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Edited Transcript of ACLS earnings conference call or presentation 6-May-20 12:30pm GMT

Q1 2020 Axcelis Technologies Inc Earnings Call

Beverly Jun 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Axcelis Technologies Inc earnings conference call or presentation Wednesday, May 6, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas A. Lawson

Axcelis Technologies, Inc. - EVP of Corporate Marketing & Strategy

* Kevin J. Brewer

Axcelis Technologies, Inc. - Executive VP & CFO

* Mary G. Puma

Axcelis Technologies, Inc. - CEO, President & Director

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Conference Call Participants

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* Christian David Schwab

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst & Partner

* Craig Andrew Ellis

B. Riley FBR, Inc., Research Division - Senior MD & Director of Research

* David Duley

Steelhead Securities LLC - Managing Principal

* J. Ho

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector

* Mark S. Miller

The Benchmark Company, LLC, Research Division - Senior Equity Analyst

* Thomas Robert Diffely

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Axcelis Technologies call to discuss the company's results for the first quarter of 2020. My name is Julie, and I will be your coordinator for today. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mary Puma, President and CEO of Axcelis Technologies. Please proceed, ma'am.

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Mary G. Puma, Axcelis Technologies, Inc. - CEO, President & Director [2]

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Thank you, Julie. With me today is Kevin Brewer, Executive Vice President and CFO; and Doug Lawson, Executive Vice President of Corporate Marketing and Strategy. We are all participating in this call remotely, so I would like to apologize in advance for any technical difficulties.

If you have not seen a copy of our press release issued last night, it is available on our website. Playback service will also be available on our website as described in our press release.

Please note that comments made today about our expectations for future revenues, profits and other results are forward-looking statements under the SEC's safe harbor provision. 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.

I hope you and your families are healthy during this difficult period. At Axcelis, we are carefully managing through this unprecedented global situation. But I would like to emphasize that we remain laser-focused on the strategic objectives we outlined at our Investor Day in September.

During the first quarter, we achieved 2 key milestones along the path to market leadership in ion implantation and to our long-term business model. First, we received our first Purion order from Japan. Second, we closed the first Purion Dragon evaluation and received a follow-on order. The dedication of our employees has made these significant accomplishments possible, and our top priority is ensuring their health and safety while continuing to serve our customers. I would personally like to give a heartfelt thank you to our extraordinary employees in the factory, global field locations and those at home in the U.S. and around the world who are working diligently to meet our customer commitments. I also want to thank our suppliers and customers for their support as we strive to meet the continuing high level of customer interest in our Purion products.

Our first quarter financial performance was very strong. Revenue for the first quarter was $119 million. Earnings per share of $0.33 was well above guidance and consensus. During the first quarter, memory accounted for 52% of our shipments, 31% DRAM and 21% NAND. Mature foundry logic customers accounted for the remaining 48%. The geographic mix of our shipment -- our system shipments in the first quarter was China 38%, Korea 34%, Taiwan 20% and the U.S. and Europe, 8%.

While the COVID-19 pandemic has generated uncertainty and new challenges for 2020, it is important to understand that the semiconductor industry is critical in today's world and remains fundamentally strong. Near term, we will be required to manage our business on a day-to-day basis relative to uncontrollable pandemic-driven hurdles associated with global government policies, the impact on world economies and the reactions of our customers and suppliers. The industry is just exiting a down cycle, a period of lower capacity investment. As a result, we can still expect to see investment in both technology and capacity for critical market segments.

Axcelis has done significant work to understand our customers, market segments and to develop products that provide a competitive advantage. We expect to see the individual market segments react differently to COVID-19 challenges. Currently, semiconductor products required for working from home and sheltering in place are in high demand. This includes products for PCs, video streaming and communications. At the same time, demand for products related to automotive and aviation, for example, have slowed.

Our knowledge and expertise allow us to work closely with our customers across these market segments even during this difficult time, to provide them with the best ion implant solutions for their specific manufacturing challenges. We are well positioned, as a result of investment in new Purion products during the down cycle and by the broad and highly diverse Purion customer base we have developed over the last several years.

In the first quarter, we closed 3 evaluations, all for new memory applications. One of these evaluations was for the first Purion Dragon at a NAND customer. This is our newest and most technologically advanced high current implanter. We also received the first Purion Dragon follow-on order and shipped that tool in the first quarter as well.

The interest level is also very high for 2 of our other new Purion systems, the Purion XEmax, a high energy tool designed for the most advanced image sensor applications and for the Purion H200, which is focused on the power device market. We also announced our first Purion order in Japan, a Purion XE for a power device customer.

It is easy during this difficult time to forget that the industry is beginning what will likely be an extended growth cycle, driven by the new communications capability of 5G technology. We still believe the 5G infrastructure build has begun and will accelerate in 2020 and into 2021. As the infrastructure expands, new 5G-capable phones and other devices will drive a strong memory cycle beginning in 2021. Following this and beginning in 2022, there will be another cycle of industrial IoT applications, even bigger than the last, which will drive strong growth in the mature process technology segment. One thing that emerges very clearly from this pandemic is that communication requirements and the technology to support them are more critical than ever and that Axcelis is extremely well positioned for strong growth during the upcoming 5G-driven cycle.

