Ichor Holdings Ltd (ICHR) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience. You've joined the Ichor Systems Q1 2017 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 be given at that time. (Operator Instructions). As a reminder, this conference maybe recorded.

I would now like to turn the call over to your host, the President and CFO of Ichor Systems, Mr. Maurice Carson. Sir, you may begin.

Thank you, Ativ. Good afternoon. I want to thank everybody for joining this conference which will be for replay telephonically and on Ichor's website shortly after we conclude this afternoon. To listen to the webcast replay, please visit Ichor's Investor Relations wepage where you will find the complete instruction.

So let's get the Safe Harbor done. 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 included - including those that are spelled out in our earnings press release, our prospectus, our annual report on Form 10-K which have all being filed with the SEC and those described in our quarterly report on Form 10-Q which will be filed. You should also consider all forward-looking statements in light of these and other risks and uncertainties.

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

We will not be providing guidance for the second half of 2017 during the call today. With me now is Chairman of Ichor Systems and CEO Tom Rohrs. Tom Rohrs will give you an overview of the results and some industry context and then I will go over the financials. After the prepared remarks, we'll open the line for questions. Tom?

Thank you, Maurice, and thank you all for joining us today for our Q1 2017 conference call. The first quarter of 2017 was an excellent quarter for Ichor Systems. We're extremely pleased with our performance and as we continued the high growth rates which we saw in 2016.

The strong demand for semiconductor capital equipment continues to outpace most forecast and we continue to grow at a faster rate in the industry. This is largely because our products are focused on the etch and deposition processes which are the fastest growing segments of the wafer fab equipment market.

In Q1, we grow our revenues by over 100% from Q1 of 2016 and we grow our year-over-year profits by over 220%. This is consistent with our stated goal of growing profits faster than revenues.

In fact, our adjusted net profit margin of almost 10% was our all-time best and very (technical difficulty) the long term model we announced during our IPO roadshow. At the midpoint of our Q2 guidance, the first half revenue growth of 80% plus is outpacing both our peers and our customers.

Since our last call, wafer fab equipment spending forecasts have improved towards $38 billion for this year. More importantly, the forecast for second half shipments has strengthened based on improved spending plans for 3D NAND and foundry.

This has led to one of our customers revising their outlook from a front half weighted year to a more balance year with little benefit to our shipment profile as well. It is important to note that in Q1, we completed our first quarter as a public company with flawless financial execution and leveraged this performance into a very successful secondary offering at the end of April.

Our performance is the result of consistent focus on what we do well. We believe we are differentiated by our skillset in fluid mechanics and we have expressed this expertise in leading gas and liquid delivery systems today and breakthrough ideas for the future.

These gas and liquid delivery systems are used in the deposition tools at three of our customers, the etch tools at our two largest customers, the CMP tools at one of our largest customers and the lithography tools at our fourth major customer. These processes are different with benefiting from the semiconductors industry toward 3D NAND, multiple patterning and print sets.

Our customers are growing faster than the wafer fab equipment market because they are the leaders in etch, deposition and CMP. Year over year, we are growing faster than our customers because etch, deposition and CMP processes are intensive users of our gas and liquid delivery systems.

This is a great trend for our business and at this point, we are not seeing a slowdown in this trend. We have another major benefit to our strategic focus. We are very focused and efficient in our operating expenses and grow our expenses dramatically slower than our revenues have grown.

This has allowed us to achieve growth in net income faster than growth in revenues. And again, we expect this will continue to drive our profitable growth. The first quarter showed continued progress in the liquid delivery sector of our business. As we have said, the product - this product lines should outgrow the gas delivery products as we continue to invest in our plastics capability and for payer for the introduction of proprietary liquid delivery module design.

We are scheduled to release this product in the second half of this year and we'll see strong growth into 2018 with accretive gross margins. I should also mention that we are seeing increased business beyond our two largest customers.

