Ichor Holdings

Good afternoon, and thank you for joining today's first quarter 2025 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 year 2024, 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 White, 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 Q1 earnings call. Thanks for joining us today. First quarter revenues came in right around the midpoint of our expectations, reflecting that the overall customer demand environment has remained relatively consistent since our last earnings call. There has been little change to the expectation that 2025 will be a modest growth year for wafer fab equipment, or WFE, and our Q1 revenues were up 5% sequentially from Q4 and grew 21% over the same period last year. Given our visibility today, we continue to expect our revenue growth this year will outperform overall WFE growth in 2025. On the gross margin side, first of all, let me say that we fully acknowledge that our track record guiding expected improvements in gross margin has been impacted by excursions one too many times at this point. In evaluating our results for the first quarter, we too found it challenging to fully understand why our increasing momentum in integrating internally sourced components has not resulted and more meaningful improvement to our gross margin profile. The best way to capture the lower than expected flow through in our Q1 gross margin performance is best summed up as growing pain. Once our internal supply is fully up to speed, we will see the benefits of the new product wins through the P&L. Our strategy is working, the qualifications are continuing, and the impact will materialize as we progress forward. In Q1, Our strategy did not materialize into the margin flow-through we anticipated, essentially because we ended up purchasing far more external supply than we had forecast. So why did that happen? As internally sourced products become a more significant portion of our bill of materials, we must improve our processes for the management of the inventory levels needed prior to inserting these components into our manufacturing pipelines. In the first quarter, the impact of the slower inventory build in the fourth quarter combined with other machine components ramping at the same time resulted in the need to buy more external supply in order to fulfill our gas panel deliveries in the early part of the quarter. Why this resulted in low 20s gross margin flow through well below expectations is because our strategy is to share a portion of the component cost savings with our customers and therefore when we purchased more external supply, instead of using our own components, the expected flow-through didn't materialize. This impact accounts for about two-thirds of our gross margin missed in Q1. Most of the remainder of the gross margin impacts came in our non-semi business, where we were awarded a new contract in the commercial space market that began shipments in the quarter. As we moved from pilot to production, it was determined that a redesign of some aspects of the park was required, and this resulted in a push out of revenue as well as incurring higher costs than expected with these initial deliveries. And lastly, during the quarter, we made the decision to exit our refurbishment business in Scotland. As a demand for product, we were licensed to refurbish, declined to a level too low to sustain the operation, and exiting this business had a slight impact on both revenue and gross margin in Q1. As we look ahead, we have identified what has made an accurate prediction of our gross margin such a challenge over the last several quarters. And as we build in the processes that better gauge both the pricing and the cost sides of the equation, we are confident you will see a longer-term trend developing and how we demonstrate progress towards our gross margin targets. Which brings me to an update on our progress in qualifying our proprietary products, which are chiefly comprised of certain components used in our existing gas panel business, as well as our next generation gas panel. We achieved a significant number of new component qualifications in 2024. And we expect these qualifications to convert into more meaningful internal supply within our gas panel business as we progress through 2025. As stated previously, the increased use of our proprietary internally sourced components is a key driver to our strategies for gross margin expansion. While 2024 marked a successful year for qualification, our work continues. As stated before, three of our major process tool customers have already qualified our substrates, which are incorporated into our gas pan. Today we are pleased to announce a fourth customer will incorporate our substrates into their next generation products as they transition to service mount technology. This same customer will also be incorporating our valve products upon successful qualification later this year. Last quarter, we announced the second customer qualification for our valve product line. We expect to complete valve qualifications for a third customer this summer, as well as the fourth substrate customer, Jess Smith, anticipated by year end. For fittings, we announced two customer qualifications in 2024 and a third customer qualification remains in the final stages today. We likewise are progressing on a fourth qualification for our fittings product line used in our weldment business, which we expect to achieve later in the second half. The key takeaway of our component qualification progress is that by the end of 2025, we expect to have all four of our largest customers qualified on all three of our major product families, valves, fittings, and substrates. which will mark a significant milestone for our business. Additionally, we have several exciting new products under development, scheduled for later release this year, enabling us to expand our share of the addressable market of our components. Now I'd like to discuss the outlook we are providing today, given the complexities of recent tariff announcements. In general, today we are affected by the steel and aluminum section 232 tariffs. for certain inbound material to the US. Our Mexico machining business falls under the USMCA exemption as of today. We are working with our suppliers and customers to mitigate and or pass on the cost of these tariffs, but there could be some transitory impacts on our gross margin as we work through the processes and customer discussions to incorporate the additional cost of tariffs and their relative impact on total supply chain costs. The final decisions on the semiconductor export controls and tariffs are expected to be issued early this summer. Obviously, there