Ichor Holdings Ltd (ICHR) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ichor Systems First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Claire McAdams, Investor Relations Counsel for Ichor. Please begin.

Thank you. Good afternoon, and thank you for joining today's conference call, which will be available for replay telephonically and on Ichor's website shortly after we conclude this afternoon.

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 2017, which have been filed with the SEC 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, and our earnings press release contains a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures.

On the call with me today are Ichor's Chairman and CEO, Tom Rohrs; and our Chief Financial Officer, Jeff Andreson. Tom will begin with a review of the business, and then Jeff will go over the first quarter financials and outlook for the second quarter of 2018. After their prepared remarks, we will open the line for questions.

I'll now turn over the call to Tom Rohrs. Tom?

Thank you, Claire, and thank you all for joining us today for our Q1 2018 conference call. Our first quarter results serve as strong evidence that our strategy and operational excellence efforts are right on target.

Our $258 million of revenue is 41% above Q4 and 74% above Q1 of 2017. This is league-leading performance. Our earnings per share of $1.03 is 47% above Q4 and 81% above Q1 of 2017. Our gross margin of 18.3% is 120 basis points above Q4 and supports and fulfills our commitment to grow gross margins, as we grow the business.

Our operating margin of 13.3% is already within our target model range. This time last year, as we went into our Q1 2017 conference call, expectations were that we would deliver just over $500 million in revenue for all of 2018 and about $2 a share in earnings. In the first half of 2018 alone, we will deliver revenue and earnings on a par with what a year ago our analysts predicted for all of 2018.

For the full year of 2018, we believe that we will be close to $1 billion in revenues, and earning close to $4 a share. This will generate about $130 million in EBITDA this year. On top of that, our gross margin and operating margins will both show strong year-over-year increases compared to 2017, as we approach our long-term model.

We are successfully achieving our goal of outgrowing the rest of the industry, evidenced by the following. Our compound annual revenue growth rate of 38% since 2014 compared to 14% for the industry. Our 62% growth last year was double the growth rate for our industry. Our strong first quarter 2018 revenue growth -- growth rates cited earlier were well above the industry, both sequentially and year-over-year. Our first half of 2018 revenue growth rate at the midpoint of 64% year-over-year and 46% versus the prior 6 months will be well-above industry performance, and we certainly expect to outperform the industry for the full year of 2018.

During all these periods, we have outperformed wafer fab equipment or WFE spending, our customers' revenue growth, and the growth of just about every supplier in the wafer fab equipment market, and we have grown earnings and profits faster than revenue.

As promised on our IPO roadshow a little over a year ago, and in every investor presentation since, we have executed tremendously well on accretive acquisitions that have served to expand our served available market without diluting our shareholders. Our private equity sponsor is no longer a holder of our stock, which removes any overhang that existed this past year. And we have met or exceeded every key growth and profit metrics set forth by our own strategic objectives or the expectations of The Street.

Despite our excellent performance, our market cap isn't much different than what it was about a year ago. My conclusion is that we're not doing a very good job of telling our story. So we will spend some time today explaining why we believe that Ichor is a great company and a great investment.

We understand that investors will always be concerned about the semiconductor business cycle, but we also believe that these concerns should be mitigated. It is becoming very clear that wafer fab equipment will continue to grow through 2018. The consensus is that it will grow 10% this year. We also believe that, in fact, if we were to see a downturn, the effects would be muted.

First of all, the industry has been restructured to lessen the effects of cycles. Consolidation has removed marginal players from the field. The worst cycles result from marginal players building capacity faster than demand. There is no evidence that this has happened.

Second, lead times have shrunk throughout the industry. As a result, the equipment planning horizon is shorter, and there is more certainty in bookings. Bad practices, like double ordering, are things of the past. So we believe that future cycles will be muted. Nevertheless, we have built the operational capability to manage the company in both an up or down business environment. This will reduce the impact on profits in a down environment, as compared to other companies with a less variable cost structure.

