Welcome to the Axcelis Investor Day, The Next Wave of Growth. I'm Doug Lawson, EVP of Corporate Marketing and Strategy, and I'll be your host for the next couple of hours. Let me read the Safe Harbor Act before we get started. This presentation and discussion contain forward-looking statements, including our expectations for future markets, for our products, revenue, profits, and other results that are forward-looking statements under the SEC safe harbor provision. These forward-looking statements are based on management's current expectations and are subject to the risks inherent in our business. These risks are described in detail in our 10-K annual report and other SEC filings. Our actual events and results may differ materially from our current expectations. We do not assume any obligation to update these forward-looking statements. This will be a focused Investor Day. Mary will provide a brief update on the industry and Axcelis.
Kevin will introduce our new financial model. Finally, Bill will do a deep dive into the specialty markets. The total presentation is approximately 45 minutes and will be followed by a 30-minute Q&A session. With me today are all the executive officers, Mary Puma, President and CEO, Kevin Brewer, Executive Vice President and CFO, Bill Bintz, Executive Vice President of Product Development, Lynnette Fallon, Executive Vice President of HR, Legal, and General Counsel, and Russell Low, Executive Vice President of Global Customer and Engineering Operations. Axcelis remains solely focused on the ion implantation business and is uniquely positioned with the capability, DNA, and unwavering focus to solve customers' high-value, high-impact ion implantation challenges. This is what differentiates Axcelis to our customers. Now let me introduce our President and CEO, Mary Puma, to begin the discussion of Axcelis' next wave of growth. Mary.
Thank you, Doug. I'd also like to welcome all of you today and thank you for tuning in to learn more about Axcelis and the exciting opportunities we believe lie ahead. As the warm-up act, I'm gonna take a few minutes to provide an overview and update on Axcelis before I turn it over to Kevin and Bill as the star attractions. Next slide, please. So I don't wanna steal their thunder, but I get to share the headlines or the highlights, as the case may be, of what you're going to hear today. First, as you know, the semiconductor market is very strong, and as a result, is driving very high levels of wafer fab equipment spending.
The market's driving this high level of spending, particularly the significant growth in the mature process technology segment, has translated into approximately a 2x increase in the implant TAM over a very short period of time, bringing it to about $2 billion in size. Our Purion products are well-positioned across key markets like power devices and CMOS image sensors. This has and will continue to drive Axcelis revenues to record levels over the next few years. Our new models, which we are unveiling today, include $850 million of revenue in the next one to two years and $1 billion in approximately three years. I just wanna make sure that everyone realizes that these models are based on an implant-only business. Next slide, please.
I know many of you are familiar with the Axcelis story, but just in case there are a few who are joining us for the first time to learn more, I'm gonna provide a brief company overview. You should feel free to call Doug Lawson if you would like additional information. Axcelis has been a leading supplier of ion implantation systems and services for over 40 years. We are the only company focused on just implant that supplies a full portfolio of products. We're a global company headquartered just north of Boston. We develop patented, innovative implant technology and equipment, and we have an extensive aftermarket business, which you will hear us refer to as CS&I, that supports a large install base in 32 countries around the world.
We have a broad, diverse range of customers across all key market segments, and Bill is gonna share more details about a couple of these markets later this morning. Next slide, please. We're proud that we've received recognition from our customers and the community, and here are a couple of accolades we've received. I'd like to point out that this is the second year in a row that Axcelis has been named to the Forbes America's Best Small Companies list. Next slide, please. I'd like to add a bit more color to what is driving growth in the semiconductor market. Earlier, I mentioned significant growth in the mature process technology segment, but really all market segments are growing. This is causing high fab utilization at all customers and resulting in strong system sales and service as they expand their capacity.
We're in a cycle right now where this growth has led to significantly more CapEx spending as customers work hard to chase demand. There are a couple of things driving this strong demand. The first is the fact that the fundamentals remain in place for long-term growth, and we've talked for a very long time about communications and big data driving demand for multiple types of devices. More recently, as a result of cars becoming computers on wheels, as Pat Gelsinger recently referred to them, demand for power devices and image sensors has accelerated. In addition, we are all aware of a few unique environmental factors, the current chip shortage, and what I'll call the arms race that multiple governments are in to attract and build fabs in their respective countries, particularly leading-edge logic fabs. Next slide, please.
In a high technology business, it's all about having the right products to meet customer needs and, of course, providing excellent service and support. Axcelis developed the right products. Our Purion products, which we began introducing in 2012, have been the engine driving our growth. About five years ago, we began investing in product line extensions that built on our base Purion products, the Purion H, the Purion XE, and the Purion M. These new products maintained our common Purion platform while bringing customers new products targeted at high-value applications and market segments. Customers embraced both the innovation and the competition that Purion brought them. It was a win-win, providing customers with solutions to their emerging manufacturing challenges and bringing Axcelis significant profitable growth. Next slide, please. Axcelis experienced strong systems growth in 2021, and we see this repeating in 2022.
This year, we expect the mature process technology market to represent 82% of our systems revenue, and you can see this highlighted in dark blue on the accompanying chart, along with the breakdown of the three key segments comprising this market. There's general mature technology, about 31%, power devices about 28%, and image sensors 24%. Memory was comprised of an almost equal split between NAND and DRAM, representing about 17% of the total, with advanced logic at about 1%. Memory will recover in 2022, and advanced logic will grow over time, but both will be dwarfed by the strength of the overall mature process technology segment. As a result, we expect this segment to again represent over 70% of our systems revenue in 2022.
