Ichor Holdings Ltd (ICHR) 2018 Q3 法說會逐字稿

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

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 third quarter financials and outlook for the fourth quarter of 2018. After the prepared remarks, we will open the line for questions. Before Tom begins, I would like to add that we have plans to be at the UBS Tech Conference next week. The New York City Summit in December and the Needham Growth Conference in January.

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

Thank you, Claire. Welcome to our Q3 conference call. The third quarter was a significant test for our business model, and I think, we passed the test with flying colors. While revenue was at the low end of our forecast, our earnings exceeded expectations. Our variable business cost model performed much as we expected. During the quarter, we lowered our direct and indirect labor costs by about 30% through a combination of rightsizing our manufacturing operation as well as by implementing other temporary cost reductions, such as lowering overtime and taking extended time off during holiday weeks. We got ahead of the game, as we began these efforts during the last month of Q2, so they could take full effect during Q3. Because of these efforts, we're able to maintain our gross margins above 16%. We also dropped our operating expenses by over 11%, and this allowed us to keep our operating margins at nearly 10% and deliver earnings per share ahead of forecasted these revenue volumes.

We always believe that our model would hold up well during the downturn, and now we're proving the point. This gives us the confidence to affirm that we will still be able to make very good profits during this current slowdown in industry spending.

Despite a soft Q3, our year-to-date revenues are up 44% over the first 9 months of 2018 -- excuse me, over the first 9 months of 2017, handily outpacing industry growth even if we exclude the impact of our acquisitions.

Now I want to spend some time discussing what we see in Q4. At the midpoint of our guidance, we expect our revenue to drop about 13% from Q3. This is in concert with what we've already been -- excuse me, this is in concert with what has already been reported by other excellent companies in the supply chain. I should mention that our guidance reflects a meaningful incremental cut from our customers just in this last week in response to our government's actions against Fuji and Jinhua in China. The question everyone is asking these days is why our company is in the supply chain seeing revenue declines in the mid-teens or such, while the major OEMs, including our largest customers, are seeing Q4 revenues flat or even slightly up from Q3?

We have heard a lot of talk about inventory corrections. We agree that there is an understanding that our largest customer will be reducing their inventory this quarter after holding it flat during Q3. And this leads to a degree of inventory rebalancing. We will see this in Q4 in our component businesses and also among some of our smaller customers, who are not as sophisticated with their inventory management. However, we continue to believe that our revenue, particularly in our gas panel business is much more closely aligned with our customers build plans than in previous cycles. And therefore, there is another factor at play here and this is our customers' deferred revenues. During the third quarter, we saw higher level of gas panel shipments that were destined for Japan. And for our OEM customers, this revenue was typically recognized about 1 quarter after shipments. In other words, our customers have a significant amount of deferred revenue contributing to their Q4 outlook, and this is verified in their public filings. This is driving their revenue outlook for Q4 being higher, while their system build plans are somewhat lower, which in turn, drives our Q4 build plans lower as well.

I believe it is important to certify the strength of our business model, because this is the first time in the last 4 years that a reduction in capital spending is lasting more than 1 quarter. Since 2014, our industry has been in a near constant state of growth with only 2 instances of a down quarter. Now the process equipment OEMs are adjusting to several consecutive quarters of new system purchases that are off anywhere from 20% to 30% from the first half 2018 levels. The good news is that Ichor will remain very profitable during this period. We are continuing to manage our cost structure to be aligned with the demands we are seeing from our customers, while ensuring that we can respond quickly when wafer fab equipment increases, which is expected to occur in the first half of 2019.

Before I finish my discussions of Q4, I want to make a couple of points about our third largest customer. You will see from our 10-Q filings that year-to-date sales to Europe are up over 140% compared to the same period last year. ASML is doing a great job, and our shipments to them reflect this. They are not yet a 10% customer, but they are moving up on the scale and we expect to see growth again next year as the redevelopments continue to increase.