Now I'd like to turn it over to Kevin to discuss our financials and some operational details.

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Kevin J. Brewer, Axcelis Technologies, Inc. - Executive VP & CFO [3]

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Thank you, Mary, and good morning. Before I provide an update on our very strong first quarter performance, I'd like to take a minute to discuss some of the actions we are taking to respond to the current pandemic situation.

I'll start by saying that all areas of our business remain operational due to the extraordinary effort of our employees, suppliers and continuing customer demand for our products. During this time, the health and well-being of our employees remains a top priority, and we are doing our best to create a safe work environment for all Axcelis employees. For those who must work in our factory, we have implemented safeguards like physical distancing and have required a use of masks. Everyone who can work from home is working from home. Field-based teams are continuing to support our customers, while following both government and customer required safety protocols.

Mary did not provide guidance for the quarter, as she normally would. The pandemic and potential economic impact has limited our visibility. It could potentially put uncontrollable challenges in our path. As a result, we will not be providing formal guidance. However, I will highlight that Q1 bookings and backlog finished at record levels, indicating the current strength and demand for Axcelis products and services. Quotation activity continues to be strong and customer discussions remain very active. Based on our current orders, Q2 revenue could be similar to Q1. But the many unknowns, including potential supply chain disruption, creates greater than normal uncertainty around our Q2 results.

Now turning to the first quarter results. Q1 revenue finished at $119 million, well above our guidance compared to $107.7 million in Q4. Q1 system sales were $82.3 million compared to $71.4 million in Q4. Q1 CS&I revenue finished at $36.7 million compared to $36.3 million in Q4. Q1 sales to our top 10 customers accounted for 85.9% of our total sales compared to 85.5% in Q4. Four customers were at 10% or above, the same as in Q4.

Q1 system bookings were $115.1 million compared to $77.2 million in Q4, with a Q1 book-to-bill ratio of 1.37 versus 1.06 in Q4. Backlog in Q1, including deferred revenue, finished at $127 million compared to $99.3 million in Q4. Q1 combined SG&A and R&D spending was $31.8 million and below our guidance of approximately $33 million due to the timing of expenses.

For the quarter, operating expenses were 28 -- 26.8% of revenue compared to $31.1 million or 28.9% in Q4. SG&A in the quarter was $17.2 million with R&D at $14.6 million. Q1 gross margin was 38.3% and above guidance compared to 41.1% in Q4. Q1 gross margin is lower than normal due to the closure of 3 evaluation tools, including the first Purion Dragon. Although we are not providing formal Q2 guidance, we still expect full year gross margin to be greater than 40%, and we remain on track to achieve our gross margin targets in our $550 million and $650 million target models. Operating profit in Q1 finished at $13.7 million compared to Q4 operating profit of 13.2%. Q1 net income was $11.2 million or $0.33 per share and above guidance compared to $9.7 million or $0.29 per share in Q4.

Inventory ended at $136.1 million compared to $140.4 million in Q4. Q1 inventory turns, excluding evaluation tools, finished at 2.2 compared to 2.0 in Q4. Q1 accounts payable were $26.1 million compared to $25.3 million in Q4. Q1 receivables were $64.2 million compared to $83.8 million in Q4. Q1 cash finished at $181.4 million compared to $146.5 million in Q4. Cash from operations in the quarter was $39.7 million.

In the quarter, we repurchased $7.5 million of our common stock, but have suspended the repurchase program. We will maintain a conservative cash investment strategy while continuing to invest in the business during these uncertain times.

Axcelis entered 2020 with great momentum. While the pandemic has shown us some near-term challenges, we have not lost focus on achieving our $550 million and $650 million target models. Our customers continue to have high expectations for our Purion products, which we intend to achieve.

I hope that all of you and your families are well during these challenging times. I will now turn the call back to Mary for her closing comments.

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Mary G. Puma, Axcelis Technologies, Inc. - CEO, President & Director [4]

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Thank you, Kevin.

We are pleased with our excellent first quarter performance and remain focused on executing well for the rest of the year. Axcelis has a competitive Purion product line, a broad and diverse customer base, a strong balance sheet and a dedicated team of employees. We are counting on these strengths to pull us through this difficult period and result in market leadership in ion implantation.

And with that, I'd like to open it up for questions. Julie?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Patrick Ho with Stifel.

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J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [2]

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Congrats on a nice quarter and glad to hear everyone is well. Maybe Kevin, to start off first, can you discuss any impact from COVID-19 on the gross margin profile? Whether there were any experienced cost, whether it was on the supply chain, logistics or even manufacturing utilization? And how much of an impact it had in Q1? And did you see anything for Q2?

