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spk00: Good afternoon and thank you for joining today's fourth quarter and fiscal year 2021 conference call. As you read our earnings press release and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in our earnings press release, those described in our annual report on Form 10-K for fiscal 2020, and those described in subsequent filings with the SEC. You should consider all forward-looking statements in light of those and other risks and uncertainties. Additionally, we will be providing certain non-GAAP financial measures during this conference call. Our earnings press release and the financial supplement posted to our IR website, each provide a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures. On the call with me today are Jeff Andreessen, our CEO, and Larry Sparks, our CFO. Jeff will begin with an update on our business and a review of our results and outlook, and then Larry will provide additional details of our fourth quarter results and first quarter guidance. After the prepared remarks, we will open the line for questions. I'll now turn over the call to Jeff Andreessen. Jeff?
spk02: Thank you, Claire, and welcome to our Q4 earnings call. Q4 revenues were $287 million, up 9% from Q3 and just below the midpoint of guidance. While the acquisition of IMG added $7 million of incremental revenue in the quarter, The supply chain challenges the industry has been facing progressively worsened in Q4, not only for component supply, but also the additional labor constraints brought by the Omicron COVID variant, which we had not predicted when we provided Q4 guidance. Despite these challenges, it was a strong end to 2021 with gross margin improvement to 17.1% in Q4. For the full year, we achieved a record $1.1 billion in sales, and $3.37 in earnings per share. We increased gross margin by 210 basis points year over year and grew net income by 65% on a revenue growth of 20%. You have probably heard on many earnings calls at this point the incredibly robust business environment we are seeing in the wafer fab equipment industry. To support unprecedented levels of customer demand, we increased revenues by 47% in 2020 and another 20% in 2021 to levels now 77% higher than we reported in 2019. Expectations for continued industry growth in 2022 have recently increased from sequential annual growth of about 10% a quarter ago to now high teens percentages or $100 billion. At the same time, the challenges in the supply chain have not only continued, but they have worsened in many ways, shifting from freight and logistics issues initially, to factory shutdowns affecting us mid-year, to the labor impact stemming from Omicron, to increasing component supply challenges, particularly electronic components, as well as shortages of materials, which certainly affected the fourth quarter and we expect will be a factor through at least the first half of this year. Nonetheless, we along with the rest of the supply chain are working to manage these challenges and steadily increase our output each quarter through 2022, which we expect will result in another record revenue and earnings year in support of $100 billion of WFE demand. With our current visibility, we are forecasting Q1 revenues to be up around 4% to 5% sequentially, chiefly as a result of a full quarter of IMG revenues though we have widened the range to account for the incremental uncertainties in the supply chain. We also expect our revenue output to increase sequentially through each quarter of 2022, and given current WFE growth expectations in the high teens percentages, we also expect our revenue growth while outperforming WFE this year. The added visibility brought upon by tight supply conditions bodes well for the longevity of the current demand cycle. with our customers expecting industry supply to finally catch up with demand sometime in 2024. In this environment, we expect to continue to demonstrate incremental improvements to our gross margins, increasing operating leverage, and strong growth in earnings per share. Earlier in 2021, we talked about our plans to increase CapEx in order to add the capacity that will enable I-Corps to achieve quarterly revenue run rates in excess of $400 million. We will continue to invest in 2022 to ensure that we have the right level of capacity to support the demand that we see in the next two years. We are also making incremental investments in R&D and in the company's infrastructure to support the growth ahead. Now I'll discuss in more detail the benefits of our IMG acquisition and our progress in other strategic growth initiatives. Our M&A strategy is focused on increasing the IP content of the business. which is accretive to our gross margins while also leveraging our existing sales challenge. IMG fits this strategy very well. They have a strong precision machining capabilities but address a larger format versus what we have today. So it is complimentary and it will be instantly accretive to our gross margin and earnings. As we indicated in our November press release, we expect IMG to add 100 basis points to gross margin and at least 40 basis points to operating margin for our fiscal 2022 results. From a valuation perspective, the EBITDA multiple was around 13, which is a bit higher than I-Corps currently, but compares favorably to deals currently being completed for other