One of these customers asked us to redesign their gas delivery system for better performance and lower cost. Our success has led them to award us the gas panels on two of their platforms which I've previously been insourced.

And the work of our design teams is also critical in our win for the next generation lithography platform. The industry has become more and more collaborative especially with regard to engineering. Our customer partnerships have been built over the years on strong operational performance.

In addition to this operational performance, these partnerships are now benefiting from true value added technical collaboration. We see this as an important differentiator for Ichor into the future as well as a catalyst to drive gross margins.

Finally, as our cash balance will grow, we expect to look at potential acquisitions which would add to our capabilities and would also be accretive to our gross margins. We are excited about the future of the wafer fab equipment business. We are optimistic that our ability to add value to our customers will position us well as a key contributor to the growth of this industry.

And now, I'll turn the discussion over to our President and CFO, Maurice Carson.

Thank you, Tom. I'm going to go through some of the details from the financials over the next couple of minutes. Unless otherwise noted, I will be referencing non-GAAP financials in Q1 versus Q4 numbers.

Revenue grew quarter on quarter by 13%. Please note that Q4 was a 14-week quarter while Q1 was 13 weeks. On a normalized basis, the growth rate was above 20%. There was no significant shift in product or customer mix during the quarter.

Gross margin was down slightly in Q1, 16.2% compared to 16.3%. Overall margins for our large customers were up slightly but margins for our new customers were down due to some start-up cost and initial product builds. This is consistent with the normal process of bringing on new customers and new products.

Operating expenses were up a little over $600,000. Over half this increase related to public company cost which we forecasted to you last quarter and the balances, some recruiting cost, consulting cost along with accounting fees for the yearend data.

The books - the book tax rate was a little over 3.6%. Our cash tax rate for the quarter was nearly zero. Net income was 9.8% of revenue, yet another quarter where we demonstrated significant operating leverage.

CapEx was around $2.3 million as we completed our capacity expansion projects in Singapore, Malaysia and Portland. Although those invoices are still open, all of these three projects are currently being used for production today and it support significantly higher revenue levels.

We anticipate that we will embark on one additional capacity expansion project this year. I will now go over a couple of key items from the balance sheet.

Accounts receivable was up significantly as we had a higher proportion of our shipments in the last three weeks of the quarter. Keep in mind that in general, we run in the mid-20s in DSO. Last quarter, we were below 20s. This quarter, we're above 25. We expect to get back to the - our normal run rate next quarter.

Both inventory and accounts payable were up as we ramped through the quarter. We are confident that we have the right inventory to support the increased demand in Q1 shipments.

Between capital expenditures and working capital, we have used our balance sheet to prepare ourselves for continued industry growth. We continue to forecast our tax rate - pro forma tax rate to be around 5%. In general, the cash tax rate will be less than half of that. Investors should keep in mind that this tax structure is in place through at least 2019.

So I'm going to get technically - I'm going to get accounting for a minute because this is important for your models. Share account will be up in Q2. Using the normal treasury stock method, the impact of diluted options vary with share price. Our great stock performance since last quarter has caused the share account use for our forecast to be up also.

With that, we are ready to take questions. Operator, please open the line.

Yes, sir. [Operator Instructions]. Our first question comes from the line of Timothy Arcuri of Cowen and Company. Your line is open.

Thank you very much. So just the first question, Maurice, can you give us a little more specifics in terms of what is assumed for the share account in June?

Yes. It will be up approximately - the assumption is 400,000 shares to 26 million shares. That's the assumption in the model.

Great. All right. Thank you. And then, Tom, I think you said in the prepared remarks, you said that you didn't want to give guidance for the full year. But -- so your customers if I take an aggregate, they sound a little more finance loaded maybe not as much as they were but certainly shipments down 15% to 20% something like that, half on half, and you guys tend to whip around a bit more than them when things are good for them or even better for you and vice versa.