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Kevin J. Brewer, Axcelis Technologies, Inc. - Executive VP & CFO [3]

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Yes. Thanks, Patrick. So let me start off by just putting a little framework around operating expenses. So we are seeing some impact from the coronavirus, it's hitting us in a couple of places. It's in freight, it's in supplies because we are supplying masks to people in addition of cleaning in the factories. There's other -- there are some inefficiencies within the factory. We want the social distancing. We've had to move workspaces out. So we're working around that. And if you ask me for a number right now, it's probably in the order of $1 million to as high as $1.5 million for Q2, Q3, at this point in time, and that's spread, Patrick, across the OpEx line and the gross margin.

If I look at my Q2 expenses, and based on the revenue we're trying to achieve, which is similar to Q1, operating expenses are going to creep up to about $35 million when you put everything in there that we need to go do both in terms of investing in the new products because we're not slowing down in our investments, we're not slowing down on eval tool that we plan to put in the field. So there is some impact at this point in time. I'm thinking that it's -- if this -- as I look at it right now, it's a Q2, Q3 type of event. I'm assuming in Q4 that we're -- it's more of a back-to-normal type situation. But just poking at freight a little bit. I know you're well aware of it and everybody probably is. I mean it's very difficult right now to get freight forwarders and carriers to bring material in and out, consolidated shipments pretty much have ended. So I think that is one area where it goes along with -- probably a lot of our peers are seeing some impact from freight cost. And that predominantly flushes into gross margin, but there is a piece of that, that does go into the OpEx, so that's going across all the buckets.

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J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [4]

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Great. That's helpful. And maybe, Kevin, as a follow-up to that question, sticking on the balance sheet and your working capital management. Obviously, inventory turns improved, and you mentioned the evaluation system going to the customers. From your internal standpoint, how do you feel about your inventory levels, given that the entire [freight chain] appears to be building a little bit of buffer inventory going from your customers to their end users and even within the supply chain. How do you feel about building up some of the inventory for yourself given any potential further disruption?

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Kevin J. Brewer, Axcelis Technologies, Inc. - Executive VP & CFO [5]

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Yes. So that's a good question, Patrick. So everybody wants to get in line to make sure they're getting their part. So we're probably doing the same thing that, again, our peer group are doing. We've looked at our MRP lead time offsets right now. We've adjusted a little bit to pull material in earlier. We're also looking at the long lead items, and we're driving some extra material for the long lead items. So we're trying to stay ahead of this because the supply chain has been a day-by-day event. We've watched it move around the world from -- starting in Asia, then in Europe, in California. And so the only thing we can do right now is to try to stay ahead of it. And again, we're driving material a little bit ahead. And you can see almost a similar thing, too, even in our -- we had a strong service -- CS&I revenue in Q1. And you can see some regions [needing spare parts where] customers are trying to pull ahead a little bit. So it's a game that I think everybody is playing right now. So yes, we're trying to stay ahead of it.

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J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [6]

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Great. And final question for me and maybe for Mary, in terms of the market environment. March saw a pretty healthy level of revenues from China. Can you give a little bit of color on that business? Was it primarily domestic? And maybe a little color between the mix between foundry and memory?

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Mary G. Puma, Axcelis Technologies, Inc. - CEO, President & Director [7]

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Okay. So China is obviously a very important region for Axcelis. It runs approximately 30% of our revenues in any given quarter. Right now China continues to be very active. And we're seeing that primarily in the mature process technology segment with the domestic Chinese manufacturers. Even though a significant portion of our business in China typically comes from the global semiconductor companies right now, there is quite a bit of activity from the domestic customers. And I would say that activity is a mix really across all segments. We're seeing not only the mature process technology, but we are seeing demand coming from some of the memory customers. And I would say the image sensors also continues to be a very active segment for us. So we continue to watch for that. We are prepared. We have teams in place to accept the shipments and do the installations and those are all things that we're watching. So right now, we're very happy that, that's an active region, and we're prepared to serve it.

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Operator [8]

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And your next question comes from Craig Ellis with B. Riley FBR.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [9]

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Congratulations on the good execution in the first quarter. Kevin, I wanted to start with some clarifications. One, there was an unusually large number of evaluation tools in the quarter. But if we set that aside and we just looked at Purion system margin performance and cost reduction, would the business have stayed on that nice Purion upward trend that we see in the investor deck? Or were there different things going on with COVID adjustments that would have precluded ongoing margin expansion?

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Kevin J. Brewer, Axcelis Technologies, Inc. - Executive VP & CFO [10]

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Yes. So the biggest impact on Q1 was at eval. If I look at what that contributed, Craig, it was about 300 basis points of negative gross margin. So if you add that back, then you can see exactly where we would have been. There are some things flowing through the gross margin line, but they haven't really hit yet because a lot of -- basically how we do the buildup on the expenses and capitalized variances and bring it back through a future point in time, most of that starts to hit in the Q2, Q3 area. So Q1 was really all about the eval tools and the like, it was about 300 basis points of negative impact.