Let me change gears now and give you an update on our growth initiatives that support the incremental $100 million of revenue for 2019 that we have discussed previously. We've been putting much effort into the strategy this year and less on making additional acquisitions. As there continues to be a disconnect between the high level evaluation sought by selling companies, and of course, our current valuation. Hence, our increased focus on the compelling organic opportunities in front of us. Our capital allocation priority this year had been primarily focused on earning capacity to support these revenue growth initiatives as well as by returning capital to our shareholders through our share buyback plan. Our strategy is to increase our market share and overall customer footprint continue to be on track to deliver an incremental $100 million of revenue in 2019. We will see the first incremental market share revenue start to kick in as we exit this year.

We're leveraging our capabilities in all areas of the company. There will be share gains enrollments in precision machining, and chemical delivery and gas panels. As you can tell, I'm very pleased with the progress we are able to make -- we were able to make since our last earnings call in several of these initiatives. In our weldment business, we are qualified on the first wave of parts and we will be seeing the initial revenue ramp beginning late in this fourth quarter. The qualification process will be in multiple phases and we are currently working on the second phase, which is much larger in scope than the initial phase. While the current business environment has been softening from the first half levels, we are committed to bringing on additional capacity we need to meet the expected weldment demands in 2019 and beyond.

In our precision machining business, we are also proceeding faster than we had initially expected and we are now in the midst of the qualifying process for the first phase of parts.

First revenue for this will be next year, as this is a longer qualification process compared to weldments. In our gas panel business, we recently -- we were recently awarded incremental share at 1 of our largest customers. The revenue first beginning in late Q4.

In our chemical or liquid delivery business, we have picked up some incremental share outside of our proprietary Liquid Delivery Module as we continued to demonstrate our operational capabilities in this highly fragmented market. And while our proprietary Liquid Delivery Module sales are still very limited today, the device manufacturers technology transition is progressing well after a number of delays. And we expect to see more meaningful levels of LDM revenues in the first half of 2019.

Our IAN Engineering acquisition is still in the early innings and unfortunately, has been negatively impacted by memory pushouts in Korea. Having said that, we are in discussions with our largest customer in Korea on our Liquid Delivery Module and continue to see significant leverage to our local foothold there.

So we are on a solid path for the $100 million of incremental revenues for these initiatives. And as I said earlier, I'm pleased with where we are today. We are closely monitoring the progress for each of our growth initiatives and we'll continue to update that -- update you on our progress each quarter.

Additionally, apart from the importance of gaining share, we're seeing a great side benefit in the spirit and excitement of these projects are bringing to our teams. It's very healthy for our organization that we're able to pursue our strategies even during times when the core business was running at a lower rate. The bottom line is this. We have built a strong company with great capabilities. We have proven that our model works well in both upturns and downturns. And in fact, the downturns allows us to use our operational excellence to gain share. Business fundamentals appear to have stabilized at this point in the fourth quarter and are improving going into the first half of 2019. We believe that the fundamental drivers for continued robust levels of wafer fab equipment investments, which have been in place for last 20 years, are still in play and we are seeing a period of healthy prudence on the part of the device manufacturers, memory, in particular, to keep the supply-demand equation in check. We can now confidently say that as the industry growth record turns positives again, we will emerge from this period as a much stronger company.

So now, let me turn this over to Jeff to provide more detail around our third quarter financial performance and our guidance for the fourth quarter. 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 and tangible assets, nonrecurring charges and discrete payments 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.

Third quarter revenues of $175 million were down 30% from the second quarter and up 6.5% from the third quarter of 2017. Our Q3 gross margin of 16.2% declined as expected from the second quarter due primarily to lower revenue volumes as well as customer mix. Operating expenses declined 11.4% to $11.3 million, up 12.7% in Q2, due to the cost containment measures initiated in June. Due to maintaining our gross margin above 16% and reducing our quarterly operating expenses by over 11%, our operating margin of 9.8% represented only a 290 basis point decrease in second quarter of 2018 on a 30% decline in revenue. Our interest expense in the second quarter was $2.6 million and will increase slightly to $2.7 million in the fourth quarter. Our tax rate for the quarter was 7%, which included an adjustment related to the completion of our 2017 taxes as well as a slightly lower rate for the remainder of the year. A lower rate is primarily a result of the geographic mix of profits and benefited EPS by approximately $0.02 per share in the third quarter. Net income of $13.6 million was equal to 7.8% of revenue. Earnings per share was $0.55.