is a large range of outcomes, but we will not speculate on the outcome today. As we look at our revenue guidance for the second quarter of between $225 and $245 million, this is about $10 million lower than what our visibility indicated a quarter ago. The lower forecast is not attributable to one particular change in demand, but rather several small factors. For example, one customer forecast was recently affected when a domestic device manufacturer began to slow their WFE purchases in advance of understanding the broader implications of various tariff policies. At the same time, the delivery timelines within lithography and advanced packaging have seen some shifting to the right. while silicon carbide applications have weakened further. This appears to be affecting each of our OEM customers differently, depending on customer and end market exposure, and there's absolutely no question that our primary markets of leading-edge foundry and high bandwidth memory, as well as technology upgrades for NAND, continue to move forward on schedule. We have not further handicapped our Q2 revenue guidance to account for additional adverse demand impact that could result from the tariff policy, other than what our customers have already incorporated into our visibility. Our visibility is somewhat shorter in duration than where we were on our last earnings call, meaning at this time we have a good feel for the first half, but less confidence in exactly how the second half will shake out. At this time, we think our business in 2025 should be relatively even weighted first half to second half, but I will remind everyone that this is the visibility we have today. Before turning the call over to Greg, a few last comments about gross margin. First, I want to provide a bit more context as to the level of proprietary content we expect to achieve this year. As a reminder, Prior to stepping up our R&D investment and launching our new product, about 90% of the bill of materials for our gas panels was sourced externally. In 2024, we were able to shrink that by about 5%. In 2025, we believe we can make further progress towards reducing external supply down to approximately 75% of the bill of materials. This is meaningful progress. but there is still much more progress to be made. The most leverage will eventually come from increasing penetration of our next generation gas panel, which has roughly 30% external parts and 70% internal. These gas panels incorporate our proprietary flow control technology. Many of the next generation gas panels delivered today are currently undergoing qualification with end-device manufacturers. These qualifications are particularly important as they represent the first end-user qualifications for our proprietary flow control technology, which constitutes the largest portion of our bill of materials and carries the longest qualification cycle, another critical milestone for I-Corps. It is not realistic to think that we will be able to move 100% of our gas panels to the I-Corps proprietary version, but we expect to continue to make incremental progress. The most immediate and significant impact you should see to our gross margin profile will be as we move from the roughly 15% proprietary content in 2024 towards around the 25% level in 2025. In Q1, we didn't achieve the flow-through we anticipated due to purchasing far more external supplies than forecast. But as our processes improve and we work through these growing pains, we still expect to show incremental improvements to gross margins through each quarter of the year, even on similar revenue levels. In February, we were confident that our gross margins for the full year would exceed 60%. Today, we are backing off that absolute number, which is currently prudent in response to the tariff uncertainties, as well as the impact of the Q1 miss. With that said, we currently expect our second half gross margin will be in the 15% to 16% range. With that, I'll turn it over to Greg to recap our Q1 results and provide further details around our 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. First quarter revenues were $244.5 million near the midpoint of guidance and up 5% from Q4. The gross margin for the quarter was 12.4%, an increase of 40 basis points from Q4, but below our forecast of 14.5%. As Jeff discussed, the gross margins were negatively affected by several factors. Primarily the slower transition from externally supplied products to our internally manufactured products, as well as higher costs associated with the redesign efforts of our commercial space contract and the decision to exit our refurbishment business in Scotland. Operating expenses came in at $23.7 million in line with our expectations. Operating income for Q1 was $6.6 million. Our net interest expense was $1.6 million, and our non-GAAP net income tax expense was below our forecast at $600,000. The resulting EPS was 12 cents per share. Turning to the balance sheet, our cash and equivalents totaled $109 million at the end of the quarter, up slightly from year end. We generated $19 million in cash flow from operations, and after deducting $18.5 million in capital expenditures, our free cash flow was $500,000. Our planned CapEx investments for 2025 are expected to be above our historical average of 2% of revenue as we execute our global expansion of our machining and non-semi-business capabilities. we estimate our 2025 CapEx will be closer to 4% of revenue and be front half weighted. Our total debt at quarter end was $127 million, and our net debt coverage ratio has now improved to just 1.5 times, well below any potential threshold for covenants. Now I'll discuss our guidance for the second quarter of 2025. With anticipated revenues in the range of 225, to $245 million, we expect our Q2 gross margins will improve to a range of 12.5 to 14 percent. We expect Q2 operating expenses to be approximately $23.5 million, or roughly flat to Q1. We expect our OPEX run rate will moderate somewhat in the second half of the year, leading us to expect our year-over-year increase in operating expenses to be somewhat lower than communicated previously and in the range of a 4% to 6% increase compared to 2024. Net interest expense for Q2 is expected to be approximately $1.5 million. For modeling purposes, you should model net interest expense for the full year of 2025 to be approximately $6 million. We expect to record a tax expense in Q2 of $800,000. For the full year, we are forecasting a non-GAAP effective tax rate of 12.5%. Finally, our EPS guidance range for Q2 of 10 to 22 cents reflects a share count of 34.4 million shares. Operator, we are ready to take questions. Please open the line.