The bottom line is that five years ago, we placed the right bets on the right products, and this has paid off handsomely already and will continue to do so into the future. Next slide, please. We are engaged in multiple efforts to continue to accelerate and expand our Purion footprint. We've talked numerous times about the opportunity that a large, diverse, growing Chinese market represents, and we've also talked a lot about Japan, a market we only reentered a few years ago, but whose customers are very interested in our Purion technology, particularly for power devices, image sensors, and NAND. We're also working hard to take share at existing accounts by selling multiple types of Purion products and expanding the number of applications and recipes that are run on our Purion tools.
We've increased our focus on implant and implant-related innovation through collaborations with customers and peers, and we're adding infrastructure, including manufacturing capacity, closer to our customers. All of these things will allow us to drive and support our new business models. I'll now turn it over to Kevin to expand on the new business models and on the actions we are taking to achieve the operational excellence required to achieve them. Kevin?
Thank you, Mary. Good morning, and I probably should say good afternoon and good evening to others, as you tune in to this webcast. I'm very happy today to have the opportunity to share with you two new target business models that we believe provide some very attractive financials. It is truly an exciting time for Axcelis and our industry, with key drivers that'll drive growth in our business, a strong market, and multiple initiatives that accelerate Purion growth across all markets. In my presentation today, I will spend time reviewing the details of these two new target business models, and I'll then turn the presentation over to Bill Bintz, who'll provide an update on the specialty device market. Doug, if you could move to slide 16, please.
I think it makes sense to go over Q3 quickly before we dive into the models and provide a little guidance on Q4 as well. In Q3, revenue finished at $176.7 million, compared to $147.3 million in Q2, which represented an increase of 20%. Systems revenue accounted for $126.2 million, which set a new record for Axcelis. CS&I revenue finished at $50.5 million, also representing a solid revenue contribution. Earnings per share in Q3 was $0.81 per share, compared to $0.55 in Q2, driven by strong gross margin and top-line performance.
We ended the quarter with record backlog at $406.6 million, and cash at $271.8 million, which included several prepayments from customers. For Q4, we guided revenues of approximately $190 million, but earnings per share at approximately $0.84. Gross margin we said would be approximately 41.5%, which includes the planned closure of multiple evaluation systems, which creates some drag on margins. Even though these tools pressure gross margins, it's great to convert them to revenue, which sets the stage for future orders. Full year gross margin should finish around 42.5%, which would imply a year-over-year improvement of 70 basis points. Slide 17, please.
Okay, I feel like this is the long-awaited slide and probably the only slide I need, but I do have a few others to share as well. Starting on the far left of this slide and moving right, you can see some financial history back to 2017. Our full year forecast for 2021 just right of the center, and our two new target business models to the far right. I want you to focus on the two new models. In our $850 million model, we assume approximately $225 million of revenue from CS&I. In the $1 billion model, we assume approximately $250 million of revenue from CS&I.
Looking at the gross margin line, both new target models drive strong gross margin performance, with margins reaching 45%-46% at $1 billion in revenue. Operating expense as a percent of revenue moves lower as we realize leverage across the business. Operating profit gets a significant boost driven by strong gross margin performance, lower spending as a percent of revenue and revenue growth. Free cash flow is strong at greater than 20% of revenue at $850 million and greater than 22% at $1 billion. At the midpoint of our operating profit, using our current share count, you should expect to see approximately $4.25 of earnings per share in our $850 million model and approximately $5.60 per share in our one billion dollar model.
Strong cash generation in both of these models. Before diving into the details of the models, I would like to take a few minutes to update on our manufacturing capacity and our supply chain. Slide 18, please. First, I am pleased to say that our new factory in South Korea is fully operational. Purion system shipments are planned from the factory starting in Q1. You can see from the picture in the bottom left-hand corner of this slide, our brand new facility. We have manufacturing clean room space, warehouse space, and offices to accommodate support staff and customer visits. Products built in this factory can be configured for any Axcelis customer. We also have completed a number of capital improvement projects at our Beverly site over the last 18 months to add manufacturing capacity.
Kaizen events completed over the same timeframe have also increased revenue output per square foot in several key areas of manufacturing. There are projects underway that further boost manufacturing capacity and support our new target models and beyond. Investment in our next phase of lean manufacturing has begun, and we plan to use varying levels of augmented reality and AI to boost efficiency and shorten cycle times. Slide 19, please. On the supply chain side of things, it remains a challenging environment and similar to what we have been dealing with over the past several quarters. Many of the proactive steps we've taken to minimize supply chain disruption have helped us achieve customer requirements and financial commitments. One of the most beneficial things we did early in the pandemic was to get aggressive with adding buffer inventory.
Rather than pulling back or what I like to call getting out of line, we continued to drive material. We are continuing to review and adjust MRP lead time offsets, which helps buffer manufacturing start dates and provides some additional visibility to our suppliers. Close collaboration with supply chain partners in bringing on new capacity in bottleneck areas is an ongoing effort. Freight costs remain very high or what I should say, through the roof. We have added resources to our logistics team. We are doing what we can to help minimize the impact of higher costs and delivery. Our new factory in South Korea should help improve material flow a bit from additional sources of supply. Supply chain actions taken to date have certainly helped us keep up with a very strong demand.
As some of you have heard me say before, our success has been a combination of solid execution and a bit of luck. Slide 20, please. Okay, moving back to the details of our new financial models. This slide shows the high-level gross margin initiatives that will move us to the 45%-46% range. The good news is many of these initiatives are not new for us, so we know what needs to happen and how to do it. Higher revenue contribution from Purion and product extensions and CS&I will continue to lift margins. Volume and time-based value engineering projects will continue to drive material costs lower. Planned Kaizen events, coupled with quality improvements, will further reduce labor and rework costs. Slide 21, please. On this slide, you can see more detail on some of our gross margin initiatives over time.
