Ichor Holdings

Multiple device types, our process tool customers are also witnessing the need for more etch and deposition steps to help create smooth patterns and reduce line width roughness. Additionally, expectations for WFE growth reflect a significant expansion in the industry's deployment of advanced packaging techniques, which have their own particular process challenges. These require better film stress management, improved defectivity, enhance uniformity, and increase material selectivity, all of which are enabled by more precise control of gas and fluid delivery. Outside of semiconductors, specifically for our IMG business, we are also driving cross-selling opportunities at our historical gas panel customers, as well as opportunities to offer I-Corps's various fluid delivery products and capabilities to IMG's customer base in medical, aerospace, and defense. As these new technologies and drivers evolve and proliferate, we see opportunities for I-Corps to expand our revenue potential and continue to add breadth and diversification to our customer base. All of these factors build a strong story for I-Corps revenue growth as the industry recovery accelerates. Furthermore, our business model and financial profile tend to generate significant operating leverage as revenues grow. Current expectations are for the Q4 industry spending levels to stay fairly consistent through the first half of 2024, followed by the beginning of a revenue ramp in the second half in advance of an expected strong recovery year in 2025. We expect to be able to deliver significant earnings growth as revenue volumes increase, which is why we continue to make critical investments in our business in support of our future growth. We are maintaining our focus on driving share gains for our proprietary products and making investments in new offerings that support our customers' long-term technology roadmaps. These periods of lowered demand provide both I-Corps and our customers the ability to work on new qualifications. We continue to make very good progress in our key focus areas. These include our next generation gas panel, qualifications of our proprietary machine components, and our silicon carbide gas panel. I'm very pleased with our progress in customer evaluations of our new gas panel. As a reminder, the new gas panel contains about 75% proprietary I-Corps content compared to just 10% today, which could drive significant expansion of our gross margin profile. We have completed the qualification of our gas panel for three process applications, And in the next two quarters, expect to ship gas panels that will support five additional systems for end-user customer tool evaluations. This is a major milestone for the program. Our best estimate of when production shipments will begin is late 2024, which is when we would expect the end-customer evaluations to be successfully completed. We continue to work with three additional customers that are evaluating our technology. In our I-Corps proprietary machine components, we continue to win new qualifications across our customer base. In Q3, we completed several new component qualifications and expect to begin initial shipments later this quarter. We also expect to integrate incremental proprietary components into our existing gas panels, but this will take some time as our customers continue to work through the existing inventory on hand. Similar to our next generation gas panel, all of these qualifications and new customer wins will be margin accretive. And lastly, we continue to ship production volume gas panels for the silicon carbide market and have now been qualified on the next generation systems as well. We estimate the silicon carbide SAM for gas delivery to be around $60 million in 2023, but a decent tailwind for our revenue growth as the overall industry rebounds in the latter half of 24 and 2025. In summary, I'll remind everyone here today that our revenues tend to recover more sharply when industry spending rebounds, and our business model enables earnings growth well in excess of revenue growth. In the meantime, we are managing through the lower demand environment by focusing on delivering solid financial results as the business recovers improving our operational capabilities, qualifying our internally developed products, and developing new products that align with our customers' needs for both technology and cost. With that, I'll turn it over to Greg to recap our Q3 results and provide further details around our Q4 outlook. Greg?

Thanks, Jeff. To begin, I would like to emphasize 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 useful financial supplement available on our investor section of our website that summarizes our GAAP and non-GAAP financial results, as well as summary balance sheet and cash flow information for the last several quarters. In the third quarter, our revenues were $197 million at the upper end of guidance and increased percent from the second quarter. Our Q3 gross margin was 13.1%, which was lower than our expectations, primarily due to the additional inventory provisions recorded during the quarter, as well as a less favorable product mix compared to our forecast. With close control of spending, Q3 operating expenses of $21.3 million declined from Q2 levels. The resulting operating margin for Q3 was 2.2%. Our net interest expense was $5 million and our non-GAAP net income tax benefit for the quarter exceeded our forecast at $2.9 million. Consequently, Our net earnings for the quarter came in at the midpoint of Q3 guidance at $0.07 per share. Now turning to the balance sheet. At the end of the quarter, our cash and equivalents totaled $76 million, a $9 million decrease from Q2, primarily due to our net debt reduction of $12 million. We generated $4 million in cash flow from operations and after deducting $2.4 million of capital expenditures, our free cash flow for the quarter was $1.6 million. This was below our expectations for free cash flow given the back-end loaded revenue profile of the quarter, which drove an $8 million increase in accounts receivable. Inventory remained flat at $267 million. Day sales outstanding increased by one day to 48, and inventory turnover stood at 2.6. We are continuing to reduce our net debt levels given the higher interest rate environment, and our net debt coverage ratio currently stands at 2.6 times. Now let's discuss our guidance for the fourth quarter. We anticipate revenues in the range of $190 to $205 million. we expect that our gross margins will improve to approximately 14% plus or minus 50 basis points. Our fourth quarter gross margin expectations reflect somewhat more favorable product mix, as well as some improvement in the level of inventory reserves forecasted. As we enter 2024, we expect to be solidly back on track with our 25% flow through at similar revenue levels when compared to our second quarter gross margin performance. We plan to carefully manage operating expenses to $21.4 million level, give or take $200,000, as we continue to prioritize our R&D investments for new product programs and maintain the essential infrastructure that will enable us to ramp revenues in response to more significant upticks in customer demand in the quarters ahead. Net interest expense is expected to be approximately $5 million. The non-GAAP income tax benefit we expect at the midpoint of Q4 guidance is approximately $1 million. For fiscal 2023, we expect to recognize a net tax benefit of approximately $7 million which is higher than our previous forecast. Looking ahead to 2024, we anticipate incurring a nominal non-GAAP tax expense each quarter. And for modeling purposes, you should assume a 5% to 10% non-GAAP effective tax rate. Operator, we are ready to take questions. Please open the line.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 keys. Your first question comes from Charles Shee with Needham. Please go ahead.