Ichor Holdings Ltd (ICHR) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2016 Ichor Holdings earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Maurice Carson, president and CFO.

Good afternoon, everyone, and thank you for joining this conference call; which will be available for replay telephonically and on Ichor's website shortly after we conclude this afternoon's session. To listen to the webcast replay, please visit Ichor's Investor Relations page where you will find complete instructions.

As you read our earnings press release and as you listen to this conference call, please recognize that both contained forward-looking statements within the meaning of the Federal Securities Law. 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 included in our prospectus filed with the SEC and those described in our annual report on Form 10-K for fiscal year 2016 that we will be filing with the SEC. You should consider all forward-looking statements in light of these and other risks and uncertainties.

Additionally, I should mention that we will be providing certain non-GAAP financial measures during this conference call and in our earnings press release. Our press release contains a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures.

Now that we have the fun part out of the way, let me introduce you to ourcChairman and CEO Tom Rohrs. Tom will give you an overview of the result and some industry context, and then I will go over the financials. After the prepared remarks, we will open the line for questions.

Good afternoon and thank you for joining us. We are very pleased to announce that Q4 2016 was a record-breaking quarter for Ichor with record-setting shipments, revenue, profits and earnings per share.

Our Q4 revenue was 24% above our Q3 revenue as we were able to ramp our production in a rapid and efficient manner. We also used the fourth quarter to set the stage for another record-breaking quarter in Q1 2017. And, of course, we also completed our initial public offering in December.

Q4 served as the capstone on an extraordinary year for Ichor. In 2016, we grew the business 40% over 2015 with the ongoing ramp of 3D NAND serving as a primary contributor. Our major customers have developed significant momentum, and we have followed suit.

Ichor has two key objectives, which we use as goals for increasing shareholder value and bringing value to our customers. The first key objective is to grow our revenue faster than the industry. During 2016, as I said, we grew our business 40% year-over-year; which brought our three-year growth rate to an average of 28%, which is far faster than the industry growth.

The second key objective is to grow our profits faster than our revenue. And again we achieved this objective by growing our net income 56% year-over-year.

We're able to achieve these objectives through these key elements of our strategy. We serve the biggest and best way for fab equipment companies in the semiconductor markets. Our customers have been very successful developing value-added products. They also choose strong subsystem suppliers to support their efforts. We continue to be one of the key players in the semiconductor food chain. Our customers grow and prosper, and as they do, we have ongoing opportunities to add to our growth.

We also continue to add capabilities to our product portfolio. For example, after years of focusing just on gas delivery processes, we are now making great strides in liquid delivery process modules. We have grown this business by an order of magnitude over the past three years, and this is now a large growth vector for us and one where we feel we can gain significant market share.

Our engineering teams have been chosen by our customers for value-added solutions and designs. We have been able to develop highly engineered subsystems, which serve to differentiate us as a supplier of fluid delivery solutions. This collaborative work has proven to be valuable for both us and our customers.

And finally, our business model is based on variable production cost, which allow us to add capacity and low fixed operating expenses, which allow us to leverage increased revenues and to higher profits. This model, along with timely investments, has enabled us to significantly increase capacity from the third quarter of 2016 to the first quarter of 2017.

Overall this strategy has worked very well in our markets. Our record levels of shipments facilitate record revenue levels [at] our customers and, in turn, enable the time to market needs of the end-users. We believe our strategy will continue to work well as our customers continue to choose to grow with larger, stronger and well-financed suppliers like Ichor.

It is our expectation that the continued ramp of 3D NAND plus a recovery of DRAM and foundry spending will drive increased volumes and revenues as we enter 2017. With a record revenue Q1 quarter starting the year, we expect 2017 to be another high-growth year for Ichor.

And now let me ask Maurice to go over the financials with you.

Again, I'd also like to personally welcome everybody to the call, our first as a public company.

As you've seen in the press release and you've just heard from Tom, Q4 was a good quarter in all respects. I'll go through some of the details from the financials for the next few minutes. Unless otherwise noted, I will be referencing non-GAAP financials and I'll be comparing Q4 of 2016 to Q3 of 2016. Please note that Q4 was a 14-week quarter while Q3 was a 13-week quarter.

Revenue grew from Q3 to Q4 by 24%. There was not a significant shift in customer mix during this quarter. Gross margin was up slightly in Q4, 16.3% compared to 16%. This was primarily due to some non-reoccurring product transition cost in Q3.

