Axcelis Technologies Inc (ACLS) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies call to discuss the Company's results for the fourth quarter and full year of 2018. My name is Brian, and I'll be your coordinator for today. (Operator Instructions) As a reminder, this conference call may be recorded for replay purposes.

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

Thank you, Brian. With me today is Kevin Brewer, Executive Vice President and CFO; and Doug Lawson, Executive Vice President of Corporate Marketing and Strategy. 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 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.

2018 was a successful year for Axcelis. One year ago, at our year-end earnings call, we set a revenue objective of $450 million. We came very close with full year 2018 revenues of $442.6 million. Only a couple of tools short, despite a significant slowdown in memory spending for the entire second half of the year. We accomplished this as a result of hard work over the last few years and a successful execution of a few critical initiatives.

First, we expanded the Purion installed base to a large and diverse group of customers. Second, we focused on key market segments in the mature-process technology area, such as image sensors, power devices and mature foundry/logic. And finally, we developed Purion product extensions specifically for these segments and became key partners with these customers. As a result, when memory slowed, Axcelis kept growing.

All of our financial metrics improved in 2018. Revenue increased by nearly 8%, systems revenue increased by approximately 7%, market share grew to 29%, CS&I revenue increased by nearly 10%, gross margin exceeded 40% and cash increased by over 30% to nearly $185 million. All this while the memory market was experiencing a deep slowdown, which is reflected in the fourth quarter in our revenue mix by segment with a split of 68% mature foundry/logic and 32% memory.

For the full year, the mix was 54% mature foundry/logic and 46% memory, highlighting the tale of the 2 halves.

Now let me summarize a few of our fourth quarter 2018 financial results and provide Q1 guidance. Revenues for the quarter were $105.7 million, with earnings per share of $0.25. Results for the quarter were above guidance and consensus estimates. 2018 revenues were $442.6 million with earnings per share of $1.35. The geographic mix of our system's shipments for the fourth quarter were: Korea, 24%; China, 22%; Taiwan, 19%; the U.S. and Europe, 22%; Japan, 10%; and the rest of the world, 3%.

Turning to guidance for the first quarter, we are forecasting revenues between $90 million and $95 million. We expect gross margins of approximately 41%, operating income of $6 million to $7 million and EPS of $0.10 to $0.13. With the memory slowdown continuing as we enter the new year, our 2019 results will depend largely on when memory spending picks back up. Based on what we know today and without providing full year guidance, our 2019 revenues could be flat to down 5% to 10%. Gross margins will continue to improve year-over-year, but will fluctuate quarter-to-quarter. Highly profitable market share leadership in ion implantation remains our primary objective. So we will maintain spending levels in R&D and SG&A through this downturn. R&D will be focused on new Purion products and extensions. We have been very successful with our market segment approach to product development and sales. In 2019, we will continue to develop Purion product extensions, focused on the image sensor market for advanced image sensor products and on the power device market, in silicon carbide as well as silicon. Additionally, we will be investing in Purion H product extensions, specifically targeting the productivity needs of the mature process technology market and the advanced technology requirements of leading-edge logic customers.

SG&A investment will be focused on development of infrastructure to support the Japanese market, continued expansion of the Chinese market and penetration of the advanced foundry/logic segment. Our 3 2019 growth objectives include: Number one, growing our Purion footprint within our existing customer base; number two, penetrating new markets with Purion, specifically the advanced foundry/logic segment in the Japanese market. Each of these markets represents approximately $150 million of the $1 billion ion implant [pm]; and number three, introducing Purion product extensions to drive growth in the next upturn.

Despite this current slowdown in memory, the fundamentals of the data-centric connected world have not changed. The cycle continues to be driven by IoT in the mature foundry/logic market, data storage in the 3D NAND market and data analytics and AI in the DRAM and advance logic segments.

As 5G proliferates, we expect another boost to this cycle across all segments. Now I'd like to turn it over to Kevin to discuss our financials.