Starting at the far left side of the chart, we leveraged the Purion common platform in two ways. First, we took advantage of parts commonality to capture supply chain savings through volume negotiations and moving parts to low-cost global partners. The second benefit of commonality was the faster learning for our factory and service teams, which lowered costs. We also completed a significant number of Kaizen events during the same time period to improve labor efficiency and cycle time. As we move to the center of the chart, showing actions taken from 2019 to present, value engineering, supply chain optimization, and Kaizen events continue to provide cost savings. A renewed commitment to quality across the business and a more mature Purion platform is also helping lower our costs. In a higher mix of margin accretive CS&I and Purion product extensions is pushing gross margins higher.
Looking at 2022 and beyond, we expect gross margin to move upwards as we achieve our $850 million-$1 billion revenue models. Capturing savings from higher part volume and evolving manufacturing techniques using augmented reality and AI will be key drivers. We're also planning on a higher mix of Purion product extensions and CS&I, which will favorably impact gross margin. Finally, as we achieve quality leadership, we'll capture savings from lower rework costs. Slide 22, please. This slide provides a little more details on the impact of better quality for our customers and on gross margin performance. Higher uptime from improved tool reliability is something customers value. As our sales team likes to say, "Happy customers buy more stuff." We're also realizing lower warranty, install, and manufacturing costs as the Purion product line matures and quality improves.
As we push the business towards certifying to the new International Task Force 16949, we anticipate further benefits for our customers and additional cost savings across the business. Slide 23, please. The key takeaway in this slide is we are making good progress closing the margin gap across our Purion products. We have initiatives underway which will continue to push the high current and medium current margins higher, so they move more closely to the high energy products. By doing this, we'll also reduce some of the quarter-to-quarter variability in gross margin that product mix can cause. I should note that we also have initiatives planned to move high energy margins upwards. Slide 24, please. This is the final slide on gross margin.
We typically have not spent a lot of time discussing CS&I with you, other than to make the comment that it is margin accretive. CS&I stands for Customer Solutions and Innovation, and it encompasses our break/fix business, which is labor, repair parts, and service contracts, a robust spares and consumable business, field upgrades, which typically improve yield or throughput for our customers, and a used tool business, which consists of older tools we purchase on the open market, refurbish, and then resell to a different customer. We like to say CS&I is Axcelis' face to the customer. It is an area of the business that we are investing in with R&D and sales support. R&D spending provides design services for new upgrades and supports development of innovative solutions like our Digital Tool Box that provides remote diagnostics, advanced software features, data analytics support, self-testing, and predictive maintenance.
We have also made strategic hires to strengthen the team and add focus to customer satisfaction and revenue growth. Slide 25, please. I would like to briefly touch on operating expenses. I mentioned earlier that expenses as a % of revenue are modeled lower to reflect the leverage we will realize in the business. Our target models assume R&D spending to be 9%-10% of revenue, which is right about where we'll finish 2021. We plan to continue to focus R&D spending on Purion product development and CIP, field upgrades to support our customers, and CS&I revenue growth, and we'll also be investing in new technologies that could provide a future benefit to the company. Most of our planned expense reductions will come from SG&A, while we still make the necessary investments in the business.
We will continue to update our enterprise systems to support business growth, invest in our employees with training and compensation and strategic hiring, and fund general business needs. As always, I plan to carefully monitor spending. Slide 26, please. Finally, I'd like to discuss our capital allocation strategy. The first point I will make is that we plan to maintain a strong and healthy balance sheet while investing in the business in ways that support growth. Our $850 million model and $1 billion target model generate strong cash flows, which will continue to strengthen the business and our balance sheet. If needed, we have access to additional liquidity through an unused $40 million line of credit and an S-3 shelf registration as a WKSI filer.
We have returned over $62 million to our shareholders since 2019 through share repurchase programs, and at the end of Q3 still had additional approved spending available under the current program. Additional options for returning cash will be discussed with our Board in Q1, and we expect to be able to share more details with you after that review is complete. As far as M&A goes, any near-term actions would likely be along the lines of helping us to grow our implant business. We plan to begin exploring M&A to grow beyond our $1 billion in revenue implant-driven target model during the upcoming year. This concludes my part of the presentation. I want to thank you for your time today, and now turn the call over to Bill Bintz to provide an update on the specialty device market. Bill?
Thank you, Kevin, and hello to everyone. What I plan to cover today are some of the key foundational elements of our new business models, specifically related to the specialty device market, and more specifically, the power and image sensor segments of that market. Next slide, please. As Mary mentioned earlier, IC demand is driving dramatically increased capital spending to what is forecast to be a new plateau. Unlike the growth of the previous plateau, this time around, the implant TAM is benefiting in a much more significant way. The implant TAM is now expected to be about $2 billion, with over 50% of that TAM associated with the mature process technology segments. The IoT, mobile, and automotive markets are driving particularly high growth in the power and image sensor device segments of the overall mature process technology market.
For this reason, my update is focused on the power and image sensor markets and Axcelis' position within them. Next slide, please. Starting with the power market, increasing automotive power device content is driving major growth, with the silicon carbide power device market forecast to grow at a 30% rate over the next five years. Within the overall power market, silicon carbide MOSFETs and silicon IGBTs represent the largest components of growth. Next slide. Connecting all this to the implant TAM, growth in the power market is driving large increases in wafer starts and the related need for new implant capacity. Beyond the increased wafer starts factor, silicon IGBT and silicon carbide MOSFET process flows require high implant capital intensity. For example, a typical silicon carbide MOSFET process flow requires about 20 implant steps.