As some of you know from the road show, we have a highly variable factory cost model and do not always see significant improvements in gross margin even in quarters with significant revenue growth. We do sometimes see variability cost by product mix.

Operating expenses were up a little under $600,000 for the quarter. Half of this increase is related to outside contract work in research and development. This will continue into Q1 and then this particular agreement will terminate. Most of the balance is due to truing up our accrual for variable comp at the end of the year.

Our book cash rate was just a little bit under 7%, bringing the annual rate to around 5%. Our cash tax, excluding refund,s was a little bit under $700,000 for the year. Net income at 9% of revenue in Q4 is a very key metric. This is driven by our continuing to leverage operating expenses in the face of significant growth.

Now let me talk about a couple of key items from the balance sheet. Our days of sales outstanding, DSO, was under 20 this quarter, better than our usual number, mostly due to the timing of our quarter-end compared to the quarter-end of one of our customers.

Inventory is up significantly over the year, but in line with revenue growth and, in fact, supported the revenue growth through the year.

Total debt is down, reflecting the use of proceeds from the IPO. We finished the year with $52.6 million of cash and restricted cash. This is an increase of almost $29 million from the beginning of the year. This includes generating close to $28 million from operation. We think this is another key metric in our overall performance in 2016.

Now let me give you a little bit of color around the guidance. Due to the success of our IPO and the subsequent share price increase, the underwriters from our IPO team exercised their option to purchase additional shares, the [shoe] in January. This resulted in an additional $7.4 million of cash in January and an additional 882,000 shares were issued. These shares are reflected in our EPS guidance.

Operating expenses will be up in 2017 compared to 2016. We've talked about this before. We have included in our forecast approximately $1.3 million of public company cost and small salary increases and a small number of additional heads. But as a percentage of revenue, operating expenses will be lower by a non-trivial amount in 2017 compared to 2016.

Interest expense comes down a little bit to a little bit under $700,000 per quarter due to the debt paydown. We continue to forecast our tax rate to be about 6% -- the book tax rate, sorry, although the cash tax rate will be around half that. Investors should keep in mind that this tax structure is in place at least through 2019.

With that, we are ready to take some questions.

(Operator Instructions) Sidney Ho from Deutsche Bank.

Congratulations on the first quarter as a public company and the strong set of results and guidance.

So my first question is, [are] customers are talking about second half will be a little weaker than the first half, do you share the same feel? And how will you characterize your [feasibility] in the second half at this point?

So, Sidney, I think you understand that obviously we are going to be giving our numbers for not only the second half, but also for Q2. Having said that we know, and I think everyone on this call knows, that Lam described the year as being 55% frontend and 45% backend. They're pretty smart, and it's one of our major customers. That feels about right to us.

Having said that, [I] keep reminding ourselves that back in the second quarter of 2016, we were panicked about whether we were going to hit $100 million or not in the fourth quarter. And in the third quarter of 2016, we had very little idea that we're going to be giving guidance of $140 million to $150 million in the first quarter of 2017.

So, I think that we're very optimistic about this business. We are optimistic in long-term investment mode; we continue to invest. We feel that there's quite a long way to go in terms of this very important technology inflection point that leads to the 3D NAND opportunities, the multiple patterning, [fin fit], et cetera. We think it's still early day. So whether the second half is down a little or up a little really is not all that critical to us. We have our eyes on it when we think it's going to be a growing market over a number of years.

OK, great. And then maybe a follow-up with Maurice; if you look at the gross margin, it's a nice uptick in the quarter. You talked about the things can move around a little bit, but you do have a longer-term margin target, I believe, is somewhere around 18% range. Can you talk about the moving pieces that will get you to that target level?

Yes, thank you, Sidney. That's a good question, because not everybody saw it through our road show.

So primarily some of the investments that Tom talked about is in new markets that we won't talk about individually. But there are margin-accretive things like the new chemical plastics wet process delivery systems that Tom mentioned, things about some of the vertical integration and key assemblies, and also some of the new technology we're developing. And a lot of these things will start to hit during the year and carry a significant momentum into the next year.

Timothy Arcuri from Cowen and Company.

Okay, so first question, Tom, can you talk a little bit about diversification of the customer base beyond the big guys? That's something I know that you guys are very focused on. So can you give us maybe some recent developments there?

