carbide market, we put our first silicon carbide tool in the field. It was a 100-millimeter tool back in, I think, 2013. So you start early, engage with those customers, stay engaged very closely, understand what their needs are moving forward and develop winning combinations of products and technology. And with that approach, we've established a strong position. I think it would take a considerable amount of time and effort to close the gap from a product and technology advantage standpoint. But one of the key points is we're not standing still. We continue to evolve these product portfolios and have every expectation that we're going to maintain a strong lead. And we have opportunities to even open up the lead in some areas.

All right. Thank you, guys. The next question is probably a little bit more of an economics question from [ Neil Meyer ]. Can you please address the impact of rising interest rates on your ability to implement growth plans and also impact -- the impact of inflation on pricing power. Kevin, do you want to take a crack at this?

Sure. So let me talk to our growth plan. So I mean, we're well capitalized right now. We have quite a bit of cash on the balance sheet. So it's not like we're out having to borrow money to do things. So there really isn't an impact from the rising rates from that point of view in terms of how -- what we need to fuel growth. Where we probably will see it will be on the supply chain side of things. I don't know the details of what every supplier's doing with their money in terms of borrowing or not borrowing. So obviously, there could be some rising costs there. But I'll be honest, I don't really think this is going to impact anything we're trying to do. I think the bigger challenges right now are the impact of logistics cost being ForEx, what they were even a year ago. Very high raw material costs at this point, compliance for things like aluminum or steel and many other commodities. Well, that's where we're dealing with it now on the supply chain side. And if I go back even further than the present build, then I think I mentioned we expect full year gross margins to be around 42.5%. So even in this very challenging environment, where we're seeing freight costs, as I said, through the roof, we're seeing very high raw material costs. Of course, we're going to move the business approximately 70 basis points over last year. And you can see in these models, continued strong growth in gross margins. And certainly, when we put these models together, we looked at a couple of things. And nearer term, on the $850 million, we did take into consideration that we don't think this pandemic is going away tomorrow. We think some of the pressures we currently have on gross margin, even though we're growing, are going to stay there. So that's why you see the range at $850 million at 43% to 45% based on timing, and the timing of both the pandemic and the timing of some of the value engineering projects. But I guess, Neil, back to your economics course, I don't see any impact on our business, frankly, that's measurable. So I'm not worried about that.

Great. Thanks, Kevin. Our next question comes from Craig Ellis. Please discuss the overall relative contribution of DRAM and NAND in the new models. Since I haven't answered one yet, I'll take this one. On the slide where we have the breakdown of 2022, we discussed that we expect 70% to 80% coming from the mature process technologies. And we'll see -- we'll continue to see probably 20% to 30% coming from memory. Again, memory is probably -- of the 3 areas, memory is the one that still has some cyclicality to it, given the commodity nature and the size of the individual projects. So we expect '22 and '23 to be strong for wafer starts. It's hard to have visibility even that far out, but we would expect that 20% to 30% is a good way to model that. Next question comes from [ Wayne Jervis ]. How much of the $1 billion model is organic versus acquisition. Mary actually answered this one. The $1 billion model is solely ion implantation. And so next question comes from Patrick Ho, and it's a follow-up to his CS&I question. From an OpEx perspective, how much do you need to add to CS&I to keep up with the growth in the business. i.e., increased installed base, more services, spare parts, et cetera. How much do you need to add to the workforce front to keep pace with the business growth. Or can you leverage existing workforce to handle this more. So again, I'll throw this to a combination of Kevin and Russell.

Yes. So there's several parts to that, I can't see the question. But -- so in terms of the spending piece of it, Patrick, we've got that factored into the models, right? So the operating expenses that we have at $850 million and $1 billion have that factored in. We -- what I would say is we have a lot of what we need right now. It's not like we've got to go out and add a lot of design resources or even a lot of selling resources. We've been doing that over the past several years. And then recently, we just brought in a couple of critical hires within that organization, the focus is on the customer satisfaction and revenue growth. So it's really kind of executing to the road maps we have. Obviously, as these models, we get to $850 million and we get to $1 billion even though the percentage is going down as a percent of revenue OpEx, there is an implied, we're going to be plenty more than we are today. So I don't want to say that we don't need to hire to hit these models. And the only thing I could to tell you there is that we've had to keep up with some fairly quick acceleration this year. I think everybody remembers, not even a year ago, we were talking about maybe $550 million this year. And now we're -- we've -- it's pretty clear right now that based on our guidance, we're going to be pretty much at our $650 million model. So we've put a lot of things in place, both from hiring staff, to sharing resource across the business to whatever we need to do and keep up with things. So I'm not too worried that we're going to have a problem keeping up hitting the growth. And CS&I did grow pretty fast this year as well. So I think the other piece of it, and again, I'm going from memory, was on the installed base. Certainly, the installed base is a big component of the CS&I business. I think some of the acceleration we've seen on CS&I in terms of revenue growth over the past year, 1.5 years, this then because there's a lot of new Purion products in the field now. So as these tools go out, there's always -- what I would like to say, there's an entitlement that goes with it. And there's the other piece, Patrick, as you mentioned, there's the entitlement, but they're making sure we hang on to the entitlement from the third parties. But -- so a good amount of revenue growth does come from new tools. And then just things that we got on the table with upgrades. We've got a full menu of things that we're working on. This is really where the R&D comes in. This is where Russell's team works. We, several years ago, made a decision to carve out that part of engineering so that -- it wasn't easy to go on and take those people to do other things for kind of the crisis of the day. So we carved out the group and put a fence around them. So there is a dedicated team just working on upgrades in that group. And we'll probably have to put a few more people in there as we move forward, but it's not anything that I expect have an issue doing at this point.