Thank you, Mary. Axcelis delivered solid fourth quarter results beating company guidance and consensus estimates across the board. Full year 2018 financial results also finished strong. The revenue and gross margin are at highest levels in 12 years. Cash generated from operations in 2018 was $49.9 million. This drove our year-end cash balance to $184.9 million. Margin improvement continue to be an area of focus across the business in 2018. As we targeted improvement initiatives on the things we could control. In 2019, we expect to realize additional product cost-out through value engineering and lean, supply chain optimization and strategic investments in CS&I projects. With regards to operating expenses, we are aligning incremental spending with initiatives that are expected to drive customer satisfaction, margin expansion and growth opportunities that support our $550 million business model and beyond.

Based on the company's strong financial performance and solid cash position, we announced on January 14 that the Axcelis board had authorized a 1-year $35 million share repurchase program. We believe this program, which is meaningful in size, will be executed while impacting our strategic growth initiatives.

Now turning to our fourth quarter financial results. Q4 revenue finished at $105.7 million compared to $95.4 million in Q3. Q4 system sales were $64.6 million compared to $56.4 million in Q3. Q4 CS&I revenue finished at $41.1 million compared to $39 million in Q3. Full year 2018 revenue was $442.6 million, up approximately 8% compared to $410.6 million in 2017. Systems revenue for the year was $280.4 million, up approximately 7% compared to $262.7 million in 2017. CS&I revenue was $162.2 million compared to $147.9 million in 2017, up approximately 10%. Q4 sales to our top 10 customers accounted for approximately 83% of our total sales compared to 80% in Q3 with 5 customers at 10% or above. Q4 system bookings were $42.1 million compared to $62.8 million in Q3. The Q4 book-to-bill ratio 0.67 versus 1.08 in Q3. Backlog in Q4, including deferred revenue finished at $63.1 million compared to $81.3 million in Q3. Q4 combined SG&A and R&D spending was $32 million or 30.3% of revenue and in line with guidance, compared to $29.2 million or 30.7% in Q3. SG&A in the quarter was $17.8 million with R&D at 14.2%.

In Q1, we expect SG&A and R&D spending to be approximately $33 million to support growth initiatives and certain expenses that occur each year in our first quarter. Q4 gross margin was 41.2% compared to 41.8% in Q3. Full year gross margin was 40.6% compared to 36.6% in 2017. Gross margin improvement initiatives, product extensions and mix favorably impacted full year margins, which finished at our highest level in 12 years.

Regarding Q1, gross margin was approximately 41%, and expect full year 2019 gross margin to be in the 40% to 41% range. Operating profit in Q4 was $11.5 million compared to $10.7 million in Q3. Full year 2018 operating profit was $60 million, up 25% compared to $47.8 million in 2017, regarding Q1 operating profit of approximately $6 million to $7 million.

Q4 net income was $8.5 million, $0.25 per share compared to $8.8 million or $0.26 per share in Q3. Full year 2018 net income was $45.9 million compared to net income of $127 million in 2017, which was favorably impacted by the reversal of our valuation allowance. Regarding Q1 earnings per share of $0.10 to $0.13. Q4 inventory ended at $129 million compared to $124 million in Q3. Q4 inventory returns, excluding evaluation tools, finished at 2.1 compared to 1.9 in Q3.

Q4 accounts payable were $36 million compared to $27.9 million in Q3. Q4 receivables were $78.7 million compared to $85 million in Q3. Q4 cash finished at $184.9 million compared to $155.6 million in Q3. In the quarter, we generated $32.6 million of cash from operations. Full year cash from operations was $49.9 million. Year-end 2018 cash of $184.9 million was up $44 million compared to $140.9 million in 2017.

We realized strong financial performance in 2018 driven by growth in system sales and CS&I. In 2019, we plan to execute initiatives that will drive customer satisfaction, margin expansion and business growth. We plan to closely monitor all incremental spending to maintain cost control or invest in initiatives that are critical to achieving our $550 million business model. Our updated model, which now reflects gross margin of 42% to 43%, operating profit of 17% to 18% and free cash flow greater than 15% can be found on the company website.

I will now turn the call back to Mary for closing comments.