But today, I want to explain the reasons why we will continue to outperform industry spending, and why we believe we can continue to grow in a flat or even a declining market. At a high level, there are 5 key attributes of our business strategy that will enable us to continue to grow above industry spending, as we have done every year since 2014.

First, expanding our footprint and overall market share in the weldment and precision machining business; second, expanding our footprint and overall market share in the gas panel business by achieving a foothold in South Korea; third, achieving incremental revenue growth in market share in our emerging liquid delivery business; fourth, expanding our footprint and overall market share in additional geographic regions; and finally, continued strong execution in M&A.

So let me go through these in some detail. First, in the area of weldments and precision machining, we increased our served markets by over $1.5 billion through the acquisition of Cal-Weld and Talon Innovations. Before we acquired these companies, they each basically served one customer. We have significant opportunities to expand our share of these served markets by leveraging our strong relationships with our other 3 large customers in the U.S. and Europe, and with our 2 new customers in Asia. We expect to achieve market share gains in weldments and precision machining, beginning with initial qualifications this quarter and first revenues in the second half of calendar 2018, accelerating into 2019. Moreover, much of our additional capacity is being built in Malaysia, which has an ultra-competitive cost structure.

Our second incremental growth opportunity is leveraging our foothold in South Korea through our recent acquisition of IAN Engineering. IAN is already a supplier of gas panels to SEMES and WONIK IPS. The leading Korean OEM semis became the 7th largest supplier of wafer fab equipment in 2017, with over $1 billion in annual sales. Their primary markets include wet processing, etch and track, all markets we can serve with our portfolio of weldments, precision machining and fluid delivery systems.

IAN's second-largest customer is WONIK IPS, also one of the fastest-growing equipment suppliers in Korea, with nearly $400 million in sales last year, primarily in CVD segment. These 2 OEMs together grew 2017 revenues 150% over 2016, and are now serving over 5% of the total worldwide market for etch, CVD, ALD, track and wet cleaning.

Today, IAN provides the gas panels to these customers, which means our overall share of the gas panel market is increasing with this acquisition. We can further expand our position within the subsidiaries of the U.S. OEMs in Korea. Furthermore, we will now be able to also leverage our weldment and precision machining solutions, as well as our chemical delivery, and in particular, our new Liquid Delivery Module, to serve the South Korean market. These additional opportunities will be an incremental growth driver, as we exit this year, but certainly, in 2019.

The next key driver for our outperforming the overall market is our growing market share in Liquid Delivery Modules, which had a de minimis contribution to last year's revenue. We won a substantial award with a U.S. OEM last year, which is just beginning to kick in, and in a small way, for the first half of 2018 and will certainly add incremental growth to the top -- on top of our core gas panel business in the second half of 2018 and in 2019 and beyond.

Furthermore, we own the IP on this proprietary Liquid Delivery Module and are working closely with multiple additional OEMs to expand our reach in clean track and other wet processes to further increase our market share.

Our next growth vector is additional geographic expansion. We are engaged in strategies to expand our market share with equipment OEMs and additional customer markets, in particular, in Japan. We're eager to bring our liquid delivery product to some of the largest OEMs there, which have a sizable market share in wet processes, such as clean and track. This should be a significant source of incremental revenue in 2019.

Finally, we are continuing to pursue additional acquisitions which fit our strategy and are accretive to our earnings. We will continue to use our strategy that has been wildly successful with Ajax Plastics, Cal-Weld, Talon Innovations, and now, IAN. We will stay with our strategic strength of fluid dynamics in the semiconductor market space. We will work with our growing list of customers, we will buy companies that give us the platform for additional revenue growth, and we will do deals that are accretive.

In summary, my objective today is to communicate why we are outperforming the industry this year, will outperform again in 2019 and for years to come. To sum up, first, we're gaining market share by expanding our weldments and precision machining businesses beyond a single customer previously served by Cal-Weld and Talon. Second, we are gaining market share in the gas panel business by gaining a foothold in Korea. Third, we are gaining share in the liquid delivery business through major OEM wins that we can further leverage with our recent acquisitions. Fourth, we are continuing to grow our international presence. And finally, there are additional opportunities for M&A, and we have a great track record of picking the right ones.

