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spk03: CBD, ECD, and clean steps. While we are not seeing an initial recovery in 3D NAND investments beyond technology transitions, we do expect NAND spending will further improve in 2025, which will benefit our business given the greater etch and deposition intensity for this application. Our silicon carbide gas panel business, which has slowed heading into the second half, is expected to return as a growth driver in 2025 to support the additional capacity that will need to be put in place in the next few years. And while the more modest pace of EUV deployments has slowed our quarterly build rate of gas delivery systems for the first half of this year, we expect the second half to be stronger and continue to grow as we move into 2025, another tailwind to our growth. Finally, in our non-semi business, we are seeing a return to pre-downturn demand levels as well as incremental share gains ahead within IMG's customer base in aerospace and defense, as well as certain commercial markets. As each of these markets and applications continue to expand, we see opportunities for I-Corps to increase our revenue potential and continue to add breadth and diversification to our customer base, altogether building a strong story for I-Corps' revenue growth as the industry recovery accelerates. Given all of these drivers, we believe we could see strong growth for our primary served markets with NWFE through the next up cycle. In particular, deposition, etch, and EUV, as well as in our non-semi business. Now I'd like to update you on our proprietary products pipeline, including our next generation gas panel. We continue to make steady progress in growing our new products this year and are seeing the impact on our profitability with improved gross margins on similar revenue levels. I'll start with our next generation gas panel. We have now shipped over 20 gas panels, which is consistent with the outlook I provided on our last earnings call. Most of these new gas panels are on our customers' evaluations tools that have been shipped to a device manufacturer. Our new gas panels contain about 80% proprietary I-Corps content compared to around 10% today. which will drive significant expansion of our gross margin profile. These tool evaluations typically take about nine months to complete, so the earliest the initial evaluation will be completed and production shipments can begin remains in the fourth quarter. We have been qualified on three applications and are now expecting to complete two additional applications in the next three to four months. As for our new components products, we are now qualified on fittings, that are used in our weldment business, substrates used in our gas panels, seals, and high purity valves. These are all critical components used in the existing gas panels that we assemble. These specific products are now qualified at three customers and have continued to ramp since we began shipping in the second half of the first quarter. All of these new component qualifications can be used in both our existing gas panels that we build today as well as are all designed into our next generation gas panel. In summary, I'll remind everyone here today that our revenues tend to recover more sharply when industry spending rebounds. Furthermore, our business model and financial profile tend to generate significant operating leverage as revenues grow. In contrast to last quarter, When any meaningful uptick in revenue growth was outside of our three-month visibility, today we are pleased to report that a return to sequential growth is now firmly within our near-term forecast. Our confidence has increased around the stronger second half largely due to the recent strengthening of the Q4 demand profile. We are encouraged by the strengthening outlook for Q4 as we move into what is expected to be a much stronger WFE year in 2025. which means we look forward to ramping revenues back towards the $250 to $300 million plus level next year. 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 future growth. With that, I'll turn the call over to Greg to recap our Q2 results and provide further details around our Q3 financial outlook. Greg.