So if that's the right sort of like baseline shipments to your customers, would it be fair to assume that you'd be down more than that, more than the 15% to 20% half on half?

Yes. Tim, your right in that we won't be commenting on the second half and therefore, I won't answer your question directly. I do believe that and as you know one of our large customers in first quarter had kind of 45, 55 thought around how the house would be loaded and they mitigated that in - this quarter to see a much more balanced year. We are seeing that in terms of our numbers. So I would go with just saying it's going to be a much more balanced year.

Okay. And then maybe one last question, Maurice, if I look at the gross margin drop through since September, so since you had all of Ajax in there, the drop through to gross margins has been about 18% as revenues gone up about $50 million on a quarterly basis.

So the drop through is sort of just right at the long-term model for absolute gross margin. So you're hitting the up margin target but I would have thought that the gross margin drop through would have been a little better than it's been. Is that just related to the new customers you're bringing on and can you talk about that?

Yes. You're exactly right. The Ajax margins are absolutely accretive but they're offset a little bit by the lower margin on the new customers. And I should comment that we feel good about the new customers and we're happy to put some upfront cost and to bringing those guys on. But the Ajax I can tell you today is absolutely accretive to the margin.

Okay. Awesome. Thank you so much.

Thank you, Tim.

Thank you. Our next question comes from Sidney Ho of Deutsche Bank. Your question please.

Thanks and congrats on the quarter and the guide. Your competitor has talked about supply constraint was a factor for the growth recently this quarter or next quarter. Curious if you were in any way, shape or form negatively impacted by the same reason or whether their share loss came from internal manufacturing sources at your customers. I understand you have been growing capacity quite rapidly since last quarter on the call but I wonder if those new capacity is already ready for production.

Okay. So this is Maurice. I'm going to answer part of that question for you. So, yes, it is already for production and it's being used for production today. I will say that our competitor is correct that the supply chain using that term most broadly has been impacted and has struggled to keep up at certain parts of the quarter and that has affected all of the industries, not just the competitor and us.

But we feel and I don't know exactly but we feel that those are starting to come together specifically around some of the key suppliers but in general that those suppliers are catching up to the demand profile that's there today.

Would you venture to get how much revenue would have been more if there were no supply constraint?

No. I really won't be able to venture that, Sidney, because there's so many puts and takes among all of the suppliers but it was really be hard to answer that question.

Okay. My second question is from the chemical business. You've talked about the market size and your market share in the past and if my math is right, it looks like it's a pretty good opportunity to grow from say $15 million a year to $200 million a year and over the next couple of years.

You mentioned this would take time but in your prepared remarks, you also talked about a new product coming in the second half. My question is are there any way that you can accelerate this growth or is it just not realistic because of design cycles alone? I'm thinking about along the line of increasing R&D or maybe inorganic growth.

So I think the answer to your question is absolutely yes and I - and obviously, that's exactly what we did in 2016 with the acquisition of Ajax which moved us into a prime position on CMP platform.

And those similar kinds of acquisitions are definitely possible although I'm not going to say we're pursuing anyone of them right now. In addition, we continue to work on the engineering side. So the growth was strongly accelerated in '16. The growth will be accelerated again as some of these engineering designs come into the market in the back half of this year.

There's always a possibility that another acquisition could be another step function growth in this particular play. But I definitely don't want to give the impression that we're in the process of doing any of that at this minute.

Okay. Great. Thank you very much.

Thank you, Sidney.

Thank you. Our next question comes from Amit Daryanani of RBC Capital Markets. Your line is open.

Thanks a lot and congrats for a quarter, guys. Two questions for me as well. I guess, first off, could you just touch on your working capital metrics? I think operating cash flow was negative. Largely, inventory and the AR spiked up. How should we think about it as we get into June quarter? Does cash flow become positive? Would that be more of a back half event you think?