As I said earlier, we have grown the wafer fab equipment industry since 2014 with 38% annual growth versus the industry's 14%. We will continue to outgrow the industry with WFE expected to grow at 10% in 2018. We will grow at several times that rate, and can do so again in 2019 with a continued robust spending environment.

And most importantly, for everyone who is worried about semiconductor cycles turning down next, even in a flatter, declining equipment market, we believe we can still show strong growth due to the incremental revenue streams I just enumerated. Let me repeat that. With all of our anticipated growth vectors, our revenue will still grow next year even if WFE spending declines.

I believe you all have the confidence that Ichor has been executing against our strategic growth initiatives at a nearly unmatched rate, outgrowing the industry and any every one of our peers. We hope to also convey our confidence in another year of revenue growth outperforming the industry, with expanding gross and operating margins, strong earnings growth and continued drivers for incremental growth in 2019.

And with that, I will turn it over to Jeff to provide more detail around our first quarter financial performance, our guidance for the second quarter and further details regarding our recently announced debt refinancing, stock repurchase plan and acquisition of IAN. Jeff?

Thank you, Tom. Before I begin my comments, I'd like to remind you, the P&L metrics discussed today are non-GAAP measures unless I identify the measure as GAAP-based.

These measures exclude the impact of share-based compensation expense, amortization of acquired intangible assets, nonrecurring charges and discrete tax items and adjustments.

I'd also like to note that we have added a schedule which summarizes GAAP and non-GAAP financial results discussed on this conference call, as well as key balance sheet and cash flow metrics and revenue by geographic region to the Investors section of our website.

First quarter revenues were a record $258 million, increasing 41% from the fourth quarter and 74% from the first quarter of 2017. We exceeded the high end of our revenue guidance, as each area of our business: fluid delivery, weldments and precision machining strengthened versus our outlook as we entered the quarter.

In the first quarter, we adopted the new revenue recognition accounting standard, which did not have an impact on the timing of our revenue recognition. Our record Q1 gross margin of 18.3% increased 120 basis points from the fourth quarter, which was slightly better than the 100 basis points of improvement we had forecast. As expected, the increase compared to the fourth quarter was primarily driven by the accretive contribution of our acquisitions, as well as the higher revenue volume, and was slightly higher than forecast due to favorable product mix.

Versus the year-ago period, our gross margin improved by 210 basis points, primarily reflecting the impact of both the Cal-Weld and Talon acquisitions. Importantly, our gross margin increased for the third straight quarter, showing strong progress towards our improved target model range of 19% to 20%.

Operating expenses were $13.1 million or 5% of revenue, and were in line with our expectations. The increase from the fourth quarter was primarily driven by the inclusion of a full quarter of operating expenses of Talon.

Our record operating margin of 13.3% increased 210 basis points from the fourth quarter, and 280 basis points from the first quarter of 2017. On the strength of the steep revenue ramp we had in Q1, we were able to perform within our published target model range for operating income for the first time.

Our tax rate for the quarter was 12.7%, at the higher end of the range we provided due to a higher contribution of profits from our U.S. entities. Net income was a record 10.6% of revenue, and EPS was $1.03, increasing 47% from the prior quarter, and up 81% from the first quarter of 2017. This was our 9th straight quarter of sequential earnings growth.

EBITDA for the quarter, which is listed on the supplemental schedule referenced earlier, was also a record at $36 million or 14% of revenue and increased 68% from the fourth quarter and 117% from the year-ago period. As you will see on the schedule, we have also grown EBITDA for 9 straight quarters, and have delivered $93 million in EBITDA over the last 12 months.

Now I'll turn to the balance sheet. Cash of $63.8 million declined $5.5 million from the fourth quarter. Free cash flow was a use of $4.5 million. Our working capital increased primarily for accounts receivable, as our payables offset the increase in inventory for the quarter.