I'll now turn to the balance sheet. Cash of $33 million declined $30 million from the second quarter, primarily as a result of the share repurchases made in the quarter. During the third quarter, the company repurchased $30 million of stock or 1.4 million shares, bringing the total amount repurchased by the end of the third quarter to $60 million out of the total $100 million authorized. Since the beginning of the fourth quarter, we repurchased an additional $20 million, bringing the total for the year to $80 million. Year-to-date and 2018, we have repurchased approximately 3.7 million shares for an average price of $21.54 per share. Given a much more back-end loaded revenue quarter, our free cash flow was the use of $5 million. Capital expenditures totaled $2.6 million, down from $5.1 million in the prior quarter.

We drew down on an additional $5 million on our revolving credit facility in the third quarter, bringing the total debt to $195 million. We remain very comfortable with our level of the indebtedness, which is equal to 1.8x EBITDA for the last 12 months and 2.5x the annualized Q3 EBITDA run rate. We will continue to review our capital allocation options, making the investments needed to ensure that we develop the products and put the capacity in place to support our growth objectives that Tom discussed earlier, while balancing this with our projected cash flow generation, prudent management of our debt level and opportunities for accretive acquisitions.

Days sales outstanding increased to 34 days from the second quarter's 24 days as a result of a more back-end loaded quarter. Inventory decreased to $133.7 million, down 10% from Q2.

Now I'll turn to the fourth quarter guidance. Our forecast is for revenues in the range of $140 million to $150 million. Given these revenue levels, we expect our earnings per share will be in the range of $0.32 to $0.40. At these revenue volumes, we expect to maintain gross margins close to the Q3 level, while we continue to reduce operating expenses. Our EPS forecast also reflects a slightly lower effective tax rate and a lower fully diluted share count of approximately 23.2 million weighted average shares outstanding for the fourth quarter. Just to clarify what Tom said earlier, our sequential Q4 revenue decline at the midpoint is 17% and is consistent with other leading subsystem and component suppliers to the semiconductor capital equipment OEMs. At the midpoint of our Q4 guidance, we expect full year 2018 revenue to increase 26% as compared to 2017.

In late Q3, we made the decision to implement additional cost reductions across the organization. In doing this, our goal was to balance the responsiveness requirements of our customers with delivering sound financial results, while ensuring we continue to invest in the business to support the market share growth opportunities we have in front of us. For modeling purposes, the semi-tax rate on an ongoing basis will be approximately 11% this year, given the moderation in the U.S. profit contribution we are now expecting. Our cash tax rate will be approximately 5% in 2018.

Operator, we're ready to take questions.

(Operator Instructions) Our first question comes from the line of Sidney Ho with Deutsche Bank.

I guess the first question I have is, just trying to understand your revenue guidance for Q4. The decline is quite a bit more severe than I expected. I'm sure it's more severe than you expected. Do you think that just most of that is driven by inventory adjustment of your customer? Is there any way you can talk about qualitatively or quantitatively how much inventory of your product is still with your customers at this time?