Thank you, Kevin. Our customers have a choice in implants, and as the numbers show, they are choosing Axcelis. They choose Axcelis for Purion platform technology, for solutions tailored to their needs in the form of Purion product extensions, and for the innovation benefit they gain from a more competitive ion implant market. In 2018, Axcelis proved, through our financial performance, that we are much more than a memory company. I am confident that with the continued focus on customer needs, the technology development to support those needs and the dedication of our employees, Axcelis will continue to grow and will achieve market share leadership in ion implantation. With that, I'd like to open it up for questions. Brian?

(Operator Instructions) Our first question will come from the line of Craig Ellis with B. Riley FBR.

Mary, I wanted to start just with the follow-up on your point on 2019 subjectives and may be tie that into the potential for revenues in 2019 to be down in the 5% to 10% range. Can you just help us with some of the milestones associated with each of the 3 objectives? And the way that plays into the potential revenues that Axcelis could realize on a longer-term basis as we look at 2019?

Okay. Well, first, let me clarify, we said that we could be flat to down 5% to 10%. So right now really what's driving our, I'll call it, directional information on where our revenues could go has to do with where we are in the cycle. And we said the long-term cycle remains intact. But the slowdown that we're experiencing, which is mainly driven by memory, is really what -- potentially will have an impact on our revenues this year. So like our peers and others in the industry, we expect memory spending to begin picking back up likely sometime in the second half of the year, maybe starting with DRAM and then spreading to 3D NAND. So in terms of the objectives that we have for the year, it -- what's going on right now really doesn't change any of the initiatives that we have or the milestones that we have. So we talked -- the 3 objectives we talked about are growth within -- growing our Purion footprint within our existing customer base. So really what's going on right now in the market doesn't have any impact on that, potentially it's just a timing issue with the memory customers. We're going to continue to focus on penetrating Japan and the advanced foundry/logic market, and again, all of those initiatives will continue as planned. And then finally, we're going to continue developing product extensions for some of the specific market segments where we feel like there's a good opportunity to win new business and expand our business. So again, we've talked about in the past, power devices, CMOS image sensors and advanced logic and memory. So again, none of those things, other than potentially timing based on and some of those memory customers, will have an impact on what we're doing in 2019.

Yes, Craig, this is Doug. Let me just add a little bit more color on the products. One of the things that we're really focusing on this year is bringing product extensions to the high current market, the Purion H. There's very different needs in high current for the mature markets compared to the advanced markets. And so as you know, we've worked very closely with image sensor companies and power device companies to tailor the Purion product family to those markets, and now we're looking at doing the same thing with the high current markets, especially as we look ahead, productivity for mature, which has been a strong point for us.

That's very helpful. My next question is on gross margin. Kevin, really strong gross margins in the quarter and the outlook. You've been clear for 18 months or so that there are cost-down initiatives that the Company is executing. So as we look at gross margins, not only in the near-term, but with the target model increasing, how much of what we're seeing is really the fruits of those cost-down initiatives versus other things like mix? And the product customization benefits that you'd be getting versus any change in the competitive landscape?

Yes. So as I -- as you highlight, I continue to say that we've been driving cost out of the projects. The value engineering, the supply chain optimization, we put a lot of work in that. The product extensions which brings some premium pricing along as well. We still have a large number of opportunities to drive further cost out of the products. As Purion, as it's matured over the last several years, we've been able to move more parts into our low-cost suppliers, and we continue to look at that at this point in time. Going forward, as Doug just kind of mentioned, we're -- and Mary did as well, we're investing in these products right now for more product extensions, which is further going to help the gross margins. And as I look at the target model, we've upped that. I think the last model we had out there had us at 40% to 42% out of $550 million, we've upped that to 42% to 43%. It's a combination of the cost out, the profit extensions. And the mix is more of a thing quarter-to-quarter that we talked about, depending on mix of service to systems or the mix within the Purion products. But in the updated investor presentation, the slide shows our relative standard margins of the 3 Purion products. You'll see as we head out to that $550 million model, but the good news is the H more closely aligns with high energy on the standard margins, which is good because that's a large opportunity for us still. So we're growing in that area, and the margins are also accelerating in that area.

That's helpful. And the last one for me before I get back in the queue. The share buyback announcement earlier this year, material development for the Company, material in size. Can you just help us understand how you would approach by utilizing that buyback? One, have you started to do anything? And two, is that something that could be used on a more ratable basis or matrix basis? Just help us with a framework per use?