Well, I can. And we all know that [our] two largest customers are over 90% of our business. And as you know, we don't apologize for that. These are the best customers we could possibly have. And to, tell you the truth, I much rather have these two customers at 90% than six lesser customers at maybe at 15% each.

Having said that, we continue to add new customers to our list. We began that in earnest last year, and we had multi-million dollar revenues with a number of them and we expect that to continue to grow this year.

I think the problem in talking more about it, Tim, is that they are going to have to [be] around quite a while before they get to the point where they are 10%. And fact of the matter is, since the two biggest customers that continue to grow, those new customers could grow to be a lot of revenue and still be less than 10%. So we're happy about where we are. We're happy about the customers we added. We feel that a couple of [of them] specifically are a very, very good match for us in terms of gas and liquid delivery systems. And we'll continue to pursue that. I just want to give you the heads up that it's not going to break into that 10% mode anytime soon.

OK, great. And then I know everyone is obviously worried about things rolling over. Because you look at these big numbers and you say, "Well, things have got to roll over from here." But I guess, I'm going to ask a question that's a little bit the opposite.

In the event that things get a lot better from here, how much capacity do you have in terms of revenue? Because there's a bunch of projects that timing seems to be congealing toward maybe the end of this year to early next year.

Right.

So what's the - hello?

Yes, I agree with you, Tim. And let me ask Maurice to go through that. We had a board meeting yesterday. We just talked about how many millions of dollars of capacity we added.

So, Tim, I'm really glad you asked that question. Because, in spite of everything that people talked about, we're focused on the long-term. And over the end of 2016 and then to the beginning of 2017, we added a significant capacity in Singapore and in Malaysia; two of our key factories for supplying products to add product lines to all product lines of both key customers and the new customers.

We're in the process of adding additional capacity in Portland. And we will add more capacity, and probably in Q2 or rolling into Q3, in Malaysia also. So we are setting ourselves up for - it's hard to quantify because of mix and how it comes through. But in terms of pure clean room space, I'm not translating exactly the dollars, it's close to a 50% increase in capacity.

And before people worry about the spend on that, the total investment in CapEx was $4 million last year, and it'll be under $5 million this year, so all of that capacity will come in at a very efficient rate.

Yes, and I would add that a good part of it has already been comprehended in the numbers you see in Q4 and the guidance you see in Q1.

Got it. So just to be clear, Maurice; so you could do somewhere in the low-two's per quarter with this additional investment, is that right?

Yes, we could do something like that. Yes, that's correct.

Amit Daryanani from RBC Capital Markets.

Yes, thanks a lot for taking my questions and congrats on the quarter, guys. I guess two from me as well. To start off, could you just talk about the dynamics [you're] seeing within the chemical delivery market? Or liquid delivery market specifically?

And I think one of the questions we get is, you guys, had 7% to 8% market share there. On the gas side, it's much higher, I think nearly a quarter of the market is yours. Structurally, did something inhibit you from picking up more market share on the chemical side and what are the key levers that people should watch for [for] that share gain to sustain?

So we believe [it has] a good opportunity to continue to gain market share. The market in the liquid delivery systems is completely different than what you would see in the gas delivery system. It's very fragmented. There are quite a few small players. These players have been around for quite a while.

And because of their financial backings, they tend to have pretty weak balance sheets. In many cases, privately owned and therefore, in many cases, challenged when it comes to spending money to add capacity.

And so these are the kind of suppliers that give our customers trouble. And with us entering into this space, we provide an option for our customers to continue to work with someone who they know and trust and to someone who has the wherewithal financially to dig in and grow that business.

So we - it's that kind of a phenomena that is very unique to the plastics wet delivery market. It's that kind of a phenomena that gives us a sense that we have a very good opportunity there.

And we've seen a reasonable amount of that already in practice. So in talking about events that have already begun. So we're very optimistic about that, we feel very good about it. As Maurice mentioned, it's one of the areas where we continue to add capacity.

Got it. It's pretty helpful. To just follow-up, when we look at the market [for] the guide that you guys gave, right, how should I think about how much of this business is already booked for you guys as you sit here in early February? Versus how much you need to grind and when over the next seven to eight weeks that are left in the quarter?

Most of it is in the books. What we see is pretty - so the way the business works is these are highly configurable systems. We'll have POs in the books, we'll know what the customers want. The configurations, however, usually happen three to four weeks before delivery date.

So the orders were in the books, we know the type of system they want. We get the finished configuration three to four weeks ahead of time and we're ready to go. So the bottom-line is we have excellent visibility into the quarter.