spk06: 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, amortization of acquired intangible assets, non-recurring charges, and discrete tax items and adjustments. There is a useful financial supplement available in the investor section of our website that summarizes our GAAP and non-GAAP financial results. as well as a summary of the balance sheet and cash flow information for the last several quarters. Second quarter revenues were near the upper end of our forecast at $203 million, up slightly from Q1, and 10% higher than the same period last year. Gross margin improved 80 basis points sequentially to 13%, which was in line with expectations. we are starting to recognize the benefit of our internally produced products, as well as continued improvement in factory efficiencies. Q2 operating expenses came in below forecast at $21.9 million, a little lower than Q1, due to favorable labor-related costs and continued efforts to control variable spending. Our operating income for Q2 was $4.5 million. Our net interest expense of $1.9 million was down significantly from the Q1 expense of $4.1 million, reflecting the benefit of our $115 million debt reduction during Q1. Our non-GAAP net income tax expense was above our forecast at $800,000, which had a one-cent impact on our EPS within the quarter. The resulting net income per share was five cents. Now turning to the balance sheet, at the end of the quarter, our cash and equivalents totaled $114 million, a $12 million increase from Q1. We generated $17.5 million in cash flow from operations, and after deducting $2.8 million of capital expenditures, our free cash flow was $14.6 million. Accounts receivable decreased from the previous quarter on improved linearity, and DSOs were 29 days. Inventory decreased $9 million during the quarter to end the quarter at $231 million, and inventory turns increased to 3.0. During the quarter, we reduced our term loan balance by $1.9 million to end the quarter with a total debt of $130 million, and our net debt coverage ratio improved to 1.8 times. Now I'll provide our guidance for the third quarter of 2024. With anticipated revenues in the range of $195 to $210 million, we expect our Q3 gross margins will again improve sequentially to a range of 13.5 to 14.5 percent. We expect Q3 operating expenses to be approximately $22.6 million, up from our Q2 level of $21.9 million. We expect OpEx to remain at a similar level for the fourth quarter. Net interest expense for Q3 is expected to decline to approximately $1.6 million, and we expect it to remain at this level for Q4. We expect to record a tax expense in Q3 of $800,000. For the full year, we are forecasting a slightly higher non-GAAP effective tax expense of $3.2 million. Beyond this year, As you update your models for 2025 and beyond, the assumed effective tax rate should be in the range of 10 to 15%. Finally, our EPS guidance range for Q3 of 5 to 15 cents reflects a share count of 34.3 million shares. Operator, we are ready to take questions. Please open the line.
spk04: Thank you. We will now 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 that 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. Our first question comes from Brian Chin with Steeple. Please proceed with your question.
spk08: Hi there. Sorry about that. Thanks for letting us ask a few questions. Maybe, Jeff, just going off some of your commentary, which advanced market are you most encouraged by between, say, Foundry and DRAM in terms of your second half outlook? And can you also put maybe some parameters around what that improvement could look like? Are you thinking sort of low single digits more or less?
spk03: Yeah. Hey, Brian. I would say right now we're probably seeing a little bigger impact from the high bandwidth memory. Okay. So we're seeing that on the chemical side of the business for sure directly. And we also know we can see some DRAM activity. But remember, we don't see all the sell-through data. But I would say that is moving along. And then FoundryLogic, from what we know, is holding up quite well. you know, as they start to continue to develop GATE all around and bring it to market, we're going to see another uptick on that. But I would say right now, if I was to handicap which one's better than the other, I'd say the impact from high bandwidth memory.
spk08: And just in terms of quantifying, maybe that uptick in the second half?
spk03: You know, I don't have the specifics, but I know that from the first half to the back half, it's actually continued to ramp. Whether it's up 10% in the back half from the front half, I don't have that specific because we don't have all the sell-throughs. Okay.
spk08: Okay, good. It sounds like within that.
spk03: Definitely versus year over year, significantly up.
spk08: Okay. It sounds like you think Q4 is up over Q3 also kind of . understand your language correctly.
spk03: You can understand my language. I think, you know, we're at this point of visibility, we're kind of seeing maybe high single digits. So it's not a massive inflection. I wouldn't say we're going to call it the inflection, but it's a good return to sequential growth for us.
spk08: Okay. And then, you know, good updates in terms of the proprietary products and a factor reflected in the Q3 gross margin guidance. Based on the progress you're making there, the potential to ship some next generation panels, maybe by Q4 of this year, maybe that's a swing factor, but do you think 15% is sort of an achievable bogey in Q4 when you think about a little bit of upward tick in the revenue and those gross margin considerations?