Yes. So we're not using a 10b5-1 program. So our plan is to be opportunistic when we purchase these shares. I want to make sure that we're utilizing the Company cash in a manner that's a good investment for both the Company and the shareholders.

And our next question will come from the line of Patrick Ho with Stifel.

Mary, may be, first off, in terms of the mature technology node, opportunities and the strength you saw in the December quarter. You talked on -- in your prepared remarks about CMOS image sensors and power semiconductors. Were there any other types of devices where you saw strength? And whether that mix changes in terms of the devices in Q1?

Okay. So I'll have Doug respond to that.

Patrick, so those 2 product lines continued to be strong. One thing that we've started to focus on is the silicon side of power device. Last year there was lot of activity in silicon carbide. As we've -- what we've found as we've really done this market segment approach, is we get very, very close with the customers, and often times with their customers. And so we're able to understand their roadmaps in more detail, and then go back and create extensions that can focus in on that area. So one of the places that we're very focused on right now is in the mature foundries, where product mix and productivity are a big deal, and high current typically is a bottleneck for them. Purion H has done well there, but we see some opportunities in that market to really focus there. And then in the advanced logic, we've had an evaluation going on so we've gotten much closer to the process needs and requirements there. And so -- now we're really looking at how to tailor Purion H even more for some of those more advanced nodes. So that's the activity there.

Right. That's helpful. And may be as a follow-up question. You talked about the extensions and how in the past productivity improvements are a key variable in driving sales for the extensions. Is that still the only variable that drives these extensions? Or are you seeing other factors, I guess, drive your, I guess, needs to create more of these extensions that you described on the call?

It varies by market segment. So for example, in image sensors, metals contamination, and infrared and deep-red implants, they require much higher energy. So that's an area that's -- that effects yield, effects device performance. In power device market, it's thermal control, it's silicon carbide substrates. And now as we move into silicon, there's different device requirements there. So it's not just productivity, oftentimes it very much gets back to device performance and yield issues.

Right. And final question from me for Kevin. Obviously, the timing of the memory recovery is still very uncertain, and that's a big swing factor for the industry as a whole. From a supply chain management and the optimization you talked about on the call, how are you managing that in your inventory levels, given that uncertainty, and I guess, helping to keep your gross margins in that 40% to 41% range?

So what we do when things start to slowdown, typically that -- we have a lot of inventory that's very short lead time. So it's really the longer lead time inventory we have to manage through. So we have planning building materials that we continue to drive. And based on what we're hearing from the sales team, and where we think the second half is going to be, the long lead stuff, we will continue to drive that, but again, the short lead we can easily turn that off. And we've also got a lot of our suppliers set up on pull right now. So it's easier to hold the material back when you don't need it and then have it there when you get ready to turn it back on. But we're keeping a close eye on things because we got to make sure that we certainly don't want to miss a ramp up. So we're -- like I said, we're closely monitoring that, Patrick.

And our next question will come from the line of David Duley with Steelhead Securities.

I had just a couple of clarification questions. There was a big jump in deferred revenue in the quarter, I think from $14 million to $19 million. Could you explain what the -- what that was?

A lot of it's on the timing of the shipments.

There was a lot that went out in December, right at the end of the year.

Right. Yes.

Okay. I -- then -- recently, when you reported around $95 million, you had higher earnings levels than, I think, you're forecasting. Operating income you're forecasting for the current level. And I'm just wondering, what the key reasons are for that? I think it's in operating expenses. Maybe you could just talk about the incremental investment in operating expenses that you're making?

Yes.

Well, yes. It is the operating expenses. And then we've -- in the call, I think, we talked about we're going to continue to invest through this cycle. Product extensions that we have lined up, we're going to invest in because those are all things we need to get us to the $550 million model. So if we pull back right now on the spending, we're going to really jeopardize the $550 million model and beyond. So the margins have been brought up to offset some of that. But there is higher spending probably than -- I'm not sure what model you're looking at, Dave, but certainly, it's probably higher than what you're seeing.

Well, I was just comparing it, I think, to the third quarter of '18, when you did $95 million and operating income was $10.7 million, and now you're guiding it to a lower number.