machining-based business transactions. It brings a strong management team with a very capable engineering group as well. The acquisition of IMG has been closed for just over two months. And in that time, we have been impressed with their leadership team and their strong customer relationships. We are expecting a smooth integration process. IMG also brings a bit of diversification to our revenues in that a portion of their revenue is recurring, and they also serve exciting growth applications in medical, aerospace, and defense. Now I'll update you on the progress the team has made on our strategy to develop new products that will result in longer-term expansion of our share of our served markets, as well as drive the operating model toward increased levels of profitability. Our first next-generation gas panel is beginning the qualification process this quarter. The qualification process is expected to take up to a year to complete. We currently expect to ship our second beta system to an additional customer by mid-year. In our chemical delivery business, after shipping a beta chemical delivery system to a North America customer in Q3, we recently completed this phase of the evaluation and are now working on designing the production configuration for their tool. We expect this qualification period for the production unit to extend into the second half of this year. Additionally, earlier this year, we shipped another beta unit for an additional application, which will begin the first phase of qualification this quarter. We completed the qualification of our first evaluation unit of our proprietary liquid delivery subsystem to a Japanese customer, and I expect to see first production orders by mid-year. As I noted on our last call, the scale of this first opportunity is relatively small, but an important step in penetrating the Japanese market which is the largest portion of the wet processing SAM. We continue to quote opportunities at other OEMs that are larger in scale. In our precision machining business, the two qualifications completed in 2021 will begin to see first revenues this quarter and increasing from there. These qualifications will both increase our proprietary content on a gas panel and be accretive to our gross margin profile. In summary, in a very challenging operating environment, the team is working extremely hard to ramp the business to address the customer demand we are experiencing. And with our current visibility, we are expecting to report sequential growth and record-setting revenues for the next several quarters. We are also pleased with our gross margin improvements in 2021. As we look to 2022, we expect strong earnings leverage on the revenue growth forecast as a result of our continued gross margin improvements. which brings us to Larry's discussion of our financial performance and further details on our outlook. Larry?
spk01: Thanks, Jeff. First, I would like to remind you that the P&L metrics discussed today are non-GAAP measures. These measures exclude the impact of share-based compensation expense, amortization of acquired intangible assets, non-recurring charges, and discrete tax items and adjustments. There is a very helpful schedule summarizing our GAAP and non-GAAP financial results, including the individual line items for non-GAAP operating expenses such as R&D and SG&A in the investor section of our website for reference during this conference call. Fourth quarter revenues were $287 million, up 9% from Q3 and 17% higher than Q4 of 2020. First year revenues totaled a record $1.1 billion. Given the challenging operating environment, we are pleased with our gross margin and profitability performance. Q4 gross margin of 17.1% was up 40 basis points from Q3 and benefited from the addition of IMG during the last month of the quarter, along with continued cost reduction programs. Full year gross margin increased to 16.7%, up 210 basis points from 2020. COVID-related impacts on our gross margin continue to be around 50 basis points and are expected to persist for the foreseeable future. Q4 operating expenses were $18.6 million compared to our guidance of $17.5 million, reflecting approximately $1 million added from the partial quarter of IMG operations. Operating margin of 10.7%, increased 20 basis points from Q3, and for the full year, operating margin was also 10.7%, up 240 basis points from 2020. Interest expense for Q4 was just under $1.5 million, essentially flat to Q3 as a result of our new debt terms, with a lower overall interest rate on the increase in borrowings to fund the IMG acquisition. Our tax rate for the quarter was 10%, and the full year tax rate was 11.5%. We reported earnings per share of $0.90 for Q4 at the midpoint of our guidance. The strong operating leverage in 2021 resulted in record net earnings of $98 million, up 65% from 2020, with EPS also outgrowing revenue growth of 34% from 2020, reflecting the higher share count. Now I will turn to the balance sheet. We closed the acquisition of IMG in late November and the purchase price of $270 million was funded with approximately $140 million of cash and investments on hand and $130 million of incremental borrowing on our newly revised credit agreement. This transaction drove the majority of the increase in total debt to $295 million and the decline in total cash and investments to $75 million at year end. Based upon