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Axcelis Technologies (NASDAQ:ACLS)
Q4 2018 Earnings Conference Call
Feb. 7, 2019 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Axcelis Technologies call to discuss the company's results for the fourth quarter and full year of 2018. My name is Brian, and I will 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.

Mary Puma -- President and Chief Executive Officer

Thank you, Bryan. 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 and 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 tail of the two 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 systems 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 three 2019 growth objectives include: No. 1, growing our Purion footprint within our existing customer base. No. 2, 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 plan. And No. 3, introducing Purion product extension 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 analyst 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.

Kevin Brewer -- Executive Vice President and Chief Financial Officer

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 one-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, the five 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.

Mary Puma -- President and Chief Executive Officer

Thank you, Kevin. Our customers have a choice in implant, 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. Bryan? 

Questions and Answers:

Operator

[Operator instructions] Our first question will come from the line of Craig Ellis with B. Riley FBR. Your line is now open.

Craig Ellis -- B. Riley FBR -- Analyst

Yeah, thanks for taking the question. And congratulations on all the financial accomplishments from 2018. 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 three objectives? And the way that plays into the potential revenues that Axcelis could realize on a longer-term basis as we look at 2019?

Mary Puma -- President and Chief Executive Officer

OK. Well, first, let me clarify, we said that we could be flat to down 5% to 10%. So right now really what's driving, 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 three 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 it 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.

Doug Lawson -- Executive Vice President of Corporate Marketing and Strategy

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.

Craig Ellis -- B. Riley FBR -- Analyst

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?

Kevin Brewer -- Executive Vice President and Chief Financial Officer

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 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 a relative standard margins of the three 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.

Craig Ellis -- B. Riley FBR -- Analyst

That's helpful. And 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?

Kevin Brewer -- Executive Vice President and Chief Financial Officer

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 manners that's a good investment for both the company and the shareholders.

Craig Ellis -- B. Riley FBR -- Analyst

Thank you very much.

Operator

And our next question will come from the line of Patrick Ho with Stifel. Your line is now open.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Thank you very much, and congratulations also. Mary, maybe 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?

Mary Puma -- President and Chief Executive Officer

So I'll have Doug respond to that.

Doug Lawson -- Executive Vice President of Corporate Marketing and Strategy

Patrick, so those two 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 an evaluation going on so we've got 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 notes. So that's the activity there.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Great. 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.

It that still the only variable that drives these extension? Are you seeing other factors, I guess, drive your, I guess, needs to create more of these extensions that you described on the call?

Doug Lawson -- Executive Vice President of Corporate Marketing and Strategy

It varies by market segment. So for example, in image sensors, metal contamination, and infrared and deep red implants, they require much higher energy. So that's an area that affects yield, affects device performance. In power device market, it's thermal control, its 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.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Right. And final question from me for Kevin. Obviously, the timing of 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, you know, in that 40 to 41% range?

Kevin Brewer -- Executive Vice President and Chief Financial Officer

Yeah. 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 supplier 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 ready when you're ready to turn 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.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Great. Thank you very much.

Kevin Brewer -- Executive Vice President and Chief Financial Officer

OK. Thanks.

Mary Puma -- President and Chief Executive Officer

Thanks, Patrick.

Operator

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

David Duley -- Steelhead Securities -- Analyst

Yeah. 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?

Kevin Brewer -- Executive Vice President and Chief Financial Officer

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

Mary Puma -- President and Chief Executive Officer

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

Kevin Brewer -- Executive Vice President and Chief Financial Officer

Right. Yeah.

David Duley -- Steelhead Securities -- Analyst

OK. 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?

Mary Puma -- President and Chief Executive Officer

Yeah.

Kevin Brewer -- Executive Vice President and Chief Financial Officer

Well, yeah. Well, I mean, 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.

David Duley -- Steelhead Securities -- Analyst

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.