Also, some of the device design trends are driving the need for deeper high-dose implants, as well as greater use of high-energy implant technology, resulting in additional growth in implant capital intensity. Next slide, please. Axcelis has heavily focused on the power market for the past seven-plus years. As a result, we are very well positioned in this market. Our Purion Power Series product portfolio covers the full range of both silicon and silicon carbide implant requirements for current and emerging device designs. As shown on one of Mary's earlier slides, we are already realizing the benefits of this focus with over 27% of our 2021 systems revenue forecast coming from this market. Next slide.
Adding some additional color to the strength of our Power Series product portfolio, this chart shows all the implant requirements for silicon and silicon carbide devices in terms of implant dose and energy. Basically, each one of the dots on this chart represents an implant recipe. Next slide. As I mentioned on an earlier slide, some of the emerging devices are trending to the use of higher energy, high dose implants, as well as higher energy, low to mid dose implants. That trend is indicated by the two trend arrows on this chart. Whereas in the past, the majority of power devices could be built with a combination of Purion H high current and Purion M medium current implanters, there's now a need for new implant capabilities. Next slide, please.
To address the needs of the higher energy application trend, our Power Series portfolio now includes the Purion XE, Purion XE Silicon Carbide, Purion EXE, and the EXE Silicon Carbide products. Next slide. To address the needs of higher energy high dose applications, the portfolio now includes the Purion H 200 and the Purion H 200 Silicon Carbide products built off of our Purion H architecture. All of these new products incorporate a unique combination of technologies to address our customers' present and emerging manufacturing requirements. Next slide. As a key takeaway from a power market standpoint, Axcelis' Purion Power Series represents a winning product portfolio in a rapidly growing power market. We'll go to the next slide. Moving on to the CMOS image sensor market, also sometimes referred to as CIS.
It is forecast to grow at better than a 7% rate over the next five years. Mobile will remain the dominant segment of the market, with automotive forecast to become the second largest segment. Next slide. Relative to what this translates to for the implant TAM, growth in the image sensor market is driving significant increases in wafer starts and the related need for new implant capacity. Beyond increased wafer start, the impact on the TAM, CIS device fabrication requires high implant capital intensity. For example, formation of the photodiode region of the image sensor at that region alone can involve eight to 10 implant steps. Also, device design trends are driving the need for deeper photodiodes to address pixel scaling and other image quality issues.
This translates to additional implant steps and the need for higher energy implant capabilities, both resulting in additional growth in implant capital intensity. Next slide. Axcelis has heavily focused on the image sensor market for the past 10+ years, and as a result, we are also very well positioned in this growing market. Our Purion image sensor series product portfolio covers the full range of implant requirements for current and emerging device designs. As shown on one of Mary's earlier slides, we are already realizing the benefits of this focus with over 23% of our 2021 systems revenue forecast coming from this market. Next slide. My last slide summarizes some of the key elements of our customers' image sensor roadmaps and our evolving image sensor series product portfolio. As you can see in the roadmap, pixel size for image sensors will continue to shrink.
Implant energy will continue to increase, and metal contamination levels will need to continue to be reduced. Each of our image sensor series products offer a unique combination of technologies to address these roadmap requirements in a differentiated way. This leads to my final key takeaways, and they are that Axcelis' image sensor series represents a winning product portfolio in the growing image sensor market. In combination with our power series portfolio, represents key foundational elements of the new business models that Mary and Kevin introduced. On that note, I'll now turn things back over to Mary. Thank you.
Thank you, Bill. To wrap up, Axcelis has the right products, the right people, the right processes, the right infrastructure, and a strong balance sheet to continue to drive profitable growth. Having a strong semiconductor market and growing implant TAM adds to the excitement and probability that we can achieve our new business models and grow the business to $1 billion in revenue. I wanna thank you all for your time today and for the support you've given us over the years. We look forward to achieving these new models and sharing our success with you. Now, I'll turn it over to Doug to moderate the Q&A. Doug?
Thank you, Mary, Kevin, and Bill. Now we're gonna go live. In case you hadn't realized, this was a recording, and we'll bring the full executive team on for about a 30-minute Q&A session. Thank you. Okay. Welcome, everyone. We're now live in various locations. I come to you from the luxurious Marriott Marquis in San Francisco. We wish we could be face to face, but we'll try to do the Q&A here through the chat. We'll get started. First question came in is from Quinn Bolton. Question is, in the new business models, how much revenue do you expect to generate from the Japanese market? I'll pass that one over to Mary.
Quinn, I think given that the $850 model is near term, you know, we expect to hit that quarterly run rate sometime in 2022, that the contribution from Japan is not going to be what I would call, you know, significant. I think as we move towards the $1 billion model, which is about three years out, you will see that percentage definitely grow. As we always do, basically what we're going to do is provide you with information on new customers that we secure. I expect that most of these new customers will be focused on applications for power devices and image sensors, given that that's where most of the interest that we're seeing from the Japanese market is focused.
Mary, maybe I can add a little bit of additional color. As Mary said, we're not counting on much from the Japan market to support the $850, but it does represent about 15% of the implant TAM. We have a lot of activities underway, engaging with customers, particularly, as Mary said, in the image sensor and power device segments. Longer term, as we move out towards the billion-dollar model and beyond in time, we expect Japan to be an increasing part of our business for a more significant whole percent.