our prior revenue guidance for Q4, we had expected stronger cash conversion of working capital late in the year. But given the continued increases in customer demand concurrent with output challenges, we built inventory in the quarter to support the growth forecast for the next several quarters. This reduced our inventory turns to 4.4 in Q4, and DSOs were higher at 49 days compared to 44 days in Q3. Going into 2022, we expect these working capital investments in 2021 will translate to strong free cash flow generation in the quarters ahead. Now I will turn to our first quarter guidance. With revenue guidance in the range of $280 to $320 million, our earnings guidance is 80 cents to $1.04 per share. At the midpoint of guidance, this includes approximately $18 million of revenue from IMG compared to $7 million in Q4. Our guidance assumes the industry's supply chain constraints will persist at the same level through the quarter, but we have also widened the guidance range to factor in the additional uncertainty we've all been experiencing since last quarter. We are expecting about an 80 basis point improvement in gross margin for Q1, reflecting a full quarter of IMG and continued cost improvement efforts. We continue to drive improvements to our gross margin profile. Our key strategies to drive gross margin higher are through incremental cost reduction programs, growing our share within our higher margin components businesses, and increasing our content of proprietary IP within our products. With the IMG acquisition, an important element of increasing our revenue mix of higher margin components we expect continued progress on our other gross margin improvement plans as we progress through 2022. Our Q1 operating expense forecast is $21.4 million with the majority of the increase due to the full quarter of IMG operations along with seasonal increases. Through 2022, we expect OPEX to increase a bit each quarter as we continue to make incremental investments in R&D supporting our new product development programs the new ERP system, and overall investments supporting company growth. We expect our interest expense will be approximately $1.5 million in the first quarter, reflecting a full quarter of borrowings for the IMG acquisitions, as well as our lower borrowing rate. Our tax rate in Q1 will increase to approximately 13.5% given the higher mix of U.S.-based revenues and we estimate our fully diluted share count to be approximately 29.1 million. Our tax planning rate over the next couple of years is now in the range of 13 to 14% given current tax policy and the expected geographical mix of revenues. Finally, we expect CapEx to be around 3% of revenues for 2022, which reflects the higher levels of investment required to support our precision machining business. We expect to deliver strong free cash flow performance in 2022 as we show improved cash conversion metrics compared to 2021 when we built inventory in support of the growth ahead. Operator, we are ready to take questions. Please open the line.
spk03: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment please while we poll for questions. And our first question comes from the line of Tom Diffley with DA Davidson. Please proceed with your question.
spk08: Yeah, thank you, and good afternoon. First, Larry, a question on the guidance. The range, $0.80 to $1.04, is that strictly just the operating leverage overhead absorption, or is there other factors that go into that earnings level based on that revenue level?
spk01: Well, the biggest piece, Tom, is the IMG will be in for a full quarter, so that's – drives some of the improvement. The others, we will get a little bit of volume leverage, but I'd say that the majority of the change is from IMG full quarter.
spk08: I guess I was talking more about the 30% range from the low end of earnings to the high end of earnings versus a much smaller revenue percentage change.
spk02: yeah from the midpoint to the to the top you'll see a little bit of leverage but again we're you know most of that flex up is you know we're pretty kind of capex light here so you know you get some but you don't get tons of it so most of it is just the incremental revenue that that'll flow through it kind of relatively the same flow through rates that we we've had in the past okay
spk08: Thanks, Jeff. When I look at the IMG acquisition, I'm curious, does that create or does that bring with it some extra capacity you can use for your core business, or is it just too different a business to have it help out the core business going forward, and that will be its own kind of growth driver, very separate going forward?
spk02: Yeah, they do have some incremental capacity that can be utilized for certain portions of the machining that we do. And so they can do some of the steps of the components that we machine, and we've already started that process. That'll take a little while to move things in, two to three months. The other thing they do is they have a portion of the business is in e-beam welding, which we also outsource, so we can insource into that capacity that they have as well. And so we're working on that as well. And those are part of the kind of the cost reductions and synergies that we've seen as we did the acquisition.
spk08: Okay. And can you just remind us what the percentage of recurring business there and the percentage of non-semi-business?