We are -- it's a great question. We had a lot of discussion about that ourselves. So we anticipate that this situation reverses itself in this quarter in Q2 and will not take to the end of the year. And we actually anticipate significant operating cash flow out of Q2 from both AR and inventory.

Perfect. That's helpful. And then you -- can you guys talk about the new customer ramps, could you just talk about what was the -- I guess, two parts really, what was the financial impact in investing in these ramps ahead of the revenue starting to happen because some of these may have impacted your profit level in the March somewhat. And then as these programs ramp up in the back of the year as you -- is there a way to think about what's the revenue contribution you could have on these new customers' new programs?

Yes. So, as we talked about the impact on the financials, I think it's important to note that this is not a negative earning situation. It's just a lower gross margin percentage.

These customers are actually bringing in positive gross margin dollars just not at the rate as the rest of the business. And that's why I mentioned earlier, we feel good about the whole impact even though it does affect our percentage slightly.

The revenue impact, we never really given a lot of guidance but I think that we've talked about our total business is growing so much that you won't see a change in the percentage of these new customers. But in absolute dollars, the total number could approach doubling.

Perfect. Finally, just to clarify one thing if you don't mind, when you guys talked about balanced growth in the back half, is that a customer specific statement for that one customer that you talked about or is that a broad Ichor revenue statement you're making?

I would say it's a broad statement. When we look around, obviously, this one major customer that's already publicly announced their earnings, there will be another one that we'll be announcing I believe next week and I'm not going to try to predict what they're going to say; However, I think it's a very - it's a reasonably broad statement covering all of our Ichor's business.

Perfect. That's it for me. Thanks, guys.

Thank you.

Thank you.

Thank you. Our next question comes from Edwin Mok of Needham & Company. Your line is open.

Great. Thanks for taking my questions. Congrats, guys. So first just a really quick follow-up on the last question you had and that's the gross margin impact on the newest customer. Is there a way you can quantify in terms of how many basis points of impact on your gross margin?

No. I mean, I can pull this question together. But it's only -- we were talking 10 or 20 basis points. So we're not talking a big number but it's not -- it's the explanation for why we're we can -- we'd stay flat or go up slightly.

Okay. Great. Great. Just -- yes, just in terms of magnitude at least just give us a clue the way you think about it. And then I think on your prepared remark, you talked about the quarter being more backend loaded in terms of shipment and you mentioned -- someone else asked question about supply chain and that might have an impact there.

Is there way you can kind of think -- talk about how this is trending in the near term in terms of the shipment trend? Is it similar backend loaded this year or we call it more normalized now or any way you can kind of talk about either your order pattern or shipment pattern in this quarter?

Yes. So the backend loaded part of the quarter was really impacted by the supply chain constraints and as those started to free up at the back half of the quarter, we shipped a lot more to the backend loaded. We do not see that as an ongoing trend that we will continue to be backend loaded but that will -- the demand which Tom can speak to, the demand is relatively evenly loaded. It's the entire supply chain that caused us to be backend loaded.

Yes. And I would just want to make sure we're clear on this, our quarters tend to be almost perfectly linear. And so when we say backend loaded, we're not talking about a situation where some company is, and certainly some companies I worked at myself which shipped 50% of their business in the last month and they'd call that backend loaded, we're not anywhere near that. It's just that we weren't perfectly linear.

And when you move from being perfectly linear to somewhat non-linear that gives rise to some AR differences etc.. So I just wanted to put that into some context for you.

And to be blunt, some of that was obviously waiting on shortages to be cleared which they were and our customers, as you can tell from their quarterly announcement that at least one of them had no trouble shipping an awful lot of their stuff right on time.

So I don't think it would have made any difference in the overall revenues of the business if we had zero supply chain problems. What problems there were did cause us to be a little more backend loaded than we were in the -- that's made visible on the receivable number.

Okay. Great. Thanks for clarifying that. And then last question I have, just kind of talk a little about longer term beyond this quarter, this quarter or second half, right?