All right. Thank you. Next question comes from Thomas Langendorf. Can you provide color around plans for returning capital to shareholders in the $850 million and $1 billion models? Kevin, can you comment on that?
Sure. Specifically, those are things that we will address as we get into these models. What I can say is, to date, we've had a couple of share repurchase programs in place. We currently have one that we're executing through 2021, and have had prior programs. As I mentioned, we returned a little over $62 million so far through those programs. You know, as we move forward, first thing we're gonna do is invest in the business as we always have, right? Keep a very, you know, strong, healthy balance sheet while investing.
I think, you know, if we follow the similar track to what we've done in the past, I think you could expect to see capital return to the shareholders through most likely some form of share repurchase program. There are other things that could be entertained. I think we all know what they are. There's dividends, one-time dividends. There are many options. So far, what we have decided to do is use the share repurchase program. Again, to your specific question, I think as we get into these models, we will define on a yearly basis, because typically we've addressed this yearly with the Board. We'll address on a yearly basis, you know, what we plan to do with returning capital at that point in time.
All right. Thanks, Kevin. Next question comes from Craig Ellis. Strong models and helpful information. Thank you, Craig. Question is, please provide more color on the composition of mature process technologies calendar 2022 mix, and to what extent is advanced logic growth and Japan penetration in the $1 billion model. Mary, do you wanna take this one?
Sure. At this point, Craig, you know, we expect all three subsegments of mature process technology to be represented in our revenues for next year. That would be general mature process technology, image sensors, and power devices. You know, I think it's fair to say that power devices at this point in time is probably the fastest-growing market. You know, we'll just have to watch and see how it plays out during 2022 in terms of the split. We do report that every quarter, so we'll keep you posted on the growth rates and what we're actually seeing in terms of revenues. I just answered the question on Japan, and I think the answer for the advanced logic is pretty similar to the answer on Japan.
Again, given the short time frame to the 850 model, we're not going to see significant contributions from advanced logic. We did just earlier this week announce the successful closure of an evaluation at a large customer for advanced logic applications. We do expect to see orders from that customer in 2022 and into 2023. There will be an increase in contribution from that segment, and we hope that at this point, and we're planning on this point, for that contribution to continue to increase as we move towards the $1 billion model.
Okay. Thank you, Mary. I apologize to everybody for the echo. The engineer is trying to figure that out. The next question comes from Quinn Bolton. As the company looks to expand beyond ion implant through M&A, can you discuss what WFE segments you might find most attractive or synergistic with ion implant? Mary, you wanna take this one too?
Sure. You know, as far as M&A goes, any near-term actions would really be focused on implant only. As Kevin mentioned, we do plan to begin exploring M&A to grow beyond our $1 billion implant-only driven target model during the upcoming year. In 2022, we will definitely focus some time and attention on that. It's not. There's nothing really specific for us to share with you right now, but again, as we get deeper into this, you know, we will certainly do that.
All right. Thank you, Mary.
Okay.
Next question comes from Patrick Ho. Thank you for today's event. Thank you, Patrick. As noted in the CS&I, it is accretive to gross margins, and you detailed some of the initiatives and opportunities you are working on in this business. As part of the margin expansion opportunities, how do you drive more value engineering in spares and even upgrades to ensure that there are no knockoffs by third-party parts providers? And how do you ensure customers utilize your parts and upgrades? We'll start with Kevin, and then Russell can add in on that.
Okay, thanks. Yeah, good question. So the knockoffs, that has certainly been something we've had to deal with for a lot of years, right? I think, Patrick, which you're well aware of, and I think most people are, that there's third parties out there, they like to get a hold of these parts, reverse engineer and sell them to our customers. So I don't expect that to get any worse. And frankly, we've actually won back some of that business over the years. So one way you beat the third parties is you provide a higher quality part. The other thing you can also do is we could, you know, as we looked at kind of our more innovative contract solutions, you can sell uptime, which it bundles your parts in there, so customers would have to use your parts.
And you can also, at time of equipment sale, you can try to bundle some spares in. So there's certainly things you can do right up front with the customers. You know, the thing that I always push engineering on, and I'm not sure Russ is gonna be able to give an answer right now, but certainly if we could design features into these parts that made it difficult to knock off these parts by third parties, it would be great. You know, we all know we have, you know, in our keys for our cars, and we still have a key, there's a computer chip. So we haven't got to the point where we can put a chip in a graphite slit that goes in the source. But those are things we talk about. Those are things we think about as we're designing.
Is there something in here that's proprietary that's probably not obvious on the surface when you're trying to reverse engineer something? Again, that's something we continue to look at.
Yeah. I think you hit the really good key points there, Kevin. I mean, clearly we wanna out-innovate anybody trying to rip off the technology. That's key. If we can come up with something faster, that's very valuable. We're also looking at licensed features, which makes it very difficult to copy. We're also looking to move beyond just transactions. We have multiple things in our toolbox that we can put together to give a kind of a more value-added solution to the customer that will be effective at locking out some of these third parties.
Yeah. If I could add, just one more thing too. On the upgrades piece, Patrick, the good thing on the upgrades is those are typically things that only Axcelis can do. It's very difficult for third parties who don't have all the knowledge, the tools to design these high value upgrades that we come out with so. That market is really driven by the speed at which we can innovate with these upgrades. That is one area that is difficult for third parties to compete with.
