AXCELIS TECHNOLOGIES INC

Results of Operations

The following table sets forth our results of operations as a percentage of total revenue:

Revenue

The following table sets forth our product and services revenue:

Product

Product revenue, which includes systems sales, sales of spare parts, product upgrades and used systems, was $243.4 million, or 96.5% of revenue, during the three months ended March 31, 2024, compared with $246.0 million, or 96.8% of revenue, for the three months ended March 31, 2023. The $2.6 million decrease in product revenue for the three-month period ended March 31, 2024, in comparison to the same period in 2023, was primarily driven by a decrease in aftermarket sales.

Deferred revenue includes payments received in advance of system sales as well as deferral of revenue from systems sales for installation and other future performance obligations. The total amount of deferred revenue at March 31, 2024 and December 31, 2023 was $208.4 million and $210.9 million, respectively.

Services

Services revenue, which includes the labor component of maintenance and service contracts and fees for service hours provided by on-site service personnel, was $9.0 million, or 3.5% of revenue, for the three months ended March 31, 2024, compared with $8.0 million, or 3.2% of revenue, for the three months ended March 31, 2023. Although services revenue typically increases with the expansion of the installed base of systems, it can fluctuate from period to period based on capacity utilization at customers’ manufacturing facilities, which affects the need for equipment service.

Revenue Categories used by Management

In addition to the line item revenue categories discussed above, management also regularly disaggregates revenue in the following categories, which it finds relevant and useful:

(Aftermarket purchases reflect current fab utilization as opposed to Systems purchases which reflect capital investment decisions by our customers, which have differing economic drivers);

Aftermarket and Systems Revenue

Included in total revenue of $252.4 million during the three months ended March 31, 2024 is revenue from our Aftermarket business of $56.9 million, compared with $58.8 million of Aftermarket revenue for the three months ended March 31, 2023. Aftermarket revenue fluctuates from period to period based on capacity utilization at customers’ manufacturing facilities, which affects the sale of spare parts and demand for equipment service. Aftermarket revenue can also fluctuate from period to period based on the demand for system upgrades or used equipment. The remaining $195.5 million of revenue for the three months ended March 31, 2024 was from system sales, compared with $195.2 million of systems revenue for the three months ended March 31, 2023. Systems revenue fluctuates from period to period based on our customers’ capital spending.

Gross Profit / Gross Margin

The following table sets forth our gross profit / gross margin:

Product

Gross margin from product revenue was 47.5% for the three months ended March 31, 2024, compared to 42.0% for the three months ended March 31, 2023. The increase in gross margin primarily resulted from a favorable mix of system revenue.

Services

Gross margin from services revenue was 6.1% for the three months ended March 31, 2024, compared to 9.8% for the three months ended March 31, 2023. The decrease in gross margin is attributable to changes in the mix of service contracts.

Operating Expenses

The following table sets forth our operating expenses:

Our operating expenses consist primarily of personnel costs, including salaries, commissions, incentive-based compensation, stock-based compensation and related benefits and taxes; project material costs related to the design and development of new products and enhancement of existing products; and professional fees, travel and depreciation expenses.

Personnel costs are our largest expense, representing $36.4 million, or 61.2%, of our total operating expenses for the three months ended March 31, 2024, compared to $30.7 million, or 58.2%, of our total operating expenses for the three months ended March 31, 2023. The higher personnel costs for the three months ended March 31, 2024 are primarily due to increases in salary associated with an increase in headcount as well as bonus and stock compensation expenses.

Research and Development

Our ability to remain competitive depends largely on continuously developing innovative technology, with new and enhanced features and systems and introducing them at competitive prices on a timely basis. Accordingly, based on our strategic plan, we establish annual research and development budgets to fund programs that we expect will solve customers’ high value, high impact, ion implantation challenges.

Research and development expense was $25.7 million during the three months ended March 31, 2024, an increase of $1.9 million, or 7.9%, compared with $23.8 million during the three months ended March 31, 2023. The increase is primarily due to higher personnel expenses associated with an increase in headcount.

Sales and Marketing

Our sales and marketing expenses result primarily from the sale of our equipment and services through our direct sales force.

Sales and marketing expense was $17.4 million during the three months ended March 31, 2024, an increase of $3.3 million, or 23.3%, compared with $14.1 million during the three months ended March 31, 2023. The increase is primarily due to higher personnel expenses associated with an increase in headcount.

General and Administrative

Our general and administrative expenses result primarily from the costs associated with our executive, finance, information technology, legal and human resource functions.

General and administrative expense was $16.4 million during the three months ended March 31, 2024, an increase of $1.7 million, or 11.3%, compared with $14.7 million during the three months ended March 31, 2023. The increase is primarily due to higher personnel expenses associated with an increase in headcount.

Other Income (Expense)

Other income (expense) consists of interest earned and accretion on our invested cash balances, interest expense relating to the finance lease obligation we incurred in connection with the 2015 sale of our headquarters facility and other financing obligations as well as foreign exchange gains and losses attributable to both fluctuations of the U.S. dollar against local currencies of the countries in which we operate and forward currency exchange contracts.

Other income was $2.5 million for the three months ended March 31, 2024, compared with other income of $1.5 million for the three months ended March 31, 2023. The $0.9 million change in other income (expense) compared to the same prior year period was primarily due to an increase in interest income of $1.6 million and an increase in foreign exchange losses of $2.2 million partially offset by foreign exchange gains of $1.5 million from forward currency exchange contracts.

Income Tax Provision

Income tax expense was $7.4 million for the three months ended March 31, 2024, compared to $5.2 million for the three months ended March 31, 2023. The $2.2 million increase was primarily due to an increase in pre-tax income and a decrease in stock compensation deduction partially offset by the tax deduction related to foreign sales taxed at a lower rate.

The effective tax rate for the three months ended March 31, 2024 was less than the U.S. statutory rate of 21% due to a forecasted Foreign Derived Intangible Income deduction, Federal research and development tax credits and a favorable discrete item related to equity compensation that reduces the annual tax rate.

The deferred income taxes of $54.5 million and $53.4 million as of March 31, 2024 and December 31, 2023, respectively, reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards. As of March 31, 2024, we have recorded a $10.8 million valuation allowance in the U.S. against certain tax credits and state net operating losses due to the uncertainty of their realization. Realization of our net deferred tax assets is dependent on future taxable income. We believe it is more likely than not that such assets will be realized; however, ultimate realization could be impacted by market conditions and other variables not known or anticipated at this time.