In terms of the cost-out activity, we're still right on plan with our road maps. I think you're well aware of it, and we've been talking about it for a while that we've got many things we're doing with both the supply chain and continue to do in a factory with lean events and the coronavirus has not impacted that. Even though a lot of folks are working from home, we're keeping up with everything. Engineers are keeping up with things, purchasing is keeping up and all the support groups. At this point in time, the people in the factory are the direct labor people, manufacturing, some supervision and some [full-on] support. But the good news is everybody else working from home is keeping up. So everything we wanted to do with our road maps, we're still on track. And I'm still very comfortable with the margin targets we have in both the $550 million and $650 million of target models.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [11]

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Very good and certainly a significant accomplishment in this environment. Just further clarifying that point. Is it reasonable to think that there's one-ish evaluation tools per quarter? Or would they be above or below that? Not looking for specific guidance, but just some color on what you see in the funnel.

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Kevin J. Brewer, Axcelis Technologies, Inc. - Executive VP & CFO [12]

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So I'll tell you this, there's many more evals going out this year than what we've disclosed in Q1. So there's plenty of evals in there, and that's part of the investment, making sure that a big chunk of that hits the OpEx line. But when I talk about still seeing full year gross margins average greater than 40%, I've got that accounted for, Craig. So even though we've got a fair number of evals coming out of, this was an unusually -- the cards are stacked against us in this quarter. We had 3 evals closed. We also had a very fine mix of high current. And you can see from our investor presentation, unfortunately, H is still at a lower margin, but it's continuing to get better. So we -- like I said, we had a few things stacked against us this quarter. But going forward, I still expect, even with this start at 38.3%, that our full year average is still going to be above 40% based on what I'm seeing for the Q2, Q3, Q4.

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Douglas A. Lawson, Axcelis Technologies, Inc. - EVP of Corporate Marketing & Strategy [13]

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Craig, just wanted to add one thing relative to expectations for future evals. The new products, the Purion XEmax, the Purion H200, Dragon and so forth, those are key targets for evals over the course of this year. So that's really part of the growth towards the $550 million, and especially towards the $650 million model is getting those products [seeded].

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [14]

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Absolutely, Doug. Mary, I wanted to see if we could get some color just on what you're seeing with the bookings and backlog strength for the first quarter, what that might mean for the mix of business in the second quarter. I know there's not specific guidance given the uncertainty, but any color on how some of the key segments might trend, mature foundry and then within memory, any DRAM and NAND color?

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Mary G. Puma, Axcelis Technologies, Inc. - CEO, President & Director [15]

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Okay. So I can tell you what the bookings look like for the first quarter. We have said that bookings typically come in one quarter, and those tools are typically shipped in the same quarter. But I can give you some color around it. So the bookings for Q1, it was actually 50-50 split between mature process technology and memory. And also, that split was pretty even in memory between DRAM and NAND. So that will give you a sense. And we mentioned on our last call that we believe that memory spending has picked up. It started for us in Q4. And in Q1, we talked about how approximately 50% of our shipments were for memory. And we are seeing strength in memory going into Q2 as well. Given the fact that we have all the COVID-19 activity going on, it's hard to assess the potential impact that, that will have on any specific segment going forward, particularly memory. But we still expect the memory spending to increase in 2021 and 2022.

We mentioned that automotive has been impacted, which obviously has an impact for us or a negative impact on power devices. So we've seen a little bit of slowdown in some of the mature process technology areas where customers are specifically focused on automotive. But other than that, demand really continues to be strong. And we attribute that not only to having a strong Purion product line, but having that large diverse customer base is positive. And so we think that while there may be some fluctuations -- some downward fluctuations in some market segments, we think that there will be a positive impact in other market segments, and we're hoping that, that will provide somewhat of a buffer for us moving forward. But demand, in general, continues to be strong.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [16]

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That's really helpful. And Mary, I know you spend a lot of time just out meeting with customers. I'm wondering if you could help us with any color just beyond the second quarter as it relates to the year's linearity. Any sense from those customer conversations? If the environment is setting up for flattish linearity, potentially down given how strong things are in the first half?

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Mary G. Puma, Axcelis Technologies, Inc. - CEO, President & Director [17]

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Yes. It's really hard to tell what's going to happen moving forward. I just mentioned some of the observations that we've had based on some of the market segments. But any further color, their -- customers are obviously taking a hard look at what's going on right now in terms of demand from their customers. And that's the part we just don't know is what is the economic impact going to be on their business and then how that will run down or impact our business.

So we continue to watch that. But as I said, right now things continue to be quite strong. And our sales teams are monitoring that on a daily basis and feeding that into us. So I think we have a pretty good handle right now on the demand for Q2, as Kevin said, but there obviously is a lot of uncertainty around some of the other factors that are going into that as he explained. So Craig, it's really hard to look much further out than that at this point and make any predictions.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [18]

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Understandable. Congratulations on the performance, Mary.