spk02: Yeah, they have some exposure to, I'll call it service parts and services, primarily around kind of their welding operation where they do welding for customers that supply the parts. And so I want to say kind of off the top of my head, it's probably a third or so.
spk08: Okay. And final question. When you look at the increased expenses lately, especially on the shipping, what kind of an impact has that had on your model? And do you think some of these shipping expenses are more of a permanent increase versus a temporary increase?
spk01: Well, I think it's been – I'd say today it's a good – the bulk of the COVID impact is really around shipping. It's been – we've probably seen, if you look at pre-COVID to now, a 50% increase in shipping. freight costs, which we've offset by some operational activities that initiatives like shipping from Malaysia into Singapore with our own trucks, that sort of thing. But I think in general, right now, we don't see a lot of significant improvement in the environment. I think it looks, at least for the first half of this year, that we're going to be facing the same issues. And We'll continue to try to look for creative ways to mitigate some of that, but right now we don't see a lot of change in the business.
spk02: Yeah, I think, Tom, I think until supply increases for air freight, particularly it'll be with us for a while, but I think that people are getting creative on how they attack the air freight, and so we've done some of that, too, with consolidating and partnering with others to try and minimize the effect on us.
spk08: Okay, well, thank you both for your time today.
spk02: Thanks, Tom.
spk03: And our next question comes from the line of Patrick Ho with Stifel. Please proceed with your question.
spk04: Thank you very much. Jeff, I know there's been a lot of moving parts on the supply chain, the COVID-related costs and the workforce reductions that have occurred. As you look at the current March quarter and maybe into the June quarter as well, can you rank, I guess, the... those aspects and which ones are creating the most pressure. Is it the supply chain that's probably causing the greatest headwinds today? And maybe as a follow-up to that, if it is the component shortages, are there multiple components that are becoming more challenging to procure, or is it just kind of one area?
spk02: Hey, Patrick. I do think that the component shortages are going to have the biggest effect on recovering and growing and on our outlook. We've seen the Omicron kind of peak a little bit. It's getting much, much better now. I would say that's becoming a little bit less of an issue, but it obviously did start to spike sometime in late October and things like that. I wouldn't say it affected the internal I-Corps much, but we did see some of that at a few suppliers. But I think largely we're seeing kind of, I'll call them electronic components, semiconductors, other electronic components, things like that that are still kind of challenged. I do see some
spk04: improvement in the future and plans and things like that so you know we're hoping that with you know each month everything continues to get a little bit better great that's helpful and maybe it's my follow-up question in terms of you talked about capex being three percent of revenues this year you continue to expand capacity are these plans you know they're always looking forward but how much forward are they looking are they looking at the next year or or so, or are they more three- to four-year planning of when, let's just say, hypothetically, we're looking at a $1.6 billion to $2 billion type of revenue company? What are some of the plans there in terms of capacity expansion? And I guess what I'm looking for is, are you trying to play a little bit of catch-up over the next year or so because of the strong demand, or are these long-term plans?
spk02: They're long-term pans. I mean, I think, you know, we started talking about this probably towards the end of 2020 and the outlook of going into 2021 and 2021 ended up much stronger. So it might have nipped the year off of the two to three year. So I'm pretty comfortable with our plans and for the next one to two years for sure. And not everything is in place, largely in place. And I think you're seeing us kind of raise that CapEx number towards 3%. And that's really driven by the fact that we have to continually increase our capacity on the machining side of the business, which has got a higher CapEx level. So on the integration side, it's still kind of in that 1% to 2%. So we're certainly looking out multiple years. And I think we're largely aligned with the view that our customers have and the industry has for the next couple of years.
spk04: Great. Thank you very much. You bet.
spk03: Our next question comes from the line of Chris Sankar with Cowan. Please proceed with your question.
spk06: Hi. This is Robert Mertens on behalf of Chris. Thanks for taking my question. I just wanted to get a little bit more detail on the IMG. Integration, if that business has any typical seasonality or you're just expecting sort of the 18 million quarterly revenue in March to grow from there. And then I know you mentioned that business has some aerospace and defense exposure. Do you sort of know the breakdown of the end markets for that business overall? And then I have one more question.