Kevin Brewer -- Executive Vice President and Chief Financial Officer

Yeah. And also -- and I mean, Q1 is a little bit heavier. There is -- there's one-time expenses that we get in Q1 that we don't see in other quarters. So that doesn't help the Q1 numbers.

David Duley -- Steelhead Securities -- Analyst

OK.

Doug Lawson -- Executive Vice President of Corporate Marketing and Strategy

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

Mary Puma -- President and Chief Executive Officer

Yeah. 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 expense like that where we're just going to continue to make the investment because it's the right thing to do.

Kevin Brewer -- Executive Vice President and Chief Financial Officer

As well as additional evals.

Mary Puma -- President and Chief Executive Officer

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

David Duley -- Steelhead Securities -- Analyst

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

Mary Puma -- President and Chief Executive Officer

At this point in time, we've talked about this a lot. Those are two 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.

David Duley -- Steelhead Securities -- Analyst

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

Kevin Brewer -- Executive Vice President and Chief Financial Officer

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

David Duley -- Steelhead Securities -- Analyst

OK. That's it for me. Thank you.

Kevin Brewer -- Executive Vice President and Chief Financial Officer

Thanks, Dave.

Mary Puma -- President and Chief Executive Officer

Thank you.

Operator

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

Christian Schwab -- Craig-Hallum Capital Group LLC -- Analyst

Hey, good morning, guys. 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?

Kevin Brewer -- Executive Vice President and Chief Financial Officer

Yeah.

Mary Puma -- President and Chief Executive Officer

Yes.

Christian Schwab -- Craig-Hallum Capital Group LLC -- Analyst

Fabulous. Can you -- what were the, you know, one, two to three reasons that you gave for your dramatic out performance of what way for fund end, equipment spending and aggregate will do this year being down mid- to high-teens?

Mary Puma -- President and Chief Executive Officer

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

Christian Schwab -- Craig-Hallum Capital Group LLC -- Analyst

Yeah. 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 two or three reasons why?

Mary Puma -- President and Chief Executive Officer

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 percent 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, 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.

Christian Schwab -- Craig-Hallum Capital Group LLC -- Analyst

OK. So not to put words in your mouth, but 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, it'll be closer to flat; if it doesn't, will be closer to down 10, is that fair?

Mary Puma -- President and Chief Executive Officer

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.

Christian Schwab -- Craig-Hallum Capital Group LLC -- Analyst

OK, great. Thanks. No other questions.

Operator

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

Mark Miller -- Benchmark Company

Thank you for the question. Pursuing a 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?

Doug Lawson -- Executive Vice President of Corporate Marketing and Strategy

Well, you know, 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.

Mark Miller -- Benchmark Company

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 a very significant increase, especially in the second half of your revenues. Is it going to be more the mature process, the memory battle, or basically share gains? What's going to be the biggest driver of the delta in the second half of the year revenues?

Doug Lawson -- Executive Vice President of Corporate Marketing and Strategy

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 No.

1. 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.

Mark Miller -- Benchmark Company

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 over currently?

Mary Puma -- President and Chief Executive Officer

Sorry, in terms of where they are?

Mark Miller -- Benchmark Company

Right. What are the areas?

Mary Puma -- President and Chief Executive Officer

OK. So we have three evals right now: one is in advanced logic, one is in memory, and one is in image sensors.

Mark Miller -- Benchmark Company

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

Mary Puma -- President and Chief Executive Officer

Well, I mean, 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, memory slowdowns 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.

Doug Lawson -- Executive Vice President of Corporate Marketing and Strategy

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 toward the Korean market.

Mark Miller -- Benchmark Company

Thank you.

Mary Puma -- President and Chief Operating Officer

Thanks, Mark.

Operator

[Operator instructions] Our next question will come from the line of Quinn Bolton with Needham & Company. Your line is now open.