Capital expenditures were $3.7 million, as we continue to add capacity in our Singapore, Malaysia and Portland facilities. The reduction in cash also reflects the use of $5 million to repurchase 196,000 shares of stock during the first quarter, which I will discuss further later in my remarks.

Days sales outstanding of 27 increased slightly from the fourth quarter of 25 days. Inventory increased to $164.6 million or 6.5% versus a revenue increase of over 40%, as we continue to focus on improving our inventory turns. While free cash flow generation fluctuates quarter-to-quarter based on working capital investments, we expect strong free cash flow performance in the second quarter.

During the first quarter, we completed the refinancing of our existing debt with a term loan facility of $175 million and increased the company's revolving credit facility to $125 million, of which we currently have $108 million available. The credit agreement decreased the applicable interest rate by 25 basis points, as well as extended the maturity from August 2020 to February 2023.

Additionally, the credit agreement increased the maximum leverage ratio to 3x from 2.5x. The current base rate is LIBOR plus 2.25%, and this will be reduced by 25 basis points in June, as our leverage ratio will drop to 1.3x. Given the reduction in our debt leverage ratio and the availability of over $100 million in incremental borrowing capacity, we have capital available for both acquisitions and opportunistic share repurchases.

Our interest expense in the first quarter was $2.5 million and is expected to come down to $2.3 million in the second quarter. Beyond Q2, assume a range of $2.4 million to $2.5 million in interest expense per quarter, depending on the number of rate hikes we see this year.

In the first quarter, the company approved a $50 million share buyback program. As of this call, we have purchased 630,000 shares for $15 million at an average price of $23.75. This means we have repurchased $10 million of stock in the second quarter on top of the $5 million in repurchases in Q1 referenced earlier. We will continue to manage this on an opportunistic basis, balancing any future purchases with our acquisition strategy, prudent management of our level of debt and cash flow generation.

In April, we announced the acquisition of IAN Engineering, as Tom noted earlier. While this is a relatively small acquisition, it is strategic in that it expands our addressable fluid delivery market by approximately $125 million, and positions the company to further expand our weldment and precision machining market share.

Our Q2 guidance to date does not include any revenue associated with this acquisition. But with an annual revenue run rate of approximately $20 million, we do expect it to add incremental revenues in the second half, and be accretive to earnings by the fourth quarter. The total acquisition value will be $8 million, with half being paid at close, and the other half paid out over the next 2 years, provided they meet certain financial and operational conditions.

Now I'll turn to the second -- to our second quarter guidance. We expect another strong revenue quarter, moderating slightly from the Q1 record, in line with our customer shipment patterns. Our forecast is for revenues in the range of $244 million to $254 million, with earnings per share in the range of $0.91 to $1.

At the midpoint of Q2 guidance, our revenues for the first half will be up 46% from the second half of 2017, and 64% from the first half of last year. As with any business, gross margin can vary due to changes in product mix and revenue volume. We are tracking well against our target gross margin model, and we'll continue to drive incremental cost improvements. We continue to expect to see modest increase, in our operating expenses each quarter over the course of the year, but our total operating expenses for the year will certainly be within our target of less than 6% of revenue. The tax rate on an ongoing basis will be in the range of 12% to 13% this year. Given the higher contribution of our U.S. entities, we are now expecting, our cash tax rate will be approximately 5% in 2018.

Operator, we are ready to take questions. Operator, please open the lines.

(Operator Instructions) Our first question comes from Patrick Ho of Stifel.

First off, in terms of the (inaudible) the March quarter, did you see any...

Patrick, you're fading in and out.

You're breaking up, Patrick.

Yes. I apologize. (inaudible) in terms of the industry environment (inaudible) level of (inaudible).

So Patrick, something is wrong with your connection, and it's almost impossible to ascertain what you are asking right now.

Is this better?

That's 100% better. Let's go.

