Ichor Holdings Ltd (ICHR) 2024 Q2 法說會逐字稿

Good afternoon and thank you for joining today's second-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 year 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. And 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 Andreson, our CEO; and Greg Swyt, 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 Andreson. Jeff?

Thank you, Claire, and welcome, everyone, to our Q2 earnings call. We are pleased to report solid second-quarter results with $203 million of sales near the top end of our forecast, continued sequential improvement in gross margin, and EPS of $0.05. Ichor's business model typically generates strong earnings leverage as revenues increase. And in Q2, the stronger gross margin performance on modest sequential revenue growth yielded an 85% improvement in operating income compared to the first quarter.

We are encouraged by the early signs of a recovery in the wafer fab equipment market, and our forecast continues to strengthen for a stronger second half. In the meantime, we remain steadfast in our focus on gross margin improvement initiatives that we expect will drive yet another sequential increase in margins and profitability for the third quarter even at similar revenue volumes. While our gross margin is the most significant lever driving EPS growth, we also continue to carefully manage costs and working capital to add further tailwinds to profitability and free cash flow performance as we turn the corner to sustained growth in our top line.

From a demand perspective, increasing confidence in a stronger second half for Ichor reflects upticks in demand from every key customer within WFE. The only meaningful offset to this improving demand profile is our emerging silicon carbide gas panel business, which we expect will be lower in the second half compared to the first half. That is still an incremental driver to our future revenue growth as that market recovers.

Within an overall demand environment, indicating modest single digit growth for 2024 and a return to a more meaningful growth in 2025, I'll share my views on the key technology inflections and CapEx investments that will drive our return to revenue growth, outperforming the overall industry. In leading edge logic, gate-all-around device architecture is estimated to require an additional 30% more process steps than the latest generation of FinFET, equating to more process tools per wafer as the device manufacturers incorporate new steps for ALD, Epi, selective etch and CVD; the growing investments in high-bandwidth memory DRAM to enable AI driving close to 20 additional process steps per wafer, in particular for etch, CVD, 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 Ichor to increase our revenue potential and continue to add breadth and diversification to our customer base, altogether, building a strong story for Ichor's revenue growth as the industry recovery accelerates. Given all of these drivers, we believe we could see strong growth for our primary served markets within WFE through the next tough 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 margin 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 Ichor 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 million 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?

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, nonrecurring charges, and discrete tax items and adjustments. There is a useful financial supplement available in the Investors 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 improvements 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 $0.01 impact on our EPS within the quarter. The resulting net income per share was $0.05.

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 million to $210 million, we expect our Q3 gross margins will again improve sequentially to a range of 13.5% to 14.5%. 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 $0.05 to $0.15 reflect a share count of 34.3 million shares.

Operator, we are ready to take questions. Please open the line.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Brian Chin, Stifel.

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 or you think sort of low-single digits, more or less?

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 a foundry logic from what we know is holding up quite well. And I think 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 would say [handicap], which one's bigger than the other, I'd say the impact from high-bandwidth memory.

And just in terms of quantifying maybe that uptick in the second half?

I think it's -- 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, got it. That sounds like within that --

Definitely versus year over year, significantly up.

Okay. It sounds like you think Q4 is up over Q3 also if I understand your language correctly.

Yeah. You can understand my language. I think we're -- at this point of visibility, we're kind of seeing maybe high single digits. So I think 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.

Okay. And then a good update in terms of the proprietary products and fact that it 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 upward tick in the revenue and those gross margin considerations?

It's not revenue growth you asked, just gross margin. I would say, yeah, we kind of -- as we see it at those revenue levels, we will 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 the continued progress with really the new -- I'll call them the passive products -- and we are taking those 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 in our customers' customers. And there's about 30 more planned for the next two quarters. So it's starting to move forward.

Okay, great. And 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?

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.

Okay, fair enough. Thank you.

Krish Sankar, TD Cowen.

Yeah, hi. I have three questions. The first one, you kind of talked a little bit about confidence in next year being a growth year. Kind of curious, how do you handicap the impact of what Intel said last week? Has that changed your growth profile for next year for Intel?

I think yeah. I mean, obviously Intel talked about pulling back CapEx. I think it obviously will have an impact. The question is, was that already incorporated in some of the outlooks that people did. I think from the analyst community, probably not. But I think when we think about the second half of the year, we haven't seen any movement that would indicate 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.

Got you. I mean, I just wanted to ask you a different way then. Intel basically gave a calendar '25 CapEx guidance, which is down 17% year over year. If you baked that in, do you still think WFE growth next year?