I think you guys talked about there's still room for you to gain sharing large customers in the gas panel side of the business and what chemical deliveries and growth opportunity. Your competitor has been offering more larger scale module, right, as part of how they have grown their business, right? Is any thought on that or any other areas that you felt that you can integrate beyond just the gas panel?

So, we talked about this I think a little bit at the last quarter and as we are now -- as you are now our competitor, we have a lot of respect for what they do and we think they're a great company.

And I also need to help you understand that we don't play in a zero-sum game. Sometimes I get the sense that there's a feeling that if one gain share, the other lose a share. When you look at it, that's not the case at all. In fact, all you have to do is look at both of our growth rates from last year to this year and you can obviously see it's not a zero-sum game. So they are in some businesses we are not in.

A lot of those revolve around sheet metal frames, around machine shops and at this point in time, we don't have any plans to enter into those business. As I said, we've developed our strategies more around our capabilities, around fluid mechanics and how that gets expressed into the gas and liquid side.

To go from there, I think we've also explained to you we do see a very fragmented market in the liquid delivery side and we do see continued opportunities to gain share and again not necessarily at the expense of our unnamed competitor here but rather at the expense of a number of very small people who've names you would never even recognize or think of.

On the gas side, the biggest opportunities we have, for example, I mentioned one of them, one of our customers we've started to gain share platforms and that's come at not at the expense of any other company but rather they've decided to insource less. At one of our major competitors - customers I should say, our opportunities in terms of gas delivery are also not at the expense of any competitor but rather with our customer deciding to insource less.

And so as customers decide to insource lessen and give more to us, yes, we see opportunities there as well. So all in all, we're pretty happy with our opportunities to grow our business and not only through gaining share but also through additional products, also through additional customers as we've been exhibiting to you.

Great. That's all I have. Thank you. Thanks for the call.

Thanks, Edwin. Thank you.

Thank you. [Operator Instructions]. Our next question comes from the line of Patrick Ho of Stifel. Your line is open.

Thank you very much and congrats guys on the quarter and outlook. Tom, maybe first off, maybe give a little bit of color on this qualitatively. I think you have customers especially your largest customers and particularly one is probably at full capacity in terms of their internal gas delivery systems need. Can you qualitatively talk about how you're benefiting from just them being a full capacity and more so in terms of them probably outsourcing any of the high demand that we're seeing right now?

So Patrick, we've over the course of the last numbers of - number of quarters, have benefited from some of that where they have decided to dedicate their capacity in growth and to capacity to more of their final assembly and test operations and we've been a beneficiary of that.

And they'll -- that will at some point I would imagine level off because I think there's an aspect of what they'll do internally that they will always do internally simply because that's their strategy at this point. But your question is exactly right and we have been the beneficiary of that phenomenon and I can see that having some more legs through the business as growth continues.

Great. That's helpful. And maybe for Maurice, you talked about the liquid delivery introduction in the second half of the year. How do I look at it from a modeling perspective of are we going to see increased startup cost or is that going to affect gross margins? How do we look at that new product delivery and the potential model impacts in the second half of the year?

So let me say that most of the startup costs have already been realized on the P&L through the last year through the development cost. Two, it will certainly ramp into the second year, the second half of this year.

However, it will not drive a ton, just as a proportion of the business and most of the margin accretion will come through in 2018. But we will begin the ramp and we'll be able to see that but it won't drive a big change in gross margin until 2018.

And just to side on that, I mentioned during my statement that we were successful here because we did a redesign in terms of gas delivery systems to help them with their performance and cost. Some of the margin that Maurice has been talking about is because as they've moved outside with their product to us, over the last - this first quarter, we're actually building a reasonable amount of their old design and it's just part of the product transfer.

And so it's really more a function of them transferring from their older design to our newer design and as that happens, our margins will improve rather than kind of a repeatable new product issue.

Great. Thank you very much.