Okay. I apologize Tom. First of all, in terms of the industry environment, can you discuss for the March quarter the level of shipment poolings you might have seen? And as we look, going forward, how's the visibility for Ichor in terms of are you starting to see any level of visibility for the September quarter?

So in the first quarter, we had guided $240 million to $250 million through the course of the quarter. Obviously, we gained more revenue than we had thought. And, obviously, then some of those were items that were originally scheduled into the second quarter and were shipped in the first quarter. So yes, there were some pull-ins into the first quarter. And with that, we were more than happy to meet our customers' requests and fulfill those. The -- in terms of the third quarter, the way we are looking at that now, right, is in terms of the second half. And I think with regard to the first half and second half, what we are seeing is very similar to what Lam had described with low 50% in the first half, and high 40% in the second half. And I think that is something that is, I think, pretty robust at this point. Obviously, if we end up being high -- low 50s and high 40s, that will start getting us very near the $1 billion number that I spoke about. Now as I said on my script, we're working on qualifications for a lot of additional revenue with weldments and precision machinings and LDM modules, and qualifications are very hard to quantify from a timing perspective. There could be some that result in second half revenues, which would be additive to those percentage numbers I just mentioned. However, most of them will serve towards the growth drivers for 2019, as I discussed. And we think there's well over $100 million when we look at what is available there in 2019. So we're quite bullish in terms of both the overall wafer fab equipment, as I said, growing 10% this year. At this point, perhaps, slightly front-end loaded, but nevertheless, strong throughout the year, and then we're actually getting very excited about 2019 and what we can do with our incremental revenue.

Great. That's helpful. And maybe as a follow-up question for Jeff in terms of the supply chain and managing that, given these elevated shipment level and the high demand from your customers, combined with the M&A you've done over the last few quarters, how are you guys managing, I guess, the supply chain and your own balance sheet as well as you have given this, I guess, really high level of spending you're seeing by your customers?

Patrick, let me -- this is Tom. Let me answer that for you. I'm really happy with our supply chain team. And last year, we added a number of executives last year because I spoke about it during conference call. We also added a new senior executive of supply chain, and he's built up a first-rate team. And so as an example, our on-time delivery gets better and better despite the large amount of purchasing. And obviously, we're really happy about the large amount of purchasing. And not only that, but we only grew our inventory about 10% in the first quarter while we were growing shipments 40%. So that gives us a lot of extra cash that we can use for things like buybacks and acquisitions. So the supply team has done exceptionally well. We've been -- we have a very good model for integrating acquisitions. We integrate them almost immediately into the appropriate functional areas, and so they team up on the supply chain side almost immediately. So that's worked extraordinarily well. And overall, we made some real significant investments, and those investments are paying off.

Our next question comes from Edwin Mok of Needham & Company.

First question I have is in terms of your concentration of those 2 largest customers, I think last year, it dipped a little bit already to, call it, 93%. I think if I combined those 2, it was high 90s obviously. If it continues trending that way, then are you growing from the other customers faster than your largest customer? Or is it still kind of similar for -- given those 2 buckets?

So we mentioned that -- I mentioned during my script that the first quarter this year was really substantially above the first quarter last year. I think it was 81% above. However, our -- outside of our 2 biggest customers, the other customers we have actually tripled in revenue from the first quarter of 2017 to the first quarter of 2018. So we're really happy about that, and it gives you a pretty good indication of how things are moving.

That's extremely helpful just to kind of see a trend, and that doesn't even include these 2 new Korean customers, which you don't expect until the second half of the year, right?

No, that does not include SEMES or WONIK.

Yes. And then kind of -- that kind of leads to my next question. In terms of how the drivers are laid out like new weldment, expansion in Korea, LDM, et cetera, is there a way you can rank the timing of these opportunities? I know you're going for all of them, but I assume some of them is sort of along the (inaudible). Just kind of give us a sense in terms of timing of these different opportunities.