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Mary G. Puma, Axcelis Technologies, Inc. - CEO, President & Director [19]

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Thanks.

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Operator [20]

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And your next question comes from Christian Schwab with Craig-Hallum Capital.

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Christian David Schwab, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst & Partner [21]

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A great quarter. Just a little bit clarity -- more clarity on the cautiousness to give exact guidance on the top line for Q2. When you're looking at the supply chain issues, is the concern more of movement restrictions? Or is it actually fears over getting certain components? Or in addition, is there any cautiousness that you could -- as the quarter goes on, see customer push-outs of the extremely strong backlog that you currently have in place. If there's any color you could provide there, that would be great.

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Kevin J. Brewer, Axcelis Technologies, Inc. - Executive VP & CFO [22]

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Yes. So Christian, right now it's all around the supply chain. From a demand point of view, I'm not worried about the customer in Q2. As a matter of fact, there's probably more customers who like to pull things in than push out at this point. It really is -- keeping track of the supply chain is very global. I mean we've had demand anywhere from factories that might have had a discrete outbreak with the virus where we had to have temporary shutdowns. We've got things coming out of Mexico, where factories still can't have more than 50 people per shift on them, things like cables, for example. We've dealt with shutdowns that were in California. So it's -- the caution really is around the daily changing environment with supply chain. And again, it's -- we can certainly look at our suppliers right now and know where there's state regulations that may be slowing people down and shutting them down, but it's -- it gets back to discrete operates, for example. And all of a sudden, you've got a critical supplier who's not delivering.

So that's probably the most color I can give you right now. So that's why we're being a little bit cautious because we are -- on a daily basis, we're dealing with things. We have a fairly large supply chain. There's a lot of components that go on these implanters. And it only takes a couple that can stop you.

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Christian David Schwab, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst & Partner [23]

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Great. That's fabulous color. And then, Mary or Doug, as you guys -- or Mary talked about your expectations for an improved memory spending environment in 2020 and for that to continue into growth in '21. Can you give us some color and your guys' thoughts, the impact of growing capital intensity in each step, no change in NAND and DRAM? Is that the predominant reason for that? Or do you finally believe we'll begin to see, due to ongoing memory demand, the beginnings of capacity, true capacity additions versus technology node transitions impacting spending? Any clarity on your guys' long-term visions on that would be fabulous.

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Douglas A. Lawson, Axcelis Technologies, Inc. - EVP of Corporate Marketing & Strategy [24]

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Okay. So I think as we said in the call, the -- last year, memory underinvested. There's -- so there's a fair amount of activity, especially on the technology side right now and a little bit on capacity. So we would expect 2020, it continues in that manner. 2021 is really still the point where we'll start to see capacity -- big capacity increases, which hasn't really changed on the grand scheme of things throughout the COVID-19 crisis. So we're seeing a lot of interest, and there's a lot of activity relative to the more difficult implant steps. Hence, there's a lot of interest in the Dragon product in those steps. There's more high energy activity in some of those -- some of the NAND steps and so forth. So I think it's probably a little more driven by technology at this point, Christian, with some capacity adds. Keep in mind, as people add layer counts, it doesn't directly impact implant in the sense that there's more implants required for the next layer count, but it does affect the capacity balance within the factory, which usually does mean they do need to rebalance and add some implant steps -- some implanters. So it's -- a combination for 2020 and 2021 is, I think, where we're going to really see the step-up in capacity adds.

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Christian David Schwab, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst & Partner [25]

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Great. And then my last question -- congratulations on the bunch of the eval tools out there. Should we be watching eval tools, in particular potentially the Dragon, as kind of the leading indicator throughout this year for market share gains in '21?

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Mary G. Puma, Axcelis Technologies, Inc. - CEO, President & Director [26]

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Yes. I mean we talked in the past -- Doug, go ahead. It's fine.

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Douglas A. Lawson, Axcelis Technologies, Inc. - EVP of Corporate Marketing & Strategy [27]

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Yes. Well, I guess what I was going to say, Christian, was that the new tools are very important indicators on the -- for the model growth. The -- I think one of the things we talked about at the Investor Day was how the current products, some of the products like the VXE and some of the power devices are very critical towards the $550 million model, and that the newer ones, Dragon, XEmax, Purion H200, will have some influence over the $550 million model, but are very important for the $650 million model. So I think you should be looking at the evals for the new products as having much more impact on the longer-term model than on the nearer term, the current product set is -- are the main drivers for the $550 million model.

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Operator [28]

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And your next question comes from Tom Diffely with D.A. Davidson.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [29]

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So first, I guess, a clarification for Kevin. It sounds like if revenues are flat quarter-over-quarter, you think margin -- gross margins will be up a little bit even though there are some extra costs coming from the corona -- the extra cost from the coronavirus?