Quinn Bolton -- Needham & Company -- Analyst

Hi, Mary and Kevin. Congratulations on the strong gross margin in the December quarter. Wanted just to -- you've talked a lot about that mix shifting from memories did 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?

Mary Puma -- President and Chief Executive Officer

Go ahead, Doug.

Doug Lawson -- Executive Vice President of Corporate Marketing and Strategy

I think it's, year over year, as a mix, it's kind of interesting. The last three years, it's come out over the year pretty much split. I mean even this year, it -- for the year, it's relatively close to split fairly evenly. Whereas the first half was much more weighted toward memory and the second have much more weighted toward mature.

It's hard to say, at this point, what the -- when memory is coming back. So will next year be heavily weighted toward mature... This year, 2019. It will be weighted toward mature, really depends on when the memory market come back.

In terms of exact revenue year on 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, likely the image sensor power device market, so productivity needs of mature foundry. We think that's fertile ground to grow share.

Quinn Bolton -- Needham & Company -- Analyst

OK, great. And I guess, you know, 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?

Doug Lawson -- Executive Vice President of Corporate Marketing and Strategy

Well, you know, 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 a much higher price than a standard high-energy tool.

Quinn Bolton -- Needham & Company -- Analyst

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 favors, 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 and half percent for the year from 41% in the first quarter?

Kevin Brewer -- Executive Vice President and Chief Financial Officer

Yes. So I mean, we're 40.6% last year, so my 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 to the number of evals that we have are going to be recognized this year, put some drag on the margins.

So...

Quinn Bolton -- Needham & Company -- Analyst

OK, thank you.

Operator

And our next question will come from the line of Gus Richard with Northland. Your line is now open.

Gus Richard -- Northland Capital Markets -- Analyst

Yes, thanks for taking the question. Typically, going into a quarter, how much backlog coverage do you have? What's the range?

Kevin Brewer -- Executive Vice President and Chief Financial Officer

Well, I mean, your point is we're -- our backlog is waiting out onto this quarter, so, you know, I don't think we're over a 100 at 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 have other customers purchase 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's going to be doing.

Gus Richard -- Northland Capital Markets -- Analyst

Right. I was just curious what the range was. Is it typically two-thirds to 120? Is it 50 to... just what the range is.

Kevin Brewer -- Executive Vice President and Chief Financial Officer

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

I could take back to last year, yes, and give you that.

Gus Richard -- Northland Capital Markets -- Analyst

OK. 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?

Doug Lawson -- Executive Vice President of Corporate Marketing and Strategy

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 No. 1 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.

Gus Richard -- Northland Capital Markets -- Analyst

OK, got it. Thank you . And then last one from me. You mentioned that the demand in -- 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?

Doug Lawson -- Executive Vice President of Corporate Marketing and Strategy

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.

Kevin Brewer -- Executive Vice President and Chief Financial Officer

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

Gus Richard -- Northland Capital Markets -- Analyst

Thank you. That's very helpful. That's it for me. Thanks so much.

Kevin Brewer -- Executive Vice President and Chief Financial Officer

[Inaudible]

Gus Richard -- Northland Capital Markets -- Analyst

No, that will do it.

Operator

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

Mary Puma -- President and Chief Executive Officer

Thank you, Bryan. 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.

Operator

[Operator signoff]

Duration: 49 minutes

Call Participants:

Mary Puma -- President and Chief Executive Officer

Kevin Brewer -- Executive Vice President and Chief Financial Officer

Craig Ellis -- B. Riley FBR -- Analyst

Doug Lawson -- Executive Vice President of Corporate Marketing and Strategy

Patrick Ho -- Stifel Financial Corp. -- Analyst

David Duley -- Steelhead Securities -- Analyst

Christian Schwab -- Craig-Hallum Capital Group LLC -- Analyst

Mark Miller -- Benchmark Company

Quinn Bolton -- Needham & Company -- Analyst

Gus Richard -- Northland Capital Markets -- Analyst

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