Yes. I think we'll start to see some activity on the precision machining first, and we are hopeful to see some of that into the back end of 2018. We'll see some activity on the weldment side soon thereafter. And with regard to the Liquid Delivery Module, we actually, and it looks like the first quarter, we hit on all cylinders. We actually had some push out, if you will, of LDM because it was qualified on a very large customer, whose 10-nanometer fab was delayed, and so we actually saw some delay of that. And so we expect that probably to start kicking back in again in the second half. So I would rank them that way in terms of timing.

And is it fair to say just based on your comments around the prepared remarks, is it fair to say that precision machining plus weldment is probably the largest opportunity of all these different ones?

Yes. I think that's a fair assessment. The market size there, and I mentioned that it's $1.5 billion of weldments and precision machining that is used in the semiconductor industry alone. And our share of that is maybe 25% to 30% on the weldment side, and probably less than 10% in the precision machining side. So there's a lot of area for us to play in.

Great. Sorry about the background noise. Last question I have just kind of in terms of M&A and debt capacity, I think you actually mentioned on the prepared remarks you guys had upped the debt, and it sounds like you're comfortable going up to 3x leverage. Is that the way to think about your debt capacity?

The way I would think about it, Edwin is that we can go to 3. We'll probably stay something below that, given that we want to make sure that we're prudent. So I suspect that we'll stay between 2, 2.5., but that's kind of where we're looking at it right now. But we have the capacity to go to 3, should something arise again, allows us to do that.

If you don't have like if you didn't come across or a deal didn't come through over the next several quarters of any kind of larger deals that will need you to use this debt, right, how do you prioritize kind of buyback versus working down the debt?

I think the way we think about it, as I mean, obviously, we'll have to look at them altogether, depending on where our share price goes. We've -- at $23.75, it was what we would consider a very good value, I think, and what we bought our shares back for. In light of the future, if we saw some risk or some kind of downtick or something, we might consider the debt ratio and make sure that we don't get over-leveraged. So we'll just have to balance it in the outlook.

Our next question comes from Karl Ackerman from Cowen.

Jeff or Tom, I know you haven't yet closed on IAN Engineering. But does this accelerate or postpone your ability to achieve your newly stated gross margin and net income model? And I have a follow-up, please.

Well, and I don't think it -- the effect on the income model is marginal. Don't forget, we're paying $4 million now and $2 million a year from now and $2 million in 2 years. And the current run rate is $20 million, and so that $20 million is not going to move the needle that much with regard to percentages. What we're even more excited about though is that it gives us, as we said, it's a beachhead, but it's also a growing point in Korea, especially with SEMES and WONIK, where we can sell weldments and precision machining and delivery modules, which would be at the same or maybe slightly higher, in some cases, margin than what we ship today. So overall, as this plays out, and I think Jeff mentioned it's over $100 million of opportunity that we see there, I think it'll play very well with our long-term plan vis-a-vis growing margins.

I appreciate that. As my follow-up, Jeff or Tom, how do you think about your manufacturing footprint today, given the soon-to-be 4 M&A deals you've completed over the last 24 months have brought about several smaller facilities spread across the world? Should we expect any opportunity to consolidate some of these facilities, maybe particularly in your -- into your Singapore and Malaysian factories that may drive additional OpEx leverage next year?

Well, I think I mentioned, as I was talking through the script today, we are building a lot of weldment capacity in Malaysia. And so while it doesn't mean we're moving anyone from the Cal-Weld business because they're doing really, really well, a lot of the incremental weldments will be done in Malaysia. So in essence, yes, that business will be consolidated with the activities we currently have in Singapore and Malaysia. And I suspect though that in terms of where we are with Talon and also with just buying IAN, those entities will remain where they are, and in fact, probably won't be consolidated. It's just that as they grow, we will probably do the growing part in more advantageous cost centers.

(Operator Instructions) And the next question comes from Sidney Ho of Deutsche Bank.

Just to follow up with a previous question on the acquisition, does IAN offer products that are similar to what you offer today? Or do they have additional capabilities that you can leverage to your existing customers? Just trying to understand the SAM expansion opportunity, which I think you said $125 million for 2 customers that you mentioned.