Patrick Ho from Stifel. Your line is open.

Thank you very much and congrats also on the quarter as well as for [2018]. Tom, maybe first off, in terms of some of the market opportunities that you've talked about; clearly you're benefitting from the industry shift to etch and deposition, but you also talked about fluid delivery systems and some of the opportunities there. Are you seeing an expansion yet into some other segments like CMP or is that still a story that that's ahead for 2017 and beyond?

[Now], that's one of the really great things that happened last year. I think as you know and many on the call know; we acquired a plastics company named Ajax, a local company. We acquired in the second quarter.

And they had, I'm going to say, close to 100%, maybe 95% of their output dedicated to CMP business. And it was one of the things we found most attractive about it, simply because along with etch and deposition, CMP is one of the process steps that is greatly leveraged by this vertical transition in devices.

So we're very happy about that. It kind of instantaneously makes us one of the most critical suppliers in CMP and that will continue. Beyond that, it gives us kind of a launching pad for additional growth and that is something, again, that we're very excited about it.

And I think finally it also, beyond CMP, gives us opportunities to participate in [claim] business, carbon electroplating business, etcetera. So beyond being immediately accretive and very good financially, that acquisition strategically was a beautiful acquisition for us.

Great, that's helpful. And maybe for Maurice on the finance side, one of the things I've highlighted is you guys have done a really good job on gross margins in terms of having greater stability through the peaks and valleys of the trends.

Can you give a little bit of color of how you maintained that stable gross margin, especially given the volatility that still occurs on the quarter-to-quarter basis depending on your customer spending trends?

Yes, Patrick, I'm happy to talk about that for a minute. And it is a key part of our overall business strategy to remain as flexible as we can in every direction of spending patterns by our customers.

And we do that through, as I talked a moment ago, low fixed cost basis. We build our factories efficiently, we don't put a lot of money upfront, we carry a low fixed cost [not] through different parts of the cycle.

We also attempt to, wherever possible, [to] keep a flexible labor force so that we can adjust our [DL] to the appropriate business levels. And we've done this, by the way. If you look historically, we've focused on this.

And that's also - we've done it through managing our supply chain and working with supply chain to make sure that we don't get stuck with a material that's not needed for shipment. And that our supply chain and us work together to make sure that we have the right parts in stock and that we can avoid writing off inventory during different parts of the cycle. So those are some of the levers that we try and pull to maintain our margins in the face of volatility.

Robert Sussman from Bentley Capital Management.

A few questions. Your comments about the liquid area and they're being extremely fragmented with a number of weaker players; and [with] your $52 million of cash, does that mean that you would look to make acquisitions in that area? Or do you want [a dept to] just do it internally?

So, yes, let me remind you; we did make an acquisition in that area this past April with the acquisition of the Ajax Manufacturing Company. And that was a very important step for us.

In terms of future acquisitions, I don't see any on the horizon right now. That doesn't mean to say nothing will pop up, but there is nothing on the horizon right now. There's nothing we're actively working.

In some of these cases, we believe that we can gain market share versus some of the incumbent players and we prefer to take that route.

Okay. Second question is, how large is the liquid market and what share do you think you have now and what would be your goal for or five years down the road?

Yes, let me turn that to Maurice in terms of the exact share numbers, etcetera, that we want to speak to.

So I just want to caution you that there is not a report that you can go get to for this. So we do our best out of estimating this internally and talking to our customers.

But we think that the liquid delivery market in 2017 will be between $600 million and $700 million. We currently believe that we have sub-10% share in that. And there is, we think, no reason to believe that we can't equal the share that we have in gas, which is 25% to 30% depending on the period, in chemical delivery system. So that gives you I think the numbers to get to your question.

But that will probably take a number of years, but obviously - just to be clear. But it's a great opportunity, that is a really terrific opportunity for us.

Last thing, just looking at it; not as an industry expert, which I'm not; but as a financial analyst. For instance, [Lam] has a 45% gross margin, you've got 16% and change.

Is it because [they've] so a few customers they exercise so much leverage? Or is it the threat that they'll take these products and make them in-house, if you're not extraordinarily competitive? What accounts for the big difference between your margin and theirs?

The very, very, very short answer is that their products contain substantially higher levels of technology. And I don't mean that in the standpoint of any one particular item being easier or less, it's just that there's an incredible amount of technology overall in an etch system or in a CVD system. And there are very few players who are able to do that.