All right. Thank you. Eric Sterling asked the next question, which we've answered a little bit. The question is: What are the expectations for leading-edge foundry penetrations in the new model? Mary discussed this in the overall question about Japan and advanced. We expect, you know, to begin slowly over the next couple of years in advanced logic, with initial production buys in 2022, and then ramp up and be a bigger piece of the billion-dollar model. The next question comes from Wayne Jarvis. What's your lead times on CIS and silicon carbide implant? Kevin, do you wanna discuss lead times maybe specific there, but in general?
Yeah. So I think this is probably a two-part question, too. Part of it might be how much of a lead do we have in SiC. In terms of build lead times, we're pretty much you know, all products are at a standard lead time. We don't take any longer to develop or manufacture a SiC tool, a CIS tool than for you know, any other market or customers. So our lead times right now have been keeping up with customer needs. You know, there has been several people that have talked about lead times extending well beyond a year. We're not at that point. Certainly, our lead times are longer than were pre-pandemic.
The fact that we did get very proactive on supply chain side with inventory, as I mentioned, in the presentation, has certainly helped us keep the lead times a little bit on the shorter side compared to what they would have been without that buffer inventory. So we're also continuing, even though, you know, we've got the same issues everybody's got with logistics and, you know, supply chain challenges that people are dealing with. We're continuing to work our, I guess I would say, the things we can control. If you look at our factory cycle times, the work we've done through our lean program, we've continued to run Kaizen events, take the best of what we learn in those Kaizen events, and try to shorten cycle times.
Overall, while it hasn't all been growth in lead time, we've been continuing to knock off some improvements. I think on the second part of the question, which I think is in here, it might be what, you know, probably how far are we ahead of the competition in this market, because I think it's been well said by us that we definitely jumped on the silicon carbide market early on. You know, I think to our surprise as well, this market has turned out to be a lot bigger than what we thought it was when we went into it. You know, we definitely have, and Bill maybe has addressed, but we definitely got, you know, a year-plus lead on the competition, maybe even longer.
Bill, I think I'll let you know, grab the rest of that.
Yeah. I think the key to how we got to the strong position we're in right now was you engage very early.
Example, in the silicon carbide market, we put our first silicon carbide tool in the field, a 100 MM tool back in, I think, 2013. You start early, engage with those customers, stay engaged very closely, understand what their needs are moving forward, and develop winning combinations of products and technology. With that approach, we've established a strong position, and I think it would take a considerable amount of time and effort to close the gap from a product and technology advantage standpoint. But one of the key points is we're not standing still. We continue to evolve these product portfolios and have every expectation that we're going to maintain a strong lead, and we have opportunities to even open up the lead in some areas.
All right. Well, thank you, guys. The next question is probably a little bit more of an economics question from Neil Meyer. Can you please address the impact of rising interest rates on your ability to implement growth plans and also the impact of inflation on pricing power? Kevin, do you wanna take a crack at this?
Sure. Let me talk to our growth plan. I mean, we're well capitalized right now. We have quite a bit of cash on the balance sheet, so it's not like we're out having to borrow money to do things. You know, there really isn't an impact from the rising rates from that point of view in terms of what we need to fuel growth. You know, where we probably will see it will be on the supply chain side of things. You know, I don't know the details of what every supplier's doing with their money in terms of borrowing or not borrowing, so obviously, there could be some rising costs there. But I'll be honest, I don't really think this is going to impact anything we're trying to do.
I think the bigger challenges right now are the impact of, you know, logistics costs being 4x what they were even a year ago, very high raw material costs at this point, compliance for things like aluminum or steel and many other commodities. Well, that's where we're dealing with it now on the supply chain side. If I go back even farther than the present date, then I think, you know, I mentioned we expect full year gross margins to be around 42.5%. Even in this very challenging environment, where we're seeing freight costs, as I said, through the roof, we're seeing very high raw material costs, we're still gonna move, you know, the business approximately 70 basis points over last year.
You can see in these models continued strong growth in gross margins. And certainly when we put these models together, we looked at a couple things. Nearer term on $850, we did take into consideration that, you know, we don't think this pandemic is going away tomorrow. We think some of the pressures we currently have on gross margin, even though we're growing, are going to stay there. That's why you see the range at $850 of 43%-45% based on timing and the, you know, timing of both the pandemic and the timing of some of the value engineering projects. But I guess, Neil, back to your economics portion, I don't see any impact on our business, frankly, that's measurable. I'm not worried about that.
All right. Thanks, Kevin. Our next question comes from Craig Ellis. Please discuss the overall relative contribution of DRAM and NAND in the new models. Since I haven't answered one yet, I'll take this one. In on the slide where we have the breakdown of 2022 we discussed that we expect 70%-80% coming from the mature process technologies. We'll continue to see probably 20%-30% coming from memory. Again, memory is probably of the three areas memory is the one that still has some cyclicality to it, given the commodity nature and the size of the individual projects. So we expect 2022 and 2023 to be strong for wafer starts.
You know, it's hard to have visibility even that far out, but we would expect that 20%-30% is a good way to model that. Next question comes from Wayne Jervis. How much of the $1 billion model is organic versus acquisition? Mary actually answered this one. The $1 billion model is solely ion implantation. Next question comes from Patrick Ho, and it's a follow-up to his CS&I question. From an OpEx perspective, how much do you need to add to CS&I to keep up with the growth in the business, i.e., increased installed base, more services, spare parts, et cetera? How much do you need to add to the workforce front to keep pace with the business growth, or can you leverage existing workforce to handle this more?
Again, I'll throw this to a combination of Kevin and Russell.