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Kevin J. Brewer, Axcelis Technologies, Inc. - Executive VP & CFO [30]

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Yes. Yes, Tom. Based on the cost-out activity that we're -- currently have in play in the Q2 mix, which does not have the 3 evals that Q1 did that we will continue to see margin expand. And throughout the year, we're going to have to continue to get better quarter-by-quarter to hit that greater than 40% for full year, which I fully expect at this point, we're going to do. And at this point, I have the impact, as I know it, baked into those gross margin assumptions. And I -- there's -- in Q2, Q3 is where, at this point, I see the majority of the impact on the business based on what I know today.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [31]

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Yes. Okay. That's very helpful. And then when we look at the new products, specifically here, the Dragon, so obviously very nice to see a follow-on order and a shipment on that. But how do you see that rolling out? Does it stay with the NAND market for a while, and then ultimately you get to look from the DRAM or the logic market? Or are companies looking at it for all 3 end markets? A little color there would be great.

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Douglas A. Lawson, Axcelis Technologies, Inc. - EVP of Corporate Marketing & Strategy [32]

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Okay. So the initial customer has looked at it for both and started -- just based on their demand and their technology needs, started on the NAND side. There's still strong interest on the DRAM side. And we'll see that roll out. And there's strong interest in the logic -- advanced logic side in the product as well. So I think, Tom, we can't go into the specifics for each of the customers. But the sales team and marketing team and the customers, they have a strategy for sort of the combination of Purion H and Dragon for each of the applications and what fits for the different recipe needs for each of the technologies. So I think you should expect to see Dragon. It's starting with NAND. It wouldn't surprise me to see DRAM activity over the course of this year and certainly into next year as well.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [33]

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Okay. So it's not a situation where the technology advantages on the Dragon are more evident or more suited towards NAND versus DRAM based on the structure?

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Douglas A. Lawson, Axcelis Technologies, Inc. - EVP of Corporate Marketing & Strategy [34]

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Yes. No, it's absolutely not specific demand. So all of those -- all 3 of the advanced technologies, whether it's logic, DRAM or NAND, have similar structural things and uniformity requirements that Dragon is better at than the existing products on the market.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [35]

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Great. Okay. And then finally, when you look at the penetration into the Japanese market, how big a market is that for ion implant right now?

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Mary G. Puma, Axcelis Technologies, Inc. - CEO, President & Director [36]

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We think that Japan actually...

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Douglas A. Lawson, Axcelis Technologies, Inc. - EVP of Corporate Marketing & Strategy [37]

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Go ahead.

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Mary G. Puma, Axcelis Technologies, Inc. - CEO, President & Director [38]

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Go ahead.

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Douglas A. Lawson, Axcelis Technologies, Inc. - EVP of Corporate Marketing & Strategy [39]

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Go ahead, Mary.

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Mary G. Puma, Axcelis Technologies, Inc. - CEO, President & Director [40]

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All right. Well, we actually think that Japan represents about 15% of the overall $1 billion ion implant TAM, so about $150 million. We have not sold there for a number of years. Just recently broke back in and sold some legacy systems, but we're very excited because we did just receive our first PO for a Purion product. It was a Purion XE for a power device application from a Japanese customer. So we believe now that we have many opportunities to expand into other customers in other market segments. We are working very closely with the large Japanese customers. We're continuing to collaborate with SCREEN, and we have equipment in their lab. But one of the things that we've learned over the last 2 years from working with SCREEN is that customers actually want to buy directly from Axcelis because of the highly technical sales process associated with an ion implanter. So we have, over the last few years, been building a Japanese organization, and we're continuing to staff our own Axcelis direct team. And in fact, we recently hired a new Japanese country manager. So it's a large opportunity and we're planning to aggressively go after it.

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Douglas A. Lawson, Axcelis Technologies, Inc. - EVP of Corporate Marketing & Strategy [41]

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Tom, let me -- if I can add just one more thing. This is another one where the Japanese market is something that we think is important on the $650 million model, will have lesser impact on the march to the $550 million model. And so it's something that we expect we'll be patient with and will take some time.

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Operator [42]

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Your next question comes from David Duley, Steelhead Securities.

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David Duley, Steelhead Securities LLC - Managing Principal [43]

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Most of my questions have been answered, but I still have a few. I guess first question is the strength in the orders and the book-to-bill. Orders were up substantially, and your book-to-bill, I guess, was 1.3. But you kind of implied that your revenues, if everything shakes out as you expect, would be flat. Could you just talk about why you would expect flat with that surge in orders?

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Kevin J. Brewer, Axcelis Technologies, Inc. - Executive VP & CFO [44]

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Well, we're looking at, at this point, what we believe we can deliver on in terms of commitments. And again, what kind of gets in our way is, we don't know from day-to-day what could happen with supply chain disruptions. So we feel at this point, it could be similar. But again, there's the day-to-day things that could get interrupted. We have a pretty strong backlog coming out of the quarter 2. Or I mean, the backlog, I think it's $127 million. So we can see things up -- going up a little bit, but that's just where we are going to be at this point in time, David,

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David Duley, Steelhead Securities LLC - Managing Principal [45]

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So this quarter, you're going to ship a lot more out of the backlog rather than book and ship during the quarter, I guess, is one assumption.