So the -- thanks for the question. A couple of things that I would add to what you had said. First of all, I guess, in terms of where most of the key players in the supply chain are this quarter, most of them, if not all of them, are somewhere between having revenue down about 14% to 18%. If you look at just their semiconductor revenue, obviously, a number of them have businesses outside of semiconductor that we do not have. So in regard to that, I'm not surprised whatsoever. But beyond that, I would also add that given the fact that we are doing our call very late in the quarter compared to some other's recent events, such as the IP issues in China that have provided reactions from our government, are comprehended in our number. And obviously, would be impossible to comprehend in some of the others. And so I think we ought to make sure we understand that situation pretty clearly. Second, I would say this as far as inventories are concerned. First of all, there's very little, if any, gas delivery system inventory at our customers. And that was, in fact, the point I was making where there are inventory corrections. It's really in 3 places. One, it's in the businesses where we're providing components, such as weldments or precision machining and also in our much smaller customers, where they do not have the same level of sophistication, if you will, as there might be between Applied Materials, Lam and Ichor. So the inventory displacements are really more in terms of the areas of components, and also the smaller company, the smaller companies that we had purchased or the smaller customers that we have. Having said that, I think, the other point I think, which was very important is that there are still at the large OEMs despite activities around 606, the fair amount of deferred revenue activities going on. Now when business is in an upturn as it has been for the last 4 years and you track shipments versus revenue because they might be separated and different revenue rec structures, you find that the shipments are ahead of the revenues and the revenues catch up. In the downturn, that is, in fact, reversed and to the extent that there is rev rec issues certainly around shipments to Japan and certainly around new product shipments, et cetera, then you find that the revenues will be higher than the, in fact, shipments in a downturn situation. And so it's not surprising to us that we see some of that, and that would be more a function of our largest customers. So all in all, we might be talking about 1 or 2 percentage points here or there between the different key suppliers to semiconductors, it's not a big deal.

Okay. Maybe a follow-up question is, now that we are 5 weeks into the quarter, can you talk about the order trends that you are seeing in the past few weeks? It seems like you guys are suggesting that the quarter was -- Q3 was very back-end loaded. So does that suggest order trends have already normalized? And I have a follow-up.

Yes. When we say back-end loaded, July was a very, very slow month for us in terms of shipments. And it seemed to us like almost people were finally digesting all the information around Samsung whose -- and very little order activity was happening. And so the bulk of our shipments occurred in the last 2 months of the quarter. Without giving out direct numbers, I can tell you that the shipments in the first month of Q4, which is October, which is now finished, were substantially higher than the first quarter of -- excuse me, the first month of Q3, which was July. So the answer to your question is, yes, there's a lot more stability there. Having said that, there is still certain degrees of volatility. And I mentioned one of them, which surprises that come out of China without much warning. And in fact, I'm actually quite pleased that our call is late in the quarter, because we would have had quite a bit higher earnings and revenue guidance for Q4, if all of those shipments had still been in our guidance.

Great. Maybe one quick follow up and then, I'll go away. Can you talk about how big of this incremental cut from export ban? Can help us quantify how big an impact that is for you guys, for the quarter?

Well, we're not going to quantify it. It's big enough that we had to redo as this became known and as our customers started to feel the hit. This became known and we had to lower our revenue outlook by millions of dollars, but we're not going to quantify how much.

Our next question comes from the line of Karl Ackerman with Cowen & Company.

I want to circle back to the last question, and I appreciate your juxtaposing your revenue outlook for CFR and peers. But I know, we don't want to quantify the impact from trade and potentially tariffs in the fourth quarter. But how should we think about the potential disruption to your own supply chain in the event tariffs continue to escalate? And I have a follow-up, please.

Sure. I think -- and I mentioned this in the last conference call, the effects of tariffs are probably less for us than almost any other supplier in the semiconductor overall supply chain that I can think of. We have no operations at all in China. We have 1 reasonably significant supplier in China. And that is 1 supplier, who we have now the capability of actually building the parts that we had been buying from them. And so one of the qualifications that I mentioned in my prepared script, is in fact that where we are building and qualifying parts that we had been buying from China in order to completely mitigate that particular issue. So you haven't heard us talk in our remarks or in Jeff's remarks about the financials, about any impact on our cost structure or on our supply chain from China. The amount that does exist is too small to worry about.

Understood. As a follow-up, it seems quite apparent first half outlook by your 2 primary customers are fairly conservative, which should then transpire toward growth in the second half of 2019.

Right.

But I think bigger picture looking at 2019, I'd love to hear your thoughts on your expectation for incremental revenue opportunities next year at several other key customers, some of you've mentioned earlier on this call, but who appear to be in the early stages of outsourcing key gas and chemical subsystems to merchant suppliers like yourself?