Yes. There's several parts to that, and I can't see the question. In terms of the spending piece of it, Patrick, we've got that factored into the models, right? The operating expenses that I have at $850 million and $1 billion have that factored in. You know, what I would say is we have a lot of what we need right now. It's not like we've got to go out and add a lot of design resources or even a lot of selling resources. We've been doing that over the past several years. Recently, we just brought in a couple of critical hires within that organization to focus on the customer satisfaction and revenue growth.
It's really kind of executing to the roadmaps we have. You know, obviously as these models, you know, we get to $850 and we get to $1 billion, even though the percentage is going down as a percent of revenue OpEx, there is an implied, you know, we're going to be spending more than we are today. I don't wanna say that we don't need to hire to hit these models. The only thing I would like to tell you there is that we have, we've had to keep up with some fairly quick acceleration this year.
I think everybody remembers that not even a year ago, we were talking about maybe $550 this year, and now, you know, we've, you know, it's pretty clear right now that based on our guidance, we're gonna be pretty much at our $650 model. We've put a lot of things in place, both from hiring staff to sharing resources across the business, whatever we need to do to keep up with things. I'm not too worried that we're gonna have a problem keeping up hitting the growth. CS&I did grow pretty fast this year as well. I think the other piece of it, and again, I'm going from memory, was on the install base. Certainly, the install base is a big component of the CS&I business.
I think some of the acceleration we've seen on CS&I in terms of revenue growth over the past year and a half is because there's a lot of new Purion products in the field now. As these tools go out, there's always an entitlement that goes with it. There's the other piece, Patrick, as you mentioned. There's the entitlement, but then making sure you can hang on to the entitlement from the third parties. You know, a good amount of revenue growth does come from new tools and then just things that we got on the table with upgrades. We've got a full menu of things that we're working on. This is really where the R&D comes in. This is where Russell's team works.
Several years ago we made a decision to carve out that part of engineering so that you know it wasn't easy to go in and take those people to do other things for kind of the crisis of the day. We carved out the group. We put a fence around them. There is a dedicated team just working on upgrades in that group. You know, we'll probably have to put a few more people in there as we move forward, but it's not anything that I expect you know to have an issue doing at this point.
Russell, you got anything you wanna add then?
No, I agree with Kevin. It's all about the leverage. You know, if we sell more upgrades, I don't necessarily need more engineers. It's just that upgrade now can go to more and more customers, but we are still investing as well. You know, we're also looking at flexible models. You know, the pandemic has certainly not helped moving people around different areas for installs, but we're certainly managing that very well. We're working with additional partners and, you know, we're adding resource through those channels as well.
I think the only other thing I'll kind of add is we developed a lot of new techniques as a result of the pandemic, where we're able to do a lot of work remotely with subject matter experts working from wherever they are, working with the team that's locally on site. That's really helped in this area as well. The next question-
Right. Oh, go ahead.
Yeah, no, go ahead, Russell. Continue.
It was technology that was always gonna be in the future, virtual reality and augmented reality. Obviously, the pandemic has accelerated that, and we've been doing a lot of work with those technologies. We've been actually able to do some installs remotely with the augmented reality and virtual reality. It's got this exciting technology that allows you to get the right people at the right time in the right place and support the field very effectively. Yeah, it has been a good use of technology.
All right. Thank you.
The augmented reality.
The next one.
Yeah, the AI and augmented reality, I think that it's crossing over into the manufacturing side, too. It's things we're gonna leverage as we go forward.
All right. Thanks. Next question comes from Craig Ellis. It seems the model periods have pulled in moderately relative to the past models that came out in 2019. Can you discuss factors leading to the confidence in those timings? Kevin, maybe you talked about this in the presentation, but maybe you can discuss the timing of the two models and then Mary, maybe talk a little bit about the confidence in terms of the market and so forth for those.
Yeah. I think we've mentioned it, too. At this point, the 850 model, which we've set as a near-term model, one to two years, I think Mary mentioned it, that, you know, we would expect that, you know, we could see that run rate sometime next year. So, let's just say that it's not two years, and let's just say that, you know, it becomes next year, for example. You know, I would not expect to see any change in what we expect to see on the bottom line of the business. If, you know, so at the operating profit level down.
Frankly, if things pull in more quickly, the margin pressure could be there a little bit, but I also think, because there is a bit of a ramp-up in spending too, the spending may not be able to ramp as fast on the OpEx side, so it could probably offset that. You know. I don't really see.
You know, too much of an impact whether this is one year out, two years out. This, you know, at this point in time, all we've said is that, you know, we could see that quarterly run rate at some point next year for the 850 model. Then, you know, the $1 billion is two to three years out. Obviously, it's we need a strong market to continue for the $1 billion market. Some of those factors, and maybe somebody else can elaborate more, but we certainly talked about the strong market conditions that we're currently seeing, and we talked about how we expect to, you know, grow our business through kind of carrying out across more of these market opportunities. I think, you know.
Right.
Beyond Mary, maybe you wanna grab the rest of this.
Yeah. Let me do that. I think, Craig, you're focused mainly on the 850 model, and how do we have confidence about the timing that Kevin just talked about for that. You know, we did say on our last call that we have started to book into the third quarter of next year. We have very good visibility at this time through the first half, and it's growing into the second half of 2022. As a number of us have mentioned, you know, demand is holding up very well. I said earlier that we think 2022 is gonna be another growth year for Axcelis and the industry. We've talked a lot about the mature process technology markets that remain strong. You've got power devices extremely strong and growing.