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Kevin J. Brewer, Axcelis Technologies, Inc. - Executive VP & CFO [46]

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We still -- I mean it's still a lot of quoting activities. So we -- it doesn't mean that Q2 can't be another strong bookings quarter. Quotation activity remains strong at this point. So I think the real key is that -- the good news, so far, is that we haven't seen -- at least Axcelis hasn't seen a falloff in some customer demand for products. And based on the Q1 numbers, bookings and backlog, and based on the quotation activity we're still seeing, we're expecting that to continue at this point.

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David Duley, Steelhead Securities LLC - Managing Principal [47]

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Okay. So it's fair to say that any constraints you have on revenue are supply side-driven rather than demand from the customers at this point?

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Kevin J. Brewer, Axcelis Technologies, Inc. - Executive VP & CFO [48]

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Absolutely for Q2, yes. Yes.

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Douglas A. Lawson, Axcelis Technologies, Inc. - EVP of Corporate Marketing & Strategy [49]

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And Dave, if I could just add on that. When you get into the segmented markets and some of the specialty markets and so forth and the mature process technologies, those guys do plan out a little bit longer in terms of POs and so forth. So some bookings are not necessarily in the same quarter alone when -- in these -- in some of these markets versus the memory, which is -- tends to be much more book and ship, very close together.

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David Duley, Steelhead Securities LLC - Managing Principal [50]

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Okay. And then as far as Chinese revenue goes, they kind of went into the pandemic first, and then, I guess, they were one of the first geographic regions to come out. And I realize you have a lot of exposure to China. But are you seeing the domestic Chinese guys' activity improve substantially as their economy improves? And do you think that, that can be a good guide for what we might expect when the U.S. and European gets to the same point in the curve?

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Mary G. Puma, Axcelis Technologies, Inc. - CEO, President & Director [51]

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So Dave, I don't actually think we saw a significant change in demand from China, even during the first quarter, while they were going through the height of the pandemic. They did a pretty good job of keeping things going, I would say, for the most part. The fabs continued to run. We continued to service the equipment in those fabs. We installed new equipment in those fabs. I'm not going to say that goes without challenges, and I want to thank our employees for actually making that happen. But we didn't really see any significant slowdown in China. So moving into Q2, it's pretty much business as usual. There hasn't been any significant change in -- for the most part, in the way that they have been laying out their products. And if anything, I would say, maybe things have accelerated a little bit. They're asking for pull-ins, but I'm not sure if that's any acceleration in projects as much as it is what Kevin mentioned earlier, some customers are a little bit nervous about supply chain issues. And so they continue to work with us and contact us to make sure that we are able to ship their products on time. And they're happy to take -- in some cases, take them earlier if we can get the shipments out earlier.

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David Duley, Steelhead Securities LLC - Managing Principal [52]

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Okay. Final question from me is, as far as the evaluation systems that were placed during the March quarter, I mentioned, I guess, 3. You got follow-on orders for one of those evals. Would we expect follow-on orders from the other 2 evaluation systems in the current quarter? Or when would we expect follow-ons for those other evals?

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Mary G. Puma, Axcelis Technologies, Inc. - CEO, President & Director [53]

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So all of those evals were memory evals. They are applications we've been working with the customer on for a long time. But I think given some of the things that are going on and the timing of the investment plans of those customers, I don't think it's something that we're necessarily going to see in the short term, meaning the next quarter, maybe even 2 quarters. It's just simply a function of planning and when those customers are going to make an investment. And I'm not sure any of those things have changed significantly as a result of what's going on right now with the pandemic. I think it's something that we knew in advance or have known for a while.

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Operator [54]

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(Operator Instructions) Your next question comes from Mark Miller with The Benchmark Company.

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Mark S. Miller, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [55]

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I'm glad everyone is staying healthy at Axcelis.

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Kevin J. Brewer, Axcelis Technologies, Inc. - Executive VP & CFO [56]

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Thanks, Mark.

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Mark S. Miller, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [57]

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You're welcome. In terms of the eval tools, do you have any eval tools in Japan currently?

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Mary G. Puma, Axcelis Technologies, Inc. - CEO, President & Director [58]

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No. We don't have any eval tools in Japan currently. The tool that we're shipping is not going to be an eval. We have one outstanding evaluation right now that is being used by an image sensor customer that we are forecasting will close within this year. But as Kevin mentioned and Doug mentioned, we have a lot of new products right now that we're working with customers on to [seed] the market, and we will have additional evals going out throughout the year. In fact, a significant number of evals going out, which, again, as Kevin mentioned, is one of the things driving our operating expenses for the year. But it's a great investment. It's [too fast] for us to make for the future for the $550 million and $650 million model.