Yes. And then also -- and Q1 is a little bit heavier. There is -- there's onetime expenses that we get in Q1 that we don't see in other quarters. So that doesn't help the Q1 numbers.

Okay.

The key, Dave, is really going back to that investment. This is -- we are somewhere in the bottom of this cycle. And as it turns around, we want to make sure that we've got the product sets. If you look on the updated revenue chart by year, you can see that we've invested pretty heavily in new product introductions during each of the down cycles. And that's the key to driving success in the up cycle.

Yes. And it's not just the R&D, it's also in the infrastructure to support growth. So we've been talking about our relationship with screen, and now that's going to drive our growth in Japan. We have shipped the Purion H there. That's going to be coming online, becoming available for demo and training in Q1. So they are expenses like that where we're just going to continue to make the investment because it's the right thing to do.

As well as additional evals.

Yes. Additional evals. We've got additional infrastructure in China and then also some to support the leading-edge foundry/logic. So those are all the right things to do to prepare us for the $550 million model and beyond.

Okay. And help us understand what's embedded in your expectations for the year from the 2 new markets, either Japan or the high-end foundry/logic market?

At this point in time, we've talked about this a lot. Those are 2 markets that are very difficult to penetrate. We're working very hard to -- well, we have an evaluation unit in an advanced foundry customer, and that's going well. And so that will just continue to expand over time. Again, it just takes time to get additional follow-on orders from that. And in Japan, I would hope that we would place some of our initial units, whether they're evaluation or actual outright sales into Japan in 2019. But again, we're not going to see any significant volume coming from either of those segments this year, it's likely to start next year.

Okay. And then, Kevin, what do you expect the tax rate to be during '19?

We always model it 21%. We've obviously been doing a little bit better than that because there's R&D tax credits and this year there's a lot of stuff going on in toll tax and things. But I would just use 21%, Dave.

And our next question will come from the line of Christian Schwab with Hallum Capital Group.

I apologize in advance. But -- I jumped on a little bit late. So in 2019, you expect your revenue year-over-year to be flat to down 5% to 10%, correct?

Yes.

Yes.

Fabulous. Can you -- what were the 1, 2 to 3 reasons that you gave for your dramatic out-performance of what way for front-end, equipment spend and aggregate will do this year being down mid- to high-teens?

What do you think is going to continue to drive our growth this year? Is that what you're asking?

Yes. I guess, my question is, why are you outperforming CapEx spending, in general. Which is expected by most to be down mid- to high-teens year-over-year? And you could do as well as flat? So I'm looking for the 2 or 3 reasons why.

Okay. So first, it does have to do with market dynamics. We talked about -- we've been talking about how we're more than just a memory company. We have a very strong customer base and revenue base in the mature process technology area, and that's likely going to have a much higher percentage -- represent a much higher percentage of our revenues in 2019. And that segment remains strong. We've also had good Purion market penetration. So we've got a diverse customer base. And we just talked about how we're going to continue to focus on increasing our presence or our Purion footprint. So we talked about Japan and advanced logic. There are some new memory applications that we're going after, and there are some specialty applications, and again, we've talked about power devices and image sensors. And so we're working all of those things, and we're continuing to gain market share despite the fact that the market -- the actual CapEx spending is likely to be down this year. And then the final thing, Doug talked about this a few minutes ago, the new product extensions. We're going to continue invest in that. And some of those new products and upgrades and things that are going to enhance our ability to meet some of these new applications are going to start to come out in 2019, and we expect those to start to get traction at the end of the year. So this year, again, I said this earlier, but it's really the flat to minus 5% to 10% of revenues, it's really being driven by the memory downturn. And we expect things, like our peers due to potentially pick back up some time in the second half of the year and that will drive where our revenues end up in 2019 versus 2018.

Okay. So -- not to put words in your mouth, so let me restate what you went through there. So you would say that maturing node spending remains robust in '19 versus '18. You would continue to expect to gain market share throughout '19 versus '18. And if memory comes back in the second half of the year, we'll be closer to flat. If it doesn't, we'll be closer to down 10, is that fair?