Yes, the products are gas delivery systems, which are very similar to what we're doing today, and that is a very good thing actually because it's a direct fit, and it actually, as much as anything, is very exciting because it gets us into 2 brand-new customers. And obviously, we have opportunities to grow that particular gas delivery business, and then we also have the opportunities to put our other products into the mix in Korea, as we use that as a launching point. But they'll be good sharing of information between -- and our current gas delivery capabilities. Point of fact is that I think IAN will gain in terms of their efficiencies since, obviously, we know as much about building gas panels as anyone and probably more than them. So I think that's the way the synergies would move in regard to the gas delivery side.

Got it, but just a follow-up to that, what is the competitive landscape in South Korea right now? And any reason why you can't get to the same market share you have with those SEMES and WONIK, as you have made with the other 2 existing customers?

Well, the competitive market in Korea is one where Samsung is very anxious to see more and more of their supply coming from Korea, and so we felt we wanted to be in Korea. We felt that it was important in terms of the growth opportunity to be in Korea. And this was the methodology we chose. We felt it would be very expensive and probably unsuccessful to start our own Ichor subsidiary. First of all, it wouldn't be Korean. And second of all, we wouldn't really know how to do that. So this is the method we chose. So now, this puts us in a preferred position in Korea because they will be anxious to buy the kind of products, weldments, machining, et cetera, et cetera, that we can do. We may end up doing some of it in Korea as well and become another indigenous source to the overall Samsung supply chain. So it's a very big opportunity, and it will be leveraged into people who are on the Korean Peninsula. Our customers in the U.S. understand this. One of them has a very, very, very big subsidiary in Korea. I think it's probably $800 million or so, and this also puts us in a position to supply them since they all want to have Korean sources of supply. So we think it's important. We think it's a great opportunity, and we're very, very happy with this deal.

Great. That's helpful. My follow-up question is on the guidance, the Q2 guidance. Which part -- well, taking the mid-point of your guidance of down 3% quarter-over-quarter, which part of the business do you expect to pull back a little bit to see weldment still growing? And I think you mentioned in your previous quarter, you had expected first quarter, the core business to grow 30%, and how did that end up?

Let me give you my perspective on this. So you understood our first quarter, we anticipated being $245 million, and I'll be very blunt with you. When we looked at that in January, and we were at $183 million going to $245 million, and we knew everyone else was forecasting up at 8% or 9% or 10%, we were kind of saying, is this real? Do we know what we are doing? Well, of course, we knew what we were doing. And fundamentally, we proceeded to do a very good job of that, and even overachieved it to get to the $258 million number. When we were looking at the first quarter, we thought it was going to be $245 million in the first quarter and about $260 million to $265 million in the second quarter, and we ended up pulling in $13 million of that into the first quarter. So if you look at the half as a whole, there's no degradation at all to the total number. It's just that customers wanted a few things earlier than others, and that's the way it played out.

Excellent. Last question, I think, last quarter, Jeff, you mentioned you expect gross margin to improve throughout 2018. Is that still true, especially after the jump in Q1? What do you think will be the drivers for the improvement over the next few quarters?

Yes, I mean, I think, as you look forward, I mean, obviously, I mentioned that we had some favorability in our margin due to product mix. I wouldn't say that we're planning on that right now. But our focus is really going to be, in addition to what the new acquisitions have brought, there's still other things that we can do with those acquisitions to internally consume some of those parts. We're working on those programs, and then as Tom said, the supply chain organization is doing a very good job at looking at how to bring over -- our overall costs down on our other products outside of the Cal-Weld and Talon-type products that we can use internally. So those will be the drivers going forward. Obviously, depending on the revenue levels and stuff, you'll see some leverage up or down.

Thank you. This concludes the Q&A portion of today's conference. I'd like to turn the call back over to Tom Rohrs, Chairman and CEO, for closing comments.

Thank you, and thank you for joining us on our call this quarter, and we certainly look forward to updating you on our Q2 call, which will be in August. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Have a wonderful day.