spk02: Thanks. Yeah, okay. It has a little bit of seasonality, believe it or not, I think, largely, but not tremendous step functions. But I would say kind of Q2, Q3 has always been a little bit stronger. And, you know, we have some plans to try and, you know, obviously add some revenue synergies. So we can probably make that happen. a little bit less of an issue. As you go in the fourth quarter, sometimes defense and things like that slow up a little bit, but I don't see their semiconductor business slowing up as we go through it. We don't actually break out their pieces of the business, but I would say the vast majority of that business is still semiconductor and the services around semiconductor. that they provide, but they do address some of the defense applications. And I would say of those, you know, you've heard some of the commercial defense, but it's not necessarily all commercial defense. So it's actually stayed pretty robust through the last couple of years that we did a pretty deep dive, obviously doing diligence on. So it's got a very strong base. And they've got some really neat new products that, As they get qualified, they have some products that address some medical applications, and those are kind of in the early stages. But if they get adopted by their customer, those could be actually good growth drivers for them beyond this year and into next year.
spk06: Great. That's very helpful. And just real quick, a question around the inventory levels. Are you confident that the current levels supporting above growth, WFE growth this year, or should we expect a bit more of a buffer the next few quarters, just to make sure you're following on the supply challenges going forward?
spk02: Yeah, I think we've been, and I think you've seen this across the industry, is no one's trying to constrain inbound inventory levels because it only takes a part that can keep you from a shortage from shipping something. So I don't think they'll grow greatly from here. And if supply chain improves as we get through mid-year and into next year, they'll probably modulate down, actually.
spk06: Okay, thank you. That's all for me.
spk02: Thanks, Robert.
spk03: And as a quick reminder, if anyone has any questions, you may press star 1 on your telephone keypad to join the question and answer queue. Our next question comes from the line of Quinn Bolton with Needham & Company. Please proceed with your question.
spk07: Hey, guys. Can I ask a question, just a clarification on your outlook for 2022 where you said you're going to grow faster than WFE? Is that organically or does that include the probably roughly six or seven points of growth that you get through the IMG acquisition in 22?
spk02: Yeah, it does. Obviously, you know, we're talking about the whole corporation, so you're approximately right that about 6% of growing above WFE. You know, I think we will grow, you know, if I had to put a number on it, I mean, I kind of think low 20s or something like that would be a reasonable estimate of where we think we can come out this year, given our exposures to the DepEdge EUV products and then adding IMG.
spk07: Got it. So that's low 20s inclusive of IMG?
spk02: Yes.
spk07: Got it. Got it. Great. And then second question just around component availability. You mentioned it sounds like it's mostly semiconductor related or maybe other electronic components. are there any constraints that you're seeing on, say, like, mass flow controllers or valves or manifolds or anything else that you're sourcing that are sort of less electronics but perhaps still critical to the gas panels?
spk02: I mean, I would say that I don't want to be specific, obviously, on any, you know, specific supplier component, but I would say anywhere, you know, that we see the use of semiconductors, and I wouldn't say that there's a lot of these issues, but there's one or two that have impacted some of the ability for those suppliers to ramp and support the demand that we're seeing. I think you know that in the industry, most of us are still chasing demand because of these issues. Other than that, I don't want to be much more specific on the supply chain challenges.
spk07: Got it. But if you're short on a component, it's probably because that component includes a semiconductor or some kind of electronic component that everybody's struggling to source.
spk02: Yeah, that would be a good characterization, yeah.
spk07: Got it. Understood. Thank you.
spk02: You bet.
spk03: And our next question comes from the line of Craig Ellis with B Riley Securities. Please proceed with your question.
spk05: Yeah, thanks for taking the questions and appreciate all the transparency you're providing around IMG. So I'll just start there. A quantitative and a qualitative question. Larry, for you, you commented on the revenue contribution for 4-in-1Q, but can you say if the business is accretive to the bottom line and more qualitative for you, Jeff? Can you just talk about how you're feeling about the early integration and the customer reaction to the business as we've had it in a portfolio for a couple months?