Well, I don't -- again, I don't know. We're not giving guidance for the year, in terms of exactly where we'll end up for the year. But what we are saying is the memory recovery -- the timing of the -- the timing and strength of the memory recovery will impact our 2019 revenues.

And our next question will come from the line of Mark Miller with Benchmark Company.

Pursuing recent line further up. With smartphone production expected to be down this year, what gives you confidence that memory will be bouncing back in the second half of the year?

Well, I think, the exact timing of when memory bounces back, Mark, is still up for debate by everybody in the universe. But memory is not -- memory spending isn't just being driven by the smartphone. The data center and data analytics and so forth, they're very big drivers. So we feel like most everyone that it's -- we are in a fairly typical memory cycle in the middle of a stronger wave, which is more this data-centric wave. And that as the supply and demand come back into line then memory will kick back in. We feel that DRAM probably kicks in a little sooner than 3D NAND, at least for implant. And then 3D NAND will kick back in again as the supply and demand come back in line. So the exact timing, we're not trying to guess exact. We certainly would prefer it to happen sooner than later.

Just from your guidance for the current quarter for the year in terms of the top line. What's going to be driving the big? It looks like very significant increase, especially centered at -- in your revenues. Is it going to be more of the mature process, the memory down or basically share gains? What's going to be the biggest driver of the delta in the second half of the year in revenues?

So it's -- the driver for -- as we look at the year, it's going to be the mature markets and our continued spread. We got a large diverse customer base there. So increasing our footprint, which we are doing by focusing in on the application needs that's driving a lot of our R&D investment relative to the product extension. So that's probably, number one. And again, as we said before, when memory comes back that will impact; if it comes back sooner then we'll be higher, if it comes back later then we'll be lower. That's -- we know that's a big piece of the market.

You mentioned advanced logic, I believe, as one of the evals. Could you give us a little more -- update us on where the evals are going on currently?

Sorry, in terms of where they are?

Right. Where they are?

Okay. So we have 3 evals right now. One is in advanced logic, one is in memory and one is in image sensors.

Okay. And finally, is -- the market from the domestic Chinese NAND manufacturers, that's similar to price right now but you're expecting that's going to pick up? Or is that somewhat stronger than the overall memory market?

Well, if you look at China, China's obviously comprised of multiple customers and multiple types of segments. And if you -- China overall, there clearly have been some delays in new China projects based on both fab construction delays and also on market conditions. And certainly, the memory slowdown is impacting those customers who are serving the memory market. But China continues to be 20% to 30% of Axcelis' revenues. Although, I just want to remind people that a significant portion of our business in China comes from the global semiconductor companies versus the domestic customers. And for the slowdowns in fab construction, that tends to be in the -- with the domestic Chinese customers.

And Mark, let me just add to that. I think the other thing that's notable is if you look at our geographic spread this particular quarter, China was still above 20%. The mix -- the spread was pretty interesting. It was around 20% for Korea, around 20% for China, around 20% for U.S. and Europe and then we had our first shipments to Japan, which accounted for 10%. And so it's a much more diverse grouping then you would typically see when memory is very strong in which we see a much heavier waiting towards the Korean market.

(Operator Instructions) Our next question will come from the line of Quinn Bolton with Needham & Company.

Want to just to -- you've talked a lot about that mix shifting from memory to mature logic foundry in 2019. I'm just kind of curious, do you expect the mature logic foundry business to actually increase year-on-year? Or is it more likely to be flat given just the overall decline in WFE?

Well, go ahead, Doug.

Yes, I think, it's year-over-year as a mix. It's kind of interesting, the last 3 years, has come out over the year pretty much split. Even this year it -- for the year it's relatively close to split fairly evenly. Whereas the first half was much more weighted towards memory and the second half much more weighted towards mature. It's hard to say, at this point, what the -- when memory is coming back. So will next year be heavily weighted towards mature -- in this year. It's 2019. It will be weighted towards mature, really depends on when the memory market come back. In terms of exact revenue year-over-year, we don't break that out specifically, but we have a very strong and diverse customer base there that continues to grow and with us focusing in on many of their needs, like the image sensor, power device markets, the productivity need, the mature foundry. We think that's fertile ground to grow share.