Well, that's fair. And in terms of thinking that through, we do have incremental revenue opportunities. I've spent some time talking about them and I think quite a bit of detail here. And as I said, we're very positive about not only our progress on those opportunities but also the effect they'll have. They do include smaller customers increasing their gas panel business and outsourcing from, perhaps, smaller players. That's continuing. We feel very good about that. We are not obviously mentioning by quantity or even who they might be. Insofar as they have internal plans and when you have a bunch of people, who are in fact now inside a company say, building gas panels and we have a game plan to move some of them, you don't want that information being talked about very widely. So we only really talk about those things after the fact. But part of our opportunities does have to do with increasing the number of gas panels we will be building next year.

Understood. Jeff, if I may squeeze in a question for you. You talked about your willingness to control cost in this near-term period of volatility in your end markets. From here, how do you think about the incremental drop through on operating margins going forward? I mean, do you expect to reinvest those savings into R&D? I guess, how should we expect those savings to flow-through to the bottom line over next few quarters?

Yes, I think, it's a good question. I mean, I'll start from the bottom of the P&L and work my way up. But I think with OpEx, we're just going to be prudent and manage that. I mean, I think we've been pretty outspoken about trying to stay in the 5% to 6%. It's difficult to do in quarters that drop quickly and stuff. But I think you'll see that we've, from the peak, dropped OpEx a lot. And I think our gross margin flow-through, I don't want to give you a specific number, because I think you can see on the way down about how far it's coming out and then, it will come back in the same mix of that level. Having said that, the $100 million of opportunities that we're working on, most of those are at higher than kind of the corporate average margin. So they'll be accretive even on top of the flow-through that you've seen on the way up in the first half of the year, and unfortunately, on the other side in the second half. So hope that helps.

Our next question comes from the line of Patrick Ho with Stifel.

Tom, maybe first off in terms of some of the commentary you made about the different business groups within Ichor, you noted that gas panel delivery systems have become, I guess, more just-in-time in today's environment. As we look at some of the other businesses like weldments as well as the precision machining businesses that you have, are there ways to improve that over time as well and make them a more just-in-time? Or are they just inherently going to have those kind of ebbs and flows in terms of inventory builds and inventory corrections?

Yes, that's a very good question. To answer the question directly, yes, we do have opportunities to improve them. I have to -- I think maybe take you back to last year when we bought say, Cal-Weld and Talon, and we were able to get very good deals when we bought them. And part of the issue was that they were not thought to be very, very proficient suppliers by our customers. We've changed that both, mostly due to the people, they are working really hard and at the same time doing some things differently in terms of processes, et cetera, so that they are now at a point where everything they ship is on time. We've gone from maybe the 1 of the worst to the best on that regard. One of the reasons why inventory is held is because this customer doesn't trust the supplier. Part of it has also to do with the systems at work. So you have great information transfer. I think we've done a really good job in making progress in terms of the customer trusting the supplier. And I'm very, both pleased and confident that, that will help us going forward. We do have some work to do on the systems side of the equation, and that is part and parcel of the work we expect to do next year in terms of improving our overall information system structure, especially in some of these companies that we acquired. So I see a very bright answer to that question where it will be much, much more like a just-in-time process than it had been in the past.

Great. That's helpful. And just a follow-up question for Jeff, in terms of, in your prepared remarks, you talked about the flexible manufacturing strategy and that's how it's helped the gross margins actually remain at very, what I would call, stable or highly supportive levels despite the revenue decline. How do you look on a going forward basis, when business turns up again? How rapidly can you add back some of those, I guess, the labor force and things of that nature, the supply chain buy, how fast can you turn that around? Because both of you guys have been in the industry a long time, things can turn very quickly and things can turn very sharply with sudden notice?

Yes. I mean, I would tell you that we've demonstrated this. You could go back to Q4 to Q1 and the business went up considerably and we added resources. We keep critical resources onboard, so the people that are really hard to find, we make sure we maintain that skill set. I mean, the first lever is quickly is over time. I mean, we grind over time down. As Tom talked about, we've done some extended time off around the holidays. And so you can bring all of that back, so then you can actually to add your workforce without adding a person. So that really helps with the quick leverage and turn up the mountain. I think we've been -- we've had the strategy and it's working. I mean, we've done a really good job of being able to kind of rightsize the workforce to the business in front of us and we did a little bit more of that again. And -- but we always keep an eye on the ability to kind of go up a little bit. So we're not cutting to the bone.