Bill went through that. You've got image sensor and general mature foundry business. We've also given you a little bit more color on that. We've seen the memory recovery starting. We've seen some initial capacity buys actually starting this quarter. You know, we're feeling good about the fact that that segment will strengthen as well. We've talked about advanced logic, and we're gonna get some additional input from those types of customers. We feel very good about what we're seeing with 2022. And you know, obviously, we've given you even more color around that, saying that we think mature process technology will be, you know, the 70%-80% next year.
There are really a number of factors that are giving us a lot of confidence that 2022 is gonna turn out to be strong and again, allow us to hit that $850 model in the timeframe that Kevin laid out.
All right. Thank you. We have three more questions in the queue, and we're gonna answer those and then end this session, and be happy to do any follow-up after everyone knows how to get ahold of me. Next question comes from Mark Miller. You have been dominant in the mature process segment. Has your competitor done anything to improve its position there? Bill, do you wanna comment on that?
Yeah, sure. I mean, our competitors have been coming at us for a number of years in those segments, and we expect them to continue to do so. The key for us is to stay close to the customers, do a good job with, you know, our install base, based on our insights working with customers, continue to evolve our product roadmap so that we can deliver unique and enabling capabilities and maintain that lead. And also, Ed, we've put a lot of emphasis on not only uniqueness, but sustainability of the uniqueness of our products and technology. You know, one of the key tools we use there is the IP tool. We're very focused on IP, developing patents and so on associated with some of our unique and enabling capabilities.
That's another piece of the puzzle in sustaining the lead and being, you know, in a good position to handle the competitor that will continue to come at us.
All right. Thanks, Bill. Next question is from Craig Ellis, actually is a good link from Mark's question. His question, and Craig, I'll probably rephrase this just a little bit, but I'll read it. It appears that the current Purion and Power line covers the entire market. Is that correct? Yes, that's correct. What about CIS? The answer to that is we have a full product line to cover that. Those are shown in the two charts that are in the presentation. Then a more forward-looking question relative to R&D, I think, is this next question: What does that mean for the phase four wave of product extensions, either here or more broadly, in the portfolio?
You know, Bill, do you wanna just comment a little bit on, you know, how we work-
Yeah, sure. We need to take it segment by segment, but just I'll use image sensor as an example. We know, and as reflected in, I think it was my last slide that showed some of the key customer roadmap requirements as they relate to implant. We know photodiodes will continue to get deeper as time moves forward to improve, you know, support reduced pixel size and improved image quality. We know that we need to continue to stay aligned with those customer requirements and continue to evolve, in that case, our energy portfolio, as we've done first with the XE, then the EXE, the VXE, and the XE Max. We're gonna be doing more of the same.
As we do it, I'll keep coming back to. We try to do it in a unique and sustainable way, leveraging IP wherever possible.
All right. Thanks, Bill. Quinn Bolton has the next question. It's actually probably been answered a little bit, so Kevin can give a quick answer on it. Given the increasing cash flow generation in the 850 model and the billion-dollar model, is there an opportunity to reduce the share count through buybacks in the absence of M&A?
Yeah. Yeah, that's a good question, Quinn. I think if you looked at the shares this year, you would see that our you know, our Q1 shares versus Q2 versus Q3, they've been coming down through the share repurchase program. If we continue on that path with share buybacks, we could reduce that further. Which is also, too, I'll go back and during the presentation, I made the point that you know, you could see $4.25 on the 850 model, and I said, that's assuming you know, the current share count. So obviously, if the share count came down, that would help.
The other thing those models assume as well too is, you know, we pretty much take the current tax rates, to the extent, you know, that changes, up or down, that can move the EPS around. I think what everybody's seeing, we've typically had a lower tax rate than the 21% over the last many quarters. So there could be a little bit of pick-up there too. Yes, we could reduce share count. You know, I think what this year has shown that even through any dilution that may occur from compensation plans with stock being issued, we've been able to more than offset that with the share repurchases. The answer is yes, we certainly could.
All right. Thanks, Kevin. The last question here is from Eric Sterling. He wants to know what the expectations from China are as it relates to the new model. Mary, do you wanna take this?
Sure. China will continue to be a very important region for Axcelis. We've talked a lot about how we've taken a lot of actions in China to not only meet customer requirements with products, but also to make sure that we've got the right support infrastructure. I think as you know, it's ranged in any given quarter in terms of systems revenues, anywhere from, like, 40%-70% over the last 12-18 months. I don't think we have any reason to believe that there's gonna be any significant change from that over the at least near term in terms of the model that we've put out there.
You know, I just wanna reiterate that not only are we selling Purion products as customers add capacity, but also our CS&I revenues are very high because of the high level of fab utilization. I'm not sure if this was driving your question, Eric, but I know there was some discussion earlier in the week from a competitor that you know, there were concerns potentially about China slowing down in 2022. We went back, and we took a very close look at this, and we don't see a slowdown in China coming next year anytime soon. In fact, you know, based on our current modeling for 2022, we expect China revenue to be similar year-over-year.
It may end up being a lower percentage of revenue mix as we see increases in other geographies, but it will remain strong. Again, I also just wanna remind people that our China business is comprised of domestic and multinational customers, and many of the customers are focused on the mature process technology markets, including power and image sensors, that you know, the markets are strong, the markets are growing, and they're very implant-intensive. That's a very positive thing for Axcelis, and again, we think that's what's going to sustain our growth in that region as we move forward.
All right. Thank you, Mary. All right. Well, that brings us to the end of our Investor Day presentation. I wanna thank everybody for tuning in and for the good questions. Hopefully, the next time we get together to do this, we're able to do it live and enjoy the live interaction that we typically do when we see all of you folks. Again, thank you, and have a good day.