Okay, great. And I guess, you have kind of -- it doesn't sound like it, but I'll ask the question. Obviously, a lot of weakness in premium handset markets that could impacts the CMOS image sensor business. It doesn't sound like you've seen any, sort of, slowdown related to the smartphone end of the image sensor market?

The interesting thing there is a lot of our focus is on the image sensor customers' future needs and so forth. And one of the strong growth areas from an implant perspective is in infrared and deep-reds, which are less driven by the mobile phone market. And so those require higher energies. So our product extensions, like the VXE, have done extremely well in that market, and those sell for much higher price than a standard high energy tool.

Got it. And then lastly, Kevin, if I heard you correctly, you said gross margin for Q1 would be in the 41% range, but for the year margins could actually be 40% to 41%. You've talked a lot about the cost improvement programs. It looks like volume certainly would be working in your favor as you come sequentially through the year. So what's the offset to gross margin to have it sort of trend down to, say, 40.5% for the year from 41% in the first quarter?

Yes. So we are -- we were 40.6% last year, so that -- point is we're basically flat year-over-year. A lot of the impact this year to the flatness is just the overall mix that we have in there. And I will say that we are experiencing some headwinds from the tariffs right now. We expect at some point to recover a lot of that through a duty drawback program. But we still have not been accepted into that program. We expect that to happen. So -- and we have -- and the other thing is, too, is the number of evals that we have are going to be recognized this year, put some drag on the margins. So I think that is how the fact is.

And our next question will come from the line of Gus Richard with Northland.

Typically going into a quarter how much backlog coverage do you have? What's the range?

Well, your point is where -- our backlog is waiting out into this quarter, so I don't think we're ever over 100 all last year. But I think more importantly is the backlog number, although it's -- it isn't -- it sounds important. Many times we'll get an order booked and shipped in the same quarter. And depending on the customers, we have some customers that give us a purchase order within a few days of shipping. So where as you'll have other customers with purchases that are out there several months ahead, which ends up in your backlog. So I'm not going to say I don't like a healthy backlog number, but it's not really indicative of what the current quarter is going to be doing.

Right. I was just curious what the range was. Is it typically 2/3 to 120? Is it 15 to -- just what the range is?

I have to go back. I don't really have that. I told you what it was last year, I don't think it was above a 100. So 40 to 100. I could take back to last year, yes, I'll give you that.

Okay. And then in the mature markets, excluding power and imaging, you've got lot of mature fabs foundries. What's the deal location of that demand? Is it out of China? Is it U.S., Europe? Where is it?

It's planetwide. So the -- it's driven by IDMs, that -- there's a bunch of IDMs in Europe. It's driven by foundries in Asia. It's driven -- it's just everywhere. It's -- the big driver is there's just such a large product mix that are flowing into these fabs. That -- the high current implant steps become bottlenecks for the fabs. And so that's probably the number one driver in terms of the productivity. And then, in more specialized markets like image sensor and power device there's very specific implant needs that can be optimized to improve their yields and device performances.

Okay. Got it. And then last one from me. You mentioned that the demand in EMOT-- sorry, CMOS image sensors was more in the infrared, deep-red. Is that -- are your customers building sensors for computer vision in autonomous vehicles? Is that the incremental demand?

They're not. They don't specifically tell us exactly what they're selling their products to. But in general, the infrared and reds are automotive, aerospace, defense, and other industrial applications. So a lot of vision type applications. So it's beyond -- well beyond the mobile phone, although, by enhancing the reds on the mobile phone you do end up with better quality image sensors. So I think it cuts across the board, Gus.

I think your backlog numbers for 6 quarters, going back to Q3. So it's anywhere from 58, as high as 89. So 58 to 89 over the last 6 quarters.

That's very helpful.

I have Q1...

No that will do.

Yes.

This concludes the question-and-answer portion today. I will now turn the call back over to Mary Puma, who'll make a few closing remarks.

Thank you, Brian. So we are looking forward to an exciting year for Axcelis. And as always, I want to thank you for your continued support, and hope to see you in the coming months at one of the several investor trips we have planned. And this includes the SFG ACE Annual Technology Conference on March 12 in New York City. Thank you very much.

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