Thank you.

Thank you. Our next question comes from Tom Diffely of D.A. Davidson. Your line is open.

Tom Diffely: Yes. Good afternoon. Just following up on the last question then, are there more opportunities that you see in the near term for less insourcing of your customers, more these programs that they might be willing to outsource the design work as well as the platform built?

Well, we certainly though. We -- the one custom I'm referring to is probably -- the third might -- no, probably the fourth largest gas delivery system consumer and they continue to do quite a bit internally and overtly hope that they'll choose to do more of that with us. So that's clearly our plan.

And I should also mention in terms of this product development cycle with -- on the liquid delivery side with our liquid delivery module that we're building for the CMP product, that is another situation where we are in now a customer phase where the product is being put on shipments to customers.

All of the tests etc. have gone very well. So we expect that would be starting to ramp again towards the second half of this year and well into '18. And again, that will be helpful to us from a margin perspective and will be, in essence, 100% incremental growth for us.

Okay. Great. I was just curious too, do you have any exposure to some of the close adjacent markets like the flat panel market at this point?

We do not.

Okay. It seems like the gas panels are somewhat similar and that could be an area of growth at some point?

Well, we absolutely understand that and the fact of the matter is at this point, we do not. At some point, I'm not saying we wouldn't be interested in and I'm just saying we don't do at this point.

Okay. And then finally, Maurice, when you look at the tax rate, obviously, it looks below for a couple more years, what's the natural tax rate beyond 2019?

So we've said in the past that we actually believe this will continue past 2019 but we have to finish our current program in Singapore and then apply for a new one in 2019. And obviously, we're performing very well in Singapore and we anticipate that if for some reason we weren't be able to continue, the natural tax rate would drop -- only go up to something like 15% or 16%.

Okay.

Based on income distribution and NOLs around the world. But we model internally that it will continue in the 5% to 7% range even past 2019.

Okay. That being, the other players in Singapore would have no troubles extending their -- getting new contracts essentially with this new equipment?

Any player that has met all of the employment in capital investment like we have.

Great. Okay. Thank you.

Thank you.

Thank you. [Operator Instructions]. Our next question is a followup from Sidney Ho of Deutsche Bank. Your line is open.

Thanks. Just a couple of housekeeping questions, based on your mix of products and new existing customers, how should we think about your gross margin mix in Q2 at least directionally? I guess I'm also asking how long into the production will these new products or customers become not a margin headwinds.

Okay. So I'm going to answer the second one and we see this by Q4 that there won't be any margin left for many of the new customers. It will improve every quarter on the way though.

So we'll see less impact in Q2 and less in Q3 and by Q4 there will be none. It will be add or accrete to all of our margins. And the model that we guided on -- for our net income or EPS, I'm sorry, has no significant changes in gross margin from our normal run rate, so in the same basic area.

Okay,. Great. Thanks. The second housekeeping question, in terms of OpEx, it was -- Q1 was higher than I forecasted but maybe it's just my forecast. So I think if the delta was mostly related to retreating and consulting, how should we think about that in Q2 and will that at some point fall off in the second half of the year?

Yes. That's exactly correct. Some of those were expenses related to that won't continue. But we did increase and I actually haven't seen your model lately. So - but there will be some increased expensing in - that's assumed in the model, our guidance for EPS, but it's kind of in the normal - still in the normal range but they will be up slightly again in Q2.

Okay. That's all I have. Thank you.

Thank you, Sidney.

Thank you. At this time, I would like to turn the call over to Chairman and CEO, Tom Rohrs for any closing remarks. Sir?

Well, thank you very much for all your questions and especially thank you for your interest in Ichor and we look forward to talking to you again next quarter. Goodbye.

Thank you, sir, and thank you, ladies and gentlemen, for your participation. That does conclude Ichor Systems' call. You may disconnect your line at this time. Have a great day.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank youMaurice Carson