spk02: I'll start and then Larry can finish up with the financial. So from an integration, largely we've kind of organizationally already integrated it, so it's going fine. We're not going to rush it on to ERP systems and things like that. I think that... We're excited. As you own it, you can see the capability of their engineering group and their manufacturing group, and they do a much higher level of automation than we do, and we can leverage that learning into it. I think the customer reaction has been pretty good. There's a lot going on, obviously, in the world today as everybody's trying to ramp and manage some of the challenges we're doing. Seeing synergies in revenue might take a little longer, just because they all will require some level of engineering support. And that's just challenging in times like this, even regardless of dealing with the supply chain constraints that everybody is dealing with. But we do see some. And we'll keep you posted on how we might grow that. And they're tied to some pretty good applications that are growing a little bit faster, I would say, than the overall semiconductor business, but it is a relatively new kind of win for them in the last couple of years, so I'll see that continuing to grow.
spk01: Yeah, and I think on the... Got it.
spk05: Yep, thanks, Larry.
spk01: Yeah, on the creative question, so as we've said, it is instantly a creative... About 100 basis points on margin, 40 basis points roughly on operating margins. And then I think if you go net, it's probably around 20 basis points on the net line. So for the year, year over year.
spk05: Got it. Got it. That's helpful. And then with regard to the supply chain issues, and I hate to beat that dead horse, but I just want to make sure I really understand it. To what extent are the supply chain issues that you're seeing things that are part of Paul Cecala, The products you're building and necessary inputs or just the cadence of or your of your manufacturer ability versus things that are external to I core. Paul Cecala, And maybe slowing and then customers demand for your product because some other part is this an issue is everything we're talking about today, things that are really just internal to. I-Corps, is it a broader issue than that that you're expressing as you talk about some of the things impacting revenue across margins?
spk02: Yeah, I think it's basically on components that are impacting our suppliers' ability to supply parts to us. I think if you're talking about internally only, those would be labor-related, things like that. That is not significantly affecting us. I mean, we... You know, everybody was affected by Omicron and stuff, but to a pretty low level for us. And that was dealt with, with, you know, over time and other things. So most of it is just in, you know, in the timing and predictability of part flow.
spk05: Yep. And, and I may have missed it because we're hopping on and off different calls, but was the impact of that quantified for the quarter in the outlook? Are we talking. 5 to 10 million, 10 to 20 million, any scoping would be particularly helpful.
spk02: Yeah, no, we haven't quantified it. What I would say is we've expanded the range. The high end of the range would need some further recovery in the supply chain versus, you know, what we can see today. And I would say demand is above that number for sure.
spk05: Yep. And demand's above that number, but you're not concerned at all about any share issues or anything like that, Jeff?
spk02: Well, I mean, obviously, we're all kind of in the same situation. So we always worry about things like that, but I don't think we're unique in any way, shape, or form. We have a fairly complex, obviously, supply chain. you know, particularly on the integration gas panel side, there's a lot of different components, different suppliers. And so we do manage a lot of different parts and suppliers and things like that. But I do not think we're unique in any way, shape, or form with the issues that are kind of, I hate to use the word generically, most people are facing, but I don't think we're much different than that.
spk05: Got it. And just last one for me. And The reason for the question is just respecting the trends that we've seen over the last 12 months, which I think you spoke to quite well in your prepared remarks, Jeff. But if demand from your customers proves to be materially higher than that kind of low 20s that you talked about, can you just talk about your confidence in being able to hit a number that might be mid-20s or high 20s should industry evolve to that level?
spk02: Oh, you know, I think if the industry continues to grow and the supply chain gets healthier, I think that in fact will occur. It's hard to handicap when the supply chain is going to get healthy. I think most of us think that at least through the middle of this year, we're going to still have constrained environments. And then, you know, I think, you know, even the $100 billion WFE has the assumption in there that, you know, People are going to, you know, that's the demand that they believe they can fulfill. The underlying demand may be a little bit higher.
spk05: Got it. Got it. Thanks very much, guys. Appreciate it.
spk03: Thank you. And we have reached the end of the question and answer session. And I'll now turn the call back over to Jeff Andreessen for closing remarks.
spk02: Thank you for joining us on our call this quarter. I'd like to thank our employees, suppliers, and customers for their support and strong execution in this historic demand environment for the semiconductor industry. We look forward to updating you on our next earnings call in early May.
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