spk03: It's not revenue growth, you asked. It's gross margin. I would say, yeah, we kind of, as we see it at those revenue levels, we'd probably be right in the mid-15s or so. Some of that is a bit of a recovery and some mix, but a lot of it is just a continued progress with really the new, I'll call them the passive products. And we are taking, there's revenue each quarter. It's relatively small, but we're seeing revenue from the new gas panels and As I said, we have 20 deployed already in various stages of evaluation at our customers' customers, and there's about 30 more planned for the next two quarters. So it's starting to move forward.
spk08: Great. Maybe just one last quick thing. I know first half 25 is probably beyond your good visibility horizon, but do your preliminary customer discussions provide any indication of an acceleration in that timeframe?
spk03: I would say that it's hard to make the call whether the trajectory will continue or remain flat in the early part of 2025. I would say consistently there's a belief that this is going to be kind of a plus 15% growth, of which a large part will be litho again. It's been relatively flat this year. So the confidence in next year being a growth year is still there. Exact timing, too early to call. OK.
spk08: Fair enough. Thank you.
spk04: Our next question comes from Krish. Our next question comes from Krish Sankar with TD Cowen. Please proceed with your question.
spk05: Yeah. Hi. I have three questions. Just first one, you know, you kind of spoke a little bit about confidence in next year being a growth year. I'm kind of curious, how do you handicap the impact of what Intel said last week? You know, has that changed your growth profile for next year for Intel?
spk03: Well, I think, yeah, I mean, obviously, Intel talked about pulling back cap backs. I think it obviously will have an impact. The question is, was that already incorporated in some of the outlooks that people that I think from the analyst community, probably not. But I think, you know, when we think about the second half of the year, we haven't seen any movement that would indicate, you know, that has impacted this year. But it could possibly impact the year, obviously, in the fourth quarter. But right now, we're not seeing any significant shifts there.
spk05: Gotcha. I mean, I just want to let me ask you a different way then. You know, Intel basically gave a calendar 25 capex guidance which is down 17% year over year. Do you, if you bake that end, do you still think WFC grows next year?
spk03: That is the direction that we're getting. So, I mean, obviously we don't, we don't have the same fab by fab market intelligence as many other larger companies have, but I would say we're not hearing a pullback in outlook. So whether it's, 15 or it comes down a little bit yet to be seen and maybe a little bit too early.
spk05: Got it. Got it. I have two other questions, Jeff. You know, last quarter you kind of spoke about some EU delays that you saw for meeting it. I'm just kind of curious, where did those end up taking out? Did they get pushed out further? Are you seeing some of this more? How do you think about that?
spk03: I think specifically around our E&V business, I think Q2 was the low point. We're seeing it grow again, and I would say kind of in the neighborhood of supporting any of the outlooks that have been provided by our customer. So I think that it was kind of a reflow, temporary, and then we see growth again in the second half versus the first half.
spk05: Got it. Got it. And then the final question, just, you know, you kind of spoke about the new gas panels and should have higher growth margin. And if I look at some of those, you know, high proprietary content subsystem component suppliers, we have like 35, 40% growth margin. Would these new gas panels just by themselves alone have that higher growth margin or how to think about the margin for those?
spk03: Yeah. I mean, obviously we're going to be moving from about 10% internal content to around 80 on some of the uh, initial shipments that we have. So it'll, it'll move it into the lower end of that bracket more than likely. But, you know, most of the components bring similar kind of margin structures if you were to sell them independently.
spk05: Got it. Got it. Thank you very much. Thank you.
spk03: Okay.
spk04: Our next question comes from Charles Chai with Needham & Co. Please proceed with your question.
spk10: Hey, Jeff. Question, the first one, what's your thought on NAND WFC recovery, the timing in terms of getting to that inflection point? Obviously, 25, it looks like you're optimistic about the next year. But any thoughts on when you're going to see that pick up, first half, second half, mid-year? What's the latest thoughts?
spk03: Oh, I mean, I would tell you that, you know, we're once removed from our customers that are probably closer to it. We don't really see it inflecting now. I would say largely the assumption is it's all geared around technology transitions. But, you know, I've kind of been saying consistently now for nine months or so that I think it's going to be kind of a midyear or later time when they'll start adding new capacity.
spk09: Got a mid or late 25, sounds like.
spk03: And obviously, we would love it to happen sooner because it's very etch-and-depth intensity, and so that's very helpful for us.
spk10: Got it. Yeah, obviously. Then the other question, I do want to ask more about the EUV side of the business because it's an interesting business because your revenue leads your customers revenue by half a year. Your customers revenue probably leads a lot of the depth and edge also by some margin. But I recall a while back you were saying you don't really see any inflection in a UV build plan. I mean, the demand coming to you, I see the rest of the year. But do you see any pickup? Because the way you answered the question to Chris, it sounds like you're seeing some improvement. But I just want to clarify with that.
spk03: Yeah. Hey, Charles, good question. I would say half over half, we see it increasing. I think Q2, you know, we saw it kind of modulate down a little bit in Q1 and some in Q2. And so it's going to increase quarter over quarter. I won't tell you how much, but it's going to, the back half of the year will be stronger than the front half of the year. So, you know, I think that lines up with all other commentary out there.
spk10: So the improvement, would you characterize that as more or less like a sequential improvement, or should we expect some very meaningful inflection to the upside for the UV business?
spk03: Well, I would say it's more of a function of Q2's drop, and then kind of going back to some of the volumes that we saw as we exited the fourth quarter. I mean, how that fits into the whole EUV thing. We do more than just EUV, you know, one-for-one matches. There's some service components and other things that we sell.
spk10: Thanks, Jeff.
spk04: Our next question comes from Craig Ellis with B. Reilly Securities. Please proceed with your question.
spk07: Yeah, thanks for taking the question and all the color stuff, our guys. Jeff, I wanted to start just by following up on a point you made on returning to $250 million to $300 million in quarterly revenues. And what I wanted you to understand how you're looking at that. Are customers telling you the business is going to need to be ready to get to those levels or not? Are you seeing visibility just coming from some of the improvement you've been talking about as you look deeper into 2025? Or is that just something that's more aspirational for now, but at least things are moving that direction?
spk03: I want to say yes, yes, and yes. But the answer is, as we look at next year, I think with 3D man not recovering until the second half, Dave Kuntz, it's likely that we could you know run sideways for a little bit and then start to inflect again. Dave Kuntz, there's pretty strong strength that we see continued around high bandwidth from memory, which we talked about, and I think gate all around is going to continue. Dave Kuntz, To drive some incremental boundary logic, so I think you know as we look at it it's it's not necessarily aspirational, but I think if you get a 15% year over year growth. and it's back half-weighted, you'll see those revenue run rates be pretty close in that area.
spk07: That's real helpful. And then the second question, and it's much more of a near-term question, and it may have been implicitly answered in some of your commentary, but earlier this year, you expressed some concern about inventory levels at some of your customers, and that being a headwind for sequential gains in the business Has that issue resolved or where do we stand with inventory at different customers and its fitness for the demand that they're seeing?
spk03: Yeah, I won't talk specifically at customers. I think that it's not an all for one. We're seeing things be resolved and turned back to normal ordering patterns going forward. But what I would tell you is that when you look at the business, I would say we typically would have seen some surge in our component business already. We still haven't seen that. I'd say it's still muted from where we expected entering the year where we're going to exit the year. And so our gas panel business is actually growing, I would say, slightly, gas panel, I'll call it integration, which includes our chemical delivery too, slightly above WFE growth this year. So the strength has really been in the integration side.
spk07: Yeah, and so you're getting some of this nice gross margin improvement without significantly higher weldments or precision machining mix. But you could get that next year. And so what does that mean for how significantly gross margin can rise next year?