That is the direction that we're getting. So I mean, obviously, 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.

Got it. And then two other questions, Jeff. Last quarter, you kind of spoke about some ease of delays that you saw for leading edge. I'm just kind of curious, where did those end up sticking out? Do they get to start further? Are you seeing some of [this model]? How to think about that?

I think specifically around our EUV business, I think Q2 was the low point and 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 a kind of a reflow temporary and then we see growth again in the second half versus the first half.

Got it. And then a final question, Jeff, I know you kind of spoke about the new gas panels and should have higher gross margin. And if I look at some of those high proprietary content subsystem component suppliers, we have like 35%, 40% plus gross margins. Would these new gas panels just by themselves alone have the higher gross margin or how to think about the margins for those?

Yeah. I mean, obviously, we're going to be moving from about 10% internal content to around 80% on some of the initial shipments that we have. So it'll move it into the lower end of that bracket more than likely. But most of the components bring similar kind of margin structures if you were to sell them independently.

Got it. Thank you very much, Jeff. Thank you.

Charles Shi, Needham & Co.

Hi, Jeff, a question, the first one, what's your thought on NAND WFE recovery, the timing of -- in terms of getting to that inflection point, obviously '25, it looks like you're optimistic about next year. But any thoughts on when you're going to see that pickup, first half second half, midyear? What's your latest thoughts?

I mean, I would tell you that 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 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 later time when they'll start adding new capacity.

Got it. Mid or late '25, sounds like.

Yeah. And obviously, we would love it to happen sooner because it's very etch and dep intensity. And so that's very helpful for us.

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 deposit and etch also by some margin.

But I recall a while back you were saying you don't really see any inflection in the EUV 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 Krish, it sounds like you are seeing some improvement, but I just wanted to clarify with that.

Yeah, hey, Charles, good question. I would say half over half, we see it increasing. I think Q2, 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 I think that lines up with all other commentary out there.

So the improvement, would you characterize that as more or less like a sequential improvement? Or are we -- should we expect some very meaningful inflection to the upside for the EUV business?

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 the EUV one-for-one matches. There are some service components and other things that we sell that --

Thanks, Jeff.

Craig Ellis, B. Riley Securities.

Yeah, thanks for taking the question and all the color so far, guys. Jeff, I wanted to just start just by following up on a point you made on returning to $250 million to $300 million in quarterly revenues. But I wanted to just 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 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?

I want to say, yes, yes and yes. But the answer is as we look at next year, I think with 3D NAND not recovering until the second half, it's likely that we could run sideways for a little bit and then start to inflect again. There's pretty strong strength that we see continued around high-bandwidth memory, which we talked about. And I think gate-all-around is going to continue to drive some incremental foundry logic.

So I think as we look at it, 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.

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 had 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?

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 return back to normal ordering patterns going forward. But what I would tell you is that when you look at the business, I would say our -- 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 has actually grown, 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.

Yeah. So you're getting some of this nice gross margin improvement without the significantly higher weldments or precision machining mix, but that you could get that next year. And so what does that mean for how significantly gross margin can rise next year?

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 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 that would be helpful once that inventory normalizes.

Thanks for all the color, Jeff. Good luck.

You bet, Craig. Thanks.

Christian Schwab, Craig-Hallum.

Great, thanks for taking my questions. Just on the EUV silicon carbide side, can you quantify that? Give us an idea of what that business is doing strong in 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?

I'm not sure we've ever cited specifically, but I'll give you some relative growth patterns. I would say when we first started delivering gas panels, it was about mid-year in '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.

And in 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?

No. We sell to a process tool manufacturer and then 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.

Okay. All right, great. That's very helpful. No other questions. Thank you.

All right, Christian, thank you.

Tom Diffely, D.A. Davidson.

Yes, good afternoon. First, a follow-up on Craig's question earlier on the margins. When we look at getting back to the $250 million, $300 million range, what is the incremental margin from today, assuming just constant mix before all of the new products come into play?

It would probably be somewhere -- dependent on the mix 20% or 22% at the high end. It will be north of 25% as you bring new products in is how I would think of it.

Okay. And then, Jeff, when we look at the new gas panel, the next-generation gas panel, like 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?

I would say initially, it's -- 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. So it's a combination of both, Tom.

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 time frame to get it across most of the gas valves?

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 will 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.

No, very helpful. Thanks, Jeff.

Thanks, Tom.

There are no further questions at this time. I would now like to turn the floor back over to Jeff Andreson for closing comments.

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.