There's substantially less technology in the gas delivery system. And, apart from everything else, that is what controls the margin on an overall basis. Having said that, the business models are different. That is to say, we don't have to spend 15% on R&D. Moreover, we don't have to spend 20% on sales.

And so, while the margins are different, I would like to call your attention to the same model we put in front of people during the road show that said, we were going to get to about 10% net profit.

Apart from the really big guys, 10% net profit's actually a pretty good number across the board. And, to be blunt, we're not too far away from that right now. We're a little worried, we may have to redo our long-term model.

But we see that as what we want to really think about. We want to turn our revenue into net profit and [then] net profit, obviously, earnings per share. That's how we view the business and that's how we will continue to run the business.

(Operator Instructions). Edwin Mok from Needham & Company.

Great, thanks for taking my question. Sorry, my line broke up in the middle so if I ask something you guys talked about, I apologize for that.

First is just a quick housekeeping. How much of your sales came from wet chemical versus gas, either for the last quarter or for 2016?

And so Edwin, in general, we wouldn't discuss sales by different product lines. There is too much overlap and it's not something that we're going to disclose going forward.

Okay, that's fine. Maybe I'll you a different question then. I think you guys talk about having some visibility probably beyond this quarter. Just kind of based on what you guys can see right now; to the extent that [when] your large customer talked about the back half being weaker and you guys being a supplier, you might see that [bullier] than they do. Do you expect that to start having an impact on your second quarter business? Or do you think the business is pretty sustainable beyond this quarter?

So I will tell you that we expect to have a very good second quarter. I wouldn't tell you what I think the number is, but I expect to have a very good second quarter.

I see. So, so far demand looks pretty strong. Okay, great. And then I guess just quickly...

Tom did address some of that earlier about the (Lam) guidance and how that flowed through to us.

Yes.

So that will be in the...

[More in] second half.

...in the second half, yes.

Yes, all right, great. And then just to talk about competition actually in your core market and [the gas] market. [Obviously] there's another direct competitor, Ultra Clean, out there at play in that space.

But beyond the two players; do you see the large contract manufacturer, which I understand is also [serve the semi-cap really well] - like the benchmark [looks] flexible. Do you see them coming in [to] be a little more aggressive in gas panel or [all three as] add on to [kind of the] larger subsystem or contract manufacturing build [it before] that they do for applying them? And do you see that as a competitive risk from these big guys?

No, but I'm sure you want to hear a little more than just that. So first of all, we think Ultra Clean is a great company and we think they're very a very strong competitor for us. And we actually think that there is a situation in the market right now where what's really happening - and I kind of alluded to this, I didn't say it. But what's really happening is, as our customers get bigger and bigger and bigger, and they continue to grow, and now you're at whatever, close to a $10 billion company and you're growing 10%, that's $1 billion of new business.

And so more and more and more, they are looking for strong well-financed, able, capable, trustworthy suppliers. And they're looking for that in all the key areas of the supply chain. So my sense is that over the next few years, there's quite enough activity for both UCT and us to really thrive; that's number one.

Number two, to answer your question with a little more detail about the big guys who might be in the subcontracting world. They have absolutely been unsuccessful in entering into the gas delivery system space and they have been either completely uninterested or unsuccessful in the liquid delivery space.

I can't say for certain [it's] that because they haven't tried. Because I know for a fact that a number of them have. But it's a very different kind of phenomena where you have this incredibly significant amount of products, just like all the different platforms at the customers.

Those products get broken down into an incredibly complex set of configurations depending on which fab they're going into or which part of which fab they're going into. And the resulting combinations of permutations of potential output change regularly, dramatically.

I said before, we get configurations about three or four weeks. And, of course, in many cases that's true. In a lot of cases, it may not be true, it may come even later than that. And the $10 billion or $15 billion or $20 billion contract manufacturers don't want to spend all the money, time and effort to put into place the infrastructure, the systems you need, all of the capabilities to be able to do that incredibly high level of mix for actually still relatively low volume.

And that doesn't even begin to get into the engineering side in which they have very little capability. So to reiterate my answer, I don't see that as a situation that is going to be a problem for us any time soon.

And I'm showing no further questions from the our phone line. I would now like to turn the conference back over to Maurice Carson for any closing remarks.

Okay, I would like to thank everybody for joining the call today and we look forward to talking to you and look forward to continued good business throughout the rest of 2017. Thank you, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect.