Ichor Holdings

Good afternoon, and thank you for joining today's third quarter 2024 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 2023, 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 Greg Swite, our CFO. Jeff will begin with an update on our business, and then Greg will provide additional details about our results and 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, everyone, to our Q3 earnings call. We are pleased to report strong third quarter results with $211 million of sales above the top end of our forecast, continued sequential improvement in gross margin, and EPS of 12 cents. I-Corps business model generates strong earnings leverage as revenues increase. And in Q3, we delivered operating income growth of more than 40% with 4% sequential revenue growth and nearly 30% gross margin flow through from Q2. As we have progressed through 2024, our visibility for a recovery in the semiconductor process equipment market has become incrementally stronger each quarter. and we are very pleased today to be reporting upside to both our Q3 results and our Q4 outlook. Our second half of 2024 is currently expected to be 7% to 10% stronger than the first half in terms of revenues. Within this incrementally stronger revenue outlook and at the midpoint of our Q4 guidance ranges, we expect to deliver gross margin flow-through of over 30% and a 160% increase in operating income compared to the first half of 2024. Around this time last year, we made some refinements to our target financial model in which we increased our planned investments in R&D to drive more significant gross margin leverage. Our expected results for the full year 2024 are proof points of strong execution on our key financial strategies. For example, We've increased gross margins each quarter through 2024 and expect additional improvement in Q4. For the full year, we expect to maintain similar SG&A levels as 2023, while R&D investments have stepped up by about 15% compared to last year. Most importantly, we are making excellent progress in our strategies to increase the proprietary content of our product portfolio. Before I review our specific progress qualifying new products, I'll briefly summarize our views on the customer demand environment. What's become much clearer since our August earnings call is that while overall WFE is expected to grow in 2025, the debate as to the magnitude of that growth has intensified. The majority of the headwinds impacting WFE growth expectations next year reflect lower estimates for lithography, China WFE, and trailing node investments. At the same time, the incremental tailwinds for 2025 growth are primarily related to growing investments in NAND, gate all around, and advanced packaging, all largely geared at supporting the performance requirements of leading-edge AI devices. These incremental tailwinds are all positive for I-Corps' business and revenue growth profiles. First and foremost, the WFE environment as we enter 2025 is expected to reflect a greater level of etch and deposition intensity than we've witnessed over the last two years. An increase in the overall etch and deposition intensity of WFE is likewise going to equate to outperformance for the fluid delivery market and is clearly a net positive mix change for I-Corps. The next tailwind specifically relates to expectations for a NAND recovery, which has recently endured the longest and steepest downturn in recent history. 2025's expected expansion of NAND WFE is aimed at technology upgrades to bring a greater proportion of the world's NAND supply up to the most advanced bit densities. These upgrades will be enabled by more fluid delivery subsystems whether through bringing in more advanced etch and deposition tools or through upgrading the process chambers on the existing installed base, an increase in NAND spending is likewise a net positive mix change for IQO. The next area of incremental confidence in spending growth is advanced logic, specifically gate all around. These device architectures require an increasing use of emerging applications such as selective etch where we participate heavily in gas delivery systems, as well as increasing intensity for multiple deposition steps, including EPPI and ALD. Overall, a transition towards more advanced logic investments is also a net positive exchange for I-Corps, mainly because it will drive increased etch and deposition intensity where we have a larger share of wallet. Furthermore, China WFE is expected to decrease in 2025. Given that WFE is expected to grow next year, this means that WFE outside of China will grow faster than the overall market. This is another net positive mix change for I-Corps. While we certainly participated in the strong business environment enjoyed by U.S. OEMs selling into China over the last couple of years, a significant portion of domestic China WFE is served by domestic China equipment OEMs. As the WFE mix shifts towards other regions in 2025, these will internally doubt performance for the US OEM's revenue growth in this next cycle. Finally, the incremental growth in advanced packaging investments in 2025 is an additional tailwind, largely mitigating the incremental downticks in EUV expectations. While expectations for EUV installations in 2025 have come down, the build rates have remained fairly stable for I-Corps throughout this year. So, at this time, we expect a similar to slightly lower level of revenues from lithography in 2025, and that these will be largely offset by our participation in advanced packaging applications and in markets outside of semiconductors who are subsidiary IMG. To summarize our expectations of industry spending dynamics, The mixed shifts of investment priorities in the coming year are, on the whole, very positive for I-Corps' business. And regardless of the magnitude of WFE growth expected for 2025, we are confident in our ability to outperform the growth in WFE next year. Likewise, we are confident in our ability to demonstrate strong flow-through and deliver continued expansion of our gross margin profile as we enjoy a more robust customer demand environment in the coming year. Before turning the call over to Greg, I'll provide a brief update on our proprietary component qualifications that are now being installed on our existing gas panels as well as our next generation gas panels. We continue to make steady progress closing our additional component qualifications and cutting them into our manufacturing pipeline. The growth in our new products this year is positively impacting our profitability, demonstrated by our performance delivering gross margin improvement on similar revenue levels over the last few quarters. I'll start with our new component products, starting with fittings, which are used in our weldment products. Our fittings are now qualified at two of our customers, and we expect to complete a third customer qualification for our proprietary fittings in early 2025. The next component, now qualified at all three of our largest process tool customers, are our substrates used in our gas panels. In valves, we have been qualified for our high purity valves at one customer and are currently in qualification at two additional customers. Fittings, substrates, and valves are all critical components used in the existing gas panels that we assemble, as well as our next generation gas panels. These components will continue to ramp in volume in 2025. Now moving to our next generation gas panel. We have now shipped over 30 of our proprietary gas panels and expect to ship an additional 25 by the end of the year. Most of these new gas panels are on our customer's evaluation tools that have been shipped to a device manufacturer. Our new gas panel contains about 80% proprietary I-Core content compared to 10% previously. 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 remains late in the fourth quarter. During Q3, we were qualified on an additional application, bringing the total qualifications for our next generation gas panel to four. In summary, I'd like to convey our confidence in our execution to date on these proprietary products. and our confidence in their strong contribution to gross margin improvement as we move into a more robust spending environment. In combination with continued operating expense discipline, I'll remind everyone today that our business model and financial profile tend to generate significant operating leverage as revenues grow. With that, I'll turn it over to Greg to recap our Q3 results and provide further details around our Q4 financial 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, amortization of acquired intangible assets, non-recurring charges, and discrete tax items and adjustments. There is a useful financial supplement available on 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. Third quarter revenues were above the upper end of guidance at $211 million, up 4% from Q2 and 7% higher than the same period last year. Gross margin improved 60 basis points sequentially to 13.6%, which was slightly below expectations While we continue to recognize the benefit of our internally produced products and improvements in factory efficiencies, these were muted by a strong mix of our integration products, which drove the upside in Q3 revenues. Q3 operating expenses came in slightly below forecast at $22.4 million and $500,000 higher than Q2. The increase from Q2 was due to the expenses associated with our ERP implementation projects. Our operating income for Q3 was $6.4 million. Net interest expense of $1.6 million was down from the Q2 expense of $1.9 million, reflecting a full quarter benefit of our improved leverage ratio. In Q3, we experienced higher foreign exchange losses than we expected, and at the same time, tax expense was lower than forecast, which completely offset the unfavorable impact of foreign currency fluctuations. The resulting net income per share was 12 cents. Now turning to the balance sheet. In Q3, our cash and equivalents increased $2 million from Q2 to end the quarter at $116 million. We generated $8 million in cash flow from operations, reflecting the net investment in working capital during the quarter. Accounts receivable increased from the previous quarter on a higher revenue, and DSOs were 36 days. Inventory increased $8 million during the quarter to end the quarter at $239 million, and inventory turns increased to 3.1. Now I will provide our guidance for the fourth quarter of 2024. With anticipated revenues in the range of 220, to $235 million, we expect Q4 gross margins will again improve sequentially to a range of 14.5 to 15.5 percent. Looking forward to 2025, we expect to continue to see the benefits of our internally produced products and improvement in factory efficiencies to drive at least a 25 percent flow through to gross margin on our incremental revenue growth. We expect Q4 operating expenses to remain similar to Q3 levels at approximately $22.5 million. Given our forecast for continued gross margin expansion and flat OpEx, at the midpoint of guidance, we expect to achieve an over 80% increase in operating income from Q3 levels. Within the stronger demand environment expected in 2025, For modeling purposes, you should assume a 5% to 10% increase in annual operating expenses as we continue to invest in the development of our proprietary products and other growth initiatives. Net interest expense for Q4 is expected to be $1.5 million, with other expense expected to be an additional $500,000. Given our pay down of the entire revolver balance in Q1, We have reduced our annual interest expense by half in fiscal 2024. For 2025, we should see a continued improvement in net insurance expense as we improve our leverage ratios and our current forecast for 2025 is for net interest and other expenses of $6 million. We expect to record a tax expense in Q4 of $300,000 given our full year non-GAAP tax expense forecast of $2 million. As you update your models for 2025 and beyond, the assumed effective tax rate is currently expected to be in the range of 12 to 15 percent. Finally, our EPS guidance range for Q4 of 21 to 33 cents reflects a share count of 34.2 million shares. Operator, we are ready to take questions. Please open the line.