spk03: Well, as you look at it, I think the flow through on relatively flat revenue is about $2 million. So that's a pretty healthy percentage. Well, it's hard to calculate on a revenue basis, but it'll help accelerate that because those are higher margin products. You have the infrastructure in place, so kind of the incremental margins are probably in weldments, maybe are in the high 20s, and machining can start probably in the mid 30s and go up to around 40 or so. So they'll be helpful once that inventory normalizes.
spk07: Thanks for all the call, Chuck. Good luck.
spk03: Thanks.
spk04: Our next question comes from Christian Schwab with Craig . Please proceed with your question.
spk00: Great. Thanks for taking my question. Just on the EV silicon carbide side, can you quantify that? Give us an idea of what that business is doing strong in, you know, second half of 23, what it's doing now, and what it could recover to back to those type of levels in 25 so we just have an idea of the order of magnitude?
spk03: Well, I'm not sure we've ever sized it specifically, but I'll give you some relative growth patterns. I would say. When we first start delivering gas panels, it was about mid year and 23. We expected that to naturally double, so it was kind of running at a relatively flat run rate and that has kind of fallen off and I would say growth this year is probably going to be somewhere between. 25 and, say, 50%, depending on if we see a fourth quarter recovery. So it's dipped down in the second half of this year. But I expect it to return back at least to where we started. Our customer will be adding more customers, but there's clearly a digestion period going on.
spk00: And your revenue in China, so the silicon carbide EV strength that you're talking about, predominantly driven by European manufacturers. You're not selling broadly that you're aware of inside of domestic China. Is that fair?
spk03: No, we sell to a process tool manufacturer, and they sell it on. We don't actually know the actual end-use customers, so I couldn't tell you specifically who their customers are because we don't know. All right, great.
spk00: That's very helpful. No other questions. Thank you.
spk03: All right, Christian. Thank you.
spk04: Our next question comes from Tom Disley with DA Davidson. Please proceed with your question.
spk01: Yes. Good afternoon. First, a follow-up on Craig's question earlier on the margins. When we look at getting back to the 250-300 range, what is the incremental margin from today assuming, you know, just constant mix before all of the new products come into play?
spk03: It would probably be somewhere, depending on the mix, 20 or 22% at the high end. It'll be north of 25 as you bring new products in is how I would think of it.
spk01: Okay. And then, Jeff, when we look at the new gas panel, the next generation gas panel with 80% of your own components, does this require your customers to have a ramping new product, or is this going to be placed in existing OEM products? that are going out the door?
spk03: I would say initially most of this is focused on new product introductions, intersecting a new tool going out. Having said that, the passive products that we have, substrates, seals, fittings, all of this is backward compatibles and valves. So those are being integrated on the gas panels today and being delivered. It's a combination of both, Tom.
spk01: Okay. So when you look out to the next generation gas panel itself with 80% content, in your mind, is that a two to three year level of adoption or two to three year timeframe to get it across most of the gas panels?
spk03: Yeah, because you're incorporating the new mass flow controller, these things will be qualified customer by customer, our customers as well, and their customers as well. So I think it is a multiyear ramp. I don't think that we believe that we'll be the sole source of all gas panels. So as we talked about in the past, you don't need a tremendous amount of penetration into the gas panel market to really move our needle and get into that kind of our model, target model for revenue of 19 to 20.
spk01: No, very helpful. Thanks, Jeff.
spk03: Thanks, Tom.
spk04: There are no further questions at this time. I would now like to turn the floor back over to Jeff and Jason for closing comments.
spk03: I want to thank you for joining us on our call this quarter. I'd like to thank our employees and suppliers, customers and investors for their ongoing dedication and support. We look forward to the opportunity to meet with investors during the third quarter, including at the upcoming virtual Needham Semiconductor Conference, as well as the Jefferies Investor Conference in Chicago. Please feel free to reach out to Claire directly to follow up with us. We look forward to updating you on our Q3 earnings call scheduled for early November. Operator, that concludes our call.
spk04: You may now disconnect your lines at this time. Thank you for your participation.
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