Ichor Holdings

Good afternoon, and thank you for joining today's fourth quarter 2022 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 2021, 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 today Each provides the 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?

Thank you, Claire, and welcome to our Q4 earnings call. Q4 revenues at $302 million, moderating 15% from our record per quarter. As we indicated in our January 10th pre-announcement, we witnessed further weakening in customer demand in the last month of the quarter. So while we had previously expected to report a decline in sales for both Q4 as well as the current quarter, Our actual results and current forecasts indicate quarter-over-quarter declines that are modestly higher than what we were expecting a quarter ago. Not surprisingly, this change in the near-term business environment has been echoed by leading equipment OEMs, with significantly reduced shipment levels and build plans expected for the March quarter. The current expectation is that following the first quarter decline, industry shipments should stabilize somewhat and we should see a relatively balanced WFE demand environment between the first and the second half of 2023. As we reflect on 2022, which was a record year for WFE, we reported strong year-over-year revenue growth, expanding gross margins, and record earnings, all while navigating through a highly dynamic and often challenging business environment. We grew revenues by 17%, which represented organic growth of more than 10% in addition to the full year impact of the acquisition of IMG. This compares to overall WFE growth in the high single digits. Gross margin improved 30 basis points, and we reported record earnings of $105 million, or $3.62 per share. On the last quarter's call, we discussed the softening business environment expected for 2023 and the drivers for our revenue that should result in our continued outperformance versus WFE in the coming year. In particular, we discussed our reduced exposure to the memory market, our increased exposure to EUV lithography, and our expectations to continue gaining market share and winning new product evaluations. All three of these drivers continue to be very much intact today. First, we continue to estimate that our exposure to the memory market fell to below 40% of our revenues in 2022. Current expectations are that memory WFE could be down as much as 50% this year, which is higher than we expected a quarter ago. As a result, even though Foundry and Logic capital spending is expected to hold up better than memory this year, the worsening memory market has certainly led to overall cuts in revenue expectations for 2023. Next, we continue to forecast growth in the part of our business that is tied to EUV. The WFE market is currently experiencing unprecedented bifurcation and outlooks between lithography and the other major segments of WFE, such as etch deposition and process control. For example, Within the overall WFE outlook calling for a year-over-year decline of 20% or more, revenues in the lithography segment are expected to increase by 25%. This means that the rest of the market for non-litho is expected to be down in the range of 25% to 30%. And while we steadily increased our share of lithography market over the past several years, It continues to represent less than 10% of our revenues, and therefore the majority of our revenues will be impacted closer to the 25% to 30% range declines that are expected for non-LithoWFE. We continue to expect three primary offsets to this forecast that can help add some resilience to our revenue performance in 2023. The first is clearly the continued growth expected in our gas delivery business serving the EUV lithography market. The second is the portion of our revenues from the IMG acquisition that is independent from the semiconductor industry. While a small piece of our overall revenues today, the IMG sales forecast areas such as medical, industrial, and aerospace are holding up better than WFE in 2023. And lastly, we continue to expect to benefit from success in gaining market share and winning new product evaluations. Before providing an update on our share gain initiatives, I'll also add a fourth potential offset, which is that our revenues tend to recover more sharply when industry spending rebounds. Current expectations call for a bottoming in non-Litho WFE shipments around midyear, followed by the beginning of a recovery. Depending on the slope of the recovery, we could see a material improvement in customer demand toward year end. and that would therefore be a fourth offset to the 25% range declines expected this year. Which brings me to an update on our share gain initiatives. Historically, we have taken advantage of these slowdowns in industry demand to drive market share gains as our customers are able to focus more resources into new product evaluations and qualifications. Our areas of focus remain, qualifying more of our internally developed machining components We have several opportunities that we're quoting this quarter and hope to see first revenues in the second half once qualified. Leveraging our global weldment footprint to gain additional share. Qualifying our next generation gas panel. We expect to ship a third qualification unit by mid-year. And qualifying our chemical delivery systems as well as developing new components that address this market. Beyond these, we are continuing to work with the customer on a gas delivery solution that serves the growing silicon carbide market and expect to deliver our first unit for qualification on Lake Q1. So our focus turns to the expected spending environment over the next several quarters and our ability to manage our variable operating model to adjust to lower levels of WFE demand. We have executed reductions in our workforce to align to the business volumes we expect in 2023 across our global footprint. We have always maintained good discipline on operating expenses and will continue to invest in our R&D programs and optimization of our capacity to ensure we can support the future growth in the business. In 2023, These continued investments will, by definition, result in a more limited reduction in operating expenses as compared to the levels of revenue decline, as Larry will discuss later. We are an essential part of our customers' growth plans as we look beyond this current downturn, and just as they will continue to invest for the future, we will as well, which in turn will drive strong operating leverage as we come out of this temporarily weak business environment. In the meantime, we are confident that we will show solid financial results and strong cash flow performance during 2023, which, by the way, is expected to be the third largest WFE year in our industry's history. And with that, I'll now turn the call over to Larry. Larry?

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 Investors section of our website for reference during this conference call. Fourth quarter revenues were $302 million, up 5% from Q4 of last year and down 15% from our record third quarter. Even though revenues declined more than expected, gross margin of 16.7% represents flow through of approximately 25% on the revenue volumes compared to Q3, which is consistent with our expectations going into the quarter. Q4 operating expenses were $23.4 million, slightly higher than forecast, primarily due to an increase in R&D investments in support of our new products. The resulting operating margin was 8.9%. As a result of higher interest rates, interest expense increased to $4.2 million in line with our expectations, while our effective tax rate was lower than expectations at 7%, reflecting the revised full-year effective rate of 9 percent. The resulting EPS for Q4 was 72 cents. Now I will turn to the balance sheet. As expected, cash conversion of working capital approved again in the fourth quarter, and we generated $32 million of free cash flow. Cash from operating activities was $39 million, and CapEx for the quarter was $7 million. Cash flow from operations benefited from a $47 million decline in accounts receivable, and receivables DSO were 41 days compared to 47 in Q3. Inventories were $284 million a year end, $7 million lower than Q3 with turns of 3.5. Total cash was $86 million a quarter end, up $30 million from Q3, and total debt was $303 million, down about $2 million from Q3. Now I will turn to our first quarter guidance. With revenue guidance in the range of $210 to $240 million, our Q1 earnings guidance is 19 to 37 cents per share. The midpoint of revenue guidance at $225 million reflects about a 25% decline from Q4. At this revenue level, we are expecting gross margins in the range of 15.5% to 16%, which incorporates our recent new and previous cost reduction action. The result is an improvement in flow through on the lower revenue volumes to about 20% compared to 25% in Q4. At this time, we expect operating expenses to decline to approximately $21.7 million in Q1 through a combination of headcount and other controllable spending reductions. We will continue to maintain our R&D investments in support of new product programs with the majority of the quarter-over-quarter spending reduction coming from G&A. We will continue to invest in new product programs and critical IT infrastructure and currently expect our quarterly OpEx run rate to remain around $21.5 to $22 million for the balance of the year. We expect our interest expense will be $4.9 million in the first quarter, reflecting the continued increases in interest rates. Our tax rate in Q1 is expected to be 10%, and we estimate our fully diluted share count to be approximately $29.4 million. Operator, we are ready to take questions. Please open the line.