Our next question comes from Amit Daryanani from RBC Capital Markets.

Just a couple from me. First off, I think, December quarter -- sorry, the first quarter we've seen year-over-year revenue declines trying to happen in the model. I'm just wondering, what's your confidence that both the inventory correction and the China tariff impact are really fully digested in the December quarter guide versus the rest of there might be multiple quarters of revenue declines on a year-over-year basis kind of happening?

So you asked the question at a really interesting time, especially, given the fact that I just told you about a week ago, we had another situation in terms of the impact of a company in China with export issues. So on the revenue side, it's affecting our guidance. So it's a very good question. I can't answer that we're 100% sure everything is going to be great from here on out. Now my sense though is this, I do believe that in terms of the overall digestion period, if you will, that the industry is going through, when we look at what customers -- our customers are saying and when we look at the Q1, although with a low -- relatively low revenue numbers in the supply chain across the board for Q4, I do believe that this will turn around and we'll see increases in terms of revenue in Q -- in the first half of next year. And I said that in my prepared remarks. And while I don't think the second half of next year is going to get back to a level where we were in the first half of 2018, I do believe it will add strength. So overall, I'm actually quite optimistic, although I am prepared for some continued volatility as both of the subjects you mentioned get worked through the system.

Understood. I guess on the selling part, do you see risk that some of your larger customers that perhaps have some captive capacity along with capacity review in the event this is a multi-quarter downturn, will you actually look to maybe take production away from you and take it more in-house into their own utilization rates? I don't know, if that's, no?

No. And in fact, probably quite the opposite, but it may surprise you. But their objectives and especially selling in a downturn is not to add additional fixed cost into their operation by, if you will, in-sourcing a bunch of things. They are very, very happy to have us do that and have that as a variable cost and during a downturn that only gets driven home to them. Obviously, inside every company, there is always 1 or 2 people, who feel like to paraphrase someone saying, real men make gas panels, I guess. But the fact of the matter is, they tend to do our jobs pretty quickly. So the bottom line is, I don't see any threat from that.

And Amit, it's Jeff. And in fact, in our prepared remarks, we talked about some incremental share that we'll start to see by the end of Q4, so that just kind of adds on to what Tom's saying.

Fair enough. And just finally, Jeff, I may have -- I didn't get this sound properly. Did you mention a 5% tax rate? Was that applicable for December quarter or for the full year? I didn't get that last thing, if you can just say that again.

For the full year, it will be about 11% on an ongoing forward record basis and probably somewhere between 11% and 13%, if we look out even out a year, but the 5% was cash. We still have some tax credits and deferred, other temporary items that our cash will be lower than the actual book tax rate, which -- what I was trying to explain.

Our next question comes from the line of Gus Richard with Northland.

Does the China export ban apply currently only to 1 company? Or is this multiple companies?

Gus, as far as we know, only 1 company, that's all we've heard of. It has to do, of course, with the problems around IP with Micron. I don't know if it's a unique case, but it's the only one of those that has come to our attention, either through the business channels or through for that matter, the media and hopefully it will stay that way.

Got it. And then, between deferred -- the delta between your guidance and your customers' guidance, there's 3 issues I picked up. One is the difference between shipments and deferred. And then this incremental negative from the China export ban and then a little bit of a inventory correction in certain places. Could you order those, the biggest order of magnitude to the smallest?

Well, I can say this that the export ban is the smallest. The inventory affects different parts of the business in different ways. But when you add it all up, when you look at our business, I would say that the biggest one right now is probably the inventory correction and then, the second is the difference in between deferred revenues. Having said that, and here is what you've got to be a little careful of, so we are not talking -- different companies are going to be growing their revenues at different rates. And so ASM, which announced their earnings a short while ago, had pretty bullish numbers for the quarter. But on the other hand, probably have one of the most challenging inventory situations. And so it's not always kind of -- it's not tied together in terms of which company is saying, we're going to grow revenues versus where we're saying we're not going to see