Russell, you got anything to add in?

No, I agree with Kevin. It's all about the leverage. And if we sell more upgrades, I don't necessarily need more engineers, it's just that, that upgrade now can go to more and more customers. But we are still investing as well. And we're also looking at flexible models. So the pandemic has certainly not helped moving people around different areas for in stores. We're certainly managing that very well. We're working with additional partners, and we're adding resource through those channels as well.

Okay. And I think the only other thing I'll kind of add is we've developed a lot of new techniques as a result of the pandemic where we're able to do a lot of work remotely with subject matter experts working from wherever they are working with the team that's locally on site. And that's really helped in this area as well. The next -- no, go ahead, Russell. Continue.

Technology, there was always going to be in the future of virtual reality and augmented reality. Obviously, the pandemic has accelerated that. And we've been doing a lot of work with those technologies. And we've been actually able to do some in stores remotely with the augmented reality and virtual reality. And it's an exciting technology that allows you to get the right people at the right time in the right place and support the field very effectively. So yes, it has been a good use of technology.

Yes, the AI and augmented reality are things that it's crossing over to the manufacturing side, too. So it's things we're going to leverage as we go forward.

All right. Thanks. Next question comes from Craig Ellis. It seems the model periods have pulled in moderately relative to the past models that came out in 9/19. Can you discuss factors leading to confidence in those timings. So Kevin, maybe -- you talked about this in the presentation, but maybe you can discuss the timing of the 2 models. And then, Mary, maybe talk a little bit about the confidence in terms of the market and so forth for those.

I think we've mentioned it, too. At this point, the $850 million model, which we've set as a near-term model 1 to 2 years, I think Mary mentioned it, that we would expect that we could see that run rate sometime next year. So let's just say that it's not 2 years. And let's just say that it becomes next year, for example. I would not expect to see any change in what we expect to see in the bottom line of the business. So if the operating profit level down. Frankly, if things pull in more quickly, the margin pressure could be there a little bit. But I also think because there is a bit of a ramp-up in spending, too, the spending may not be able to ramp as fast on the OpEx side, so it could probably offset that. So I don't really see too much of an impact whether this is 1 year out or 2 years out. And at this point in time, all we've said is that we could see that quarterly run rate at some point next year for the $850 million model. And then that $1 billion is 2 to 3 years out. Obviously, we need a strong market to continue for the $1 billion market. And some of those factors and maybe some guys can elaborate more, but we certainly talked about the strong market conditions that we're currently seeing and we talked about how we expect to grow our business through handing Purion out across more of these market opportunities. And I think, Mary, maybe you want to grab the rest of this?

Yes. So let me do that. So I think, Craig, you're focused mainly on the $850 million model and how do we have confidence about the timing that Kevin just talked about for that. We did say on our last call that we've started to book into the third quarter of next year. And so we have very good visibility at this time through the first half, and it's growing into the second half of 2022. And as a number of us have mentioned, demand is holding up very well. And I said earlier that we think 2022 is going to be another growth year for Axcelis and the industry. We've talked a lot about the mature process technology markets that remain strong. You've got power devices, extremely strong and growing. Bill went through that. You've got image sensor, in general, mature foundry business. We've also given you a little bit more color on that. We've seen the memory recovery starting. We've seen some initial capacity buys actually starting this quarter. So we're feeling good about the fact that, that segment will strengthen as well. We've talked about advanced logic, and we're going to get some additional input from those types of customers. So we feel very good about what we're seeing with 2022. And obviously, we've given you even more color around that, saying that we think mature process technology will be the 70% to 80% next year. So there are really a number of factors that are giving us a lot of confidence that 2022 is going to turn out to be strong and again, allow us to hit that $850 million model in the time frame that Kevin laid out.

All right. Thank you. So we have 3 more questions in the queue, and so we're going to answer those and then end this session, and be happy to do any follow-up after. Everyone knows how to get a hold of me. Next question comes from [ Mark Miller ]. You have been dominant in the mature process segment. Has your competitor done anything to improve its position there? Bill, do you want to comment on that?