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Mark S. Miller, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [59]

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I believe you said -- you mentioned you weren't really seeing any major impact in terms of component supply for your equipment because of the virus. Was that correct?

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Kevin J. Brewer, Axcelis Technologies, Inc. - Executive VP & CFO [60]

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No. So -- well, I guess yes and no. So we're working around issues on a daily basis, Mark. But at this point, we've been able to resolve most of the issues we've had, some of them have been taken longer than others. It's definitely impacted the flow of materials into the factory in terms of the self-starts and stuff. But there's been nothing, to date, that has put us down hard. We've been able to, so far, work around things. And as I mentioned, probably the biggest impact is the unknown at this point. I know what I know, but I don't know what I don't know. And there are -- we have had to deal with -- some are -- actually some of the smaller suppliers where there were discrete outbreaks in their factories and they had to shut down for a period of time. So that's kind of what we're navigating around.

I think in terms of what the governments are going to do around the world, the various governments, we have a good handle on the capacity of our suppliers. We know where there are still restrictions. You know what limitations we are working with. So again, this is more about what could change on a daily basis and discrete components that's -- we buy a lot of parts, but there's millions of parts that go into the parts we buy. So it's hard to even know. It could happen to any discrete component, a capacitor, a transistor, whatever. So -- but anyway, we're working around what we know at this point, Mark.

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Mark S. Miller, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [61]

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You benefited from a lower corporate tax rate in the March quarter. Is that -- are you going to go back to more normal corporate tax rate in the rest of quarters of this year?

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Kevin J. Brewer, Axcelis Technologies, Inc. - Executive VP & CFO [62]

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Yes. I mean I'm not sure we're going to -- for many years if we're going to -- I think we've always [called figures] 21%, 22%. There still could be different pickups in that. We have R&D tax credit, for example, that we're still working through, but it will probably come up from where it was in Q1.

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Mark S. Miller, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [63]

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What was the reason it was so low? Was it the R&D tax credit phasing in?

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Kevin J. Brewer, Axcelis Technologies, Inc. - Executive VP & CFO [64]

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Yes. There was various credits that we had to come in through that we phased in.

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Operator [65]

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And your next question comes from Craig Ellis with B. Riley FBR.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [66]

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Yes. Two, please. The first one, Mary, from the depiction that we're hearing around China, it seems that China has potential to stay more in the mid- to high 30s then drift back towards what's historically been about 30% of sales. Is that a fair view of what the team is seeing over the next quarter or so?

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Mary G. Puma, Axcelis Technologies, Inc. - CEO, President & Director [67]

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Craig, I'm not -- I can't -- I'm not going to give you any guidance on China. I will say that we do expect it to continue to contribute a large portion of our revenues moving out through the rest of the year.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [68]

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Okay. And then the follow-up question is more strategic, and it goes back to Analyst Day. At Analyst Day, I thought one of the more interesting slides relative to the $550 million and $650 million models were the market segmentation work the team had done across mature process technology, memory and advanced logic in the 30 to 40 implant recipes that the company sees across those as incremental opportunities for new product and custom product. As we move through this year and exit 2020, Mary, where will we be in terms of progress, placing product into those 30 to 40 incremental recipes? And what should we expect the team could do in 2021 there?

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Mary G. Puma, Axcelis Technologies, Inc. - CEO, President & Director [69]

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Doug, do you want to take that?

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Douglas A. Lawson, Axcelis Technologies, Inc. - EVP of Corporate Marketing & Strategy [70]

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Sure. So Craig, the XEmax is a key product in the image sensor space that we're going after several recipes. So we should -- we would expect and hope that we'll see evaluation systems for that over that time frame that you're discussing. Purion Dragon certainly has a lot of interest, has the first eval closed and the first follow-on for a NAND order. As I mentioned before in one of the other questions, we would expect additional activity in NAND and in the DRAM and hopefully into logic over that cycle.

And then the Purion H is -- Purion H200, excuse me, is targeted, first and foremost, at the power device market. And so there's a lot of interest there because it's a much more productive tool for those applications, which is key to the customers in reducing the overall cost of their devices. So I think that we should over this next couple of years that you described, see many applications and many new evals of -- especially of those 3 systems.

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Operator [71]

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And this concludes the Q&A portion of the call. I will now turn the call back over to Mary Puma who will make a few closing remarks.

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Mary G. Puma, Axcelis Technologies, Inc. - CEO, President & Director [72]

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Thank you, Julie.

I'd like to thank everyone for listening to our call, and we hope you can join us virtually for several conferences this spring. We will be participating in the Craig-Hallum 17th Annual Institutional Investor Conference on May 27, The Cowen 2020 Technology, Media & Telecom Conference on May 29, and the Stifel's 2020 Cross Sector Insight Conference on June 8. We will also be participating in virtual non-deal road shows with D.A. Davidson and B. Riley during the quarter.

We thank you for your continued support, and please stay healthy.

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Operator [73]

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