Yes, sure. I mean, our competitors have been coming at us for number of years in those segments, and we expect them to continue to do so. So the key for us is to stay close to the customers, do a good job with our installed base. Based on our insights working with customers, continue to evolve our product road map so that we can deliver unique and enabling capabilities and maintain that lead. And also add, we put a lot of emphasis on not only uniqueness, but sustainability of the uniqueness of our products and technology. And one of the key tools we use there is the IP tool. So we're very focused on IP, both in patents and so on associated with some of our unique and enabling capabilities, and that's another piece of the puzzle in sustaining the lead and being in a good position to handle the competitor that will continue to come at us.

All right. Thanks, Bill. Next question is from Craig Ellis and actually is a good link from Mark's question. His question, and Craig, I'll probably rephrase this just a little bit, but I'll read it. It appears that current Purion power line covers the entire market, is that correct? Yes, that's correct. What about CIS? The answer to that is we have a full product line to cover that. Those are shown in the 2 charts that are in the presentation. And then a more forward-looking question relative to R&D, I think, is this next question is what does that mean for the Phase 4 wave of product extensions, either here or more broadly in the portfolio? Bill, do you want to just comment a little bit on how we work?

Yes, sure. We need to take it segment by segment, but just I'll use image sensor as an example. We know and as reflected in -- I think it was my last slide that showed some of the key customer road map requirements as they relate to implant. We know photodiodes will continue to get deeper as time moves forward to improve -- to support reduced pixel size and improve the image quality. And so we know that we need to continue to stay aligned with those customer requirements and continue to evolve. In that case, our energy portfolio, as we've done first with the XE, then the EXE, the VXE and the XEmax. So we're going to be doing more of the same. And as we do it, as I just keep coming back to -- I'll keep coming back to, we try to do it in a unique and a sustainable unique way, leveraging IP wherever possible.

All right. Thanks, Bill. Quinn Bolton has the next question. It's actually probably been answered a little bit, so Kevin can give a quick answer on it. But given the increasing cash flow generation in the $850 million model and $1 billion model, is there an opportunity to reduce the share count through buybacks in the absence of M&A?

Yes. So yes, that's a good question, Quinn. So I think if you looked at the shares this year, you would see that our Q3 -- Q1 shares versus Q2 versus Q3, they've been coming down through the share repurchase program. So if we continue on that path with buybacks, we certainly continue -- we could reduce that further, which is also true of about -- and during the presentation, I made the point that you could see $4.25 on the $850 million model. And I said, that's assuming the current share count. So obviously, if the share count came down, that would help. The other thing those models assume as well, too, is we pretty much take the current tax rate to the extent that changes, up or down, that can move the EPS around. But -- and we've -- I think what everybody is saying, we've typically had a lower tax rate than the 21% over the last -- many quarters. So there could be a little bit of pickup there, too. So yes, we could reduce share count. I think what this year has shown that even through any dilution that may occur from compensation plans with stock being issued, we've been able to more than offset that with the share repurchases. So the answer is yes, we certainly could.

All right. Thanks, Kevin. So last question here is from [ Eric Sterling ]. And he wants to know what the expectations from China are as it relates to the new model. Mary, do you want to take this?

Sure. So China will continue to be a very important region for Axcelis. We've talked a lot about how we've taken a lot of actions in China to not only meet customer requirements with products, but also to make sure that we've got the right support infrastructure. I think, as you know, it's ranged in any given quarter in terms of systems revenues, anywhere from like 40% to 70% over the last 12 to 18 months. And I don't think we have any reason to believe that there's going to be any significant change from that. Over -- at least near term in terms of the model that we've put out there. And I just want to reiterate that not only are we selling Purion products as customers add capacity but also our CS&I revenues are very high because of the high level of fab utilization. I'm not sure if this was driving your question, Eric, but I know there was some discussion earlier in the week from a competitor that there were concerns potentially about China slowing down in 2022. And I just -- we went back and we took a very close look at this, and we don't see a slowdown in China coming next year or anytime soon. In fact, based on our current modeling for 2022, we expect China revenue to be similar year-over-year. It may end up being a lower percentage of revenue mix as we see increases in other geographies, but it will remain strong. And again, I also just want to remind people that our China business is comprised of domestic and multinational customers. And many of the customers are focused on the mature process technology markets, including power and image sensors that the markets are strong, the markets are growing, and they're very implant intensive. So that's a very positive thing for Axcelis. And again, we think that's what's going to sustain our growth in that region as we move forward.

All right. Thank you, Mary. All right. Well, that brings us to the end of our Investor Day presentation. I want to thank everybody for tuning in and for the good questions. Hopefully, the next time we get together to do this, we're able to do it live and enjoy the live interaction that we typically do when we see all of you folks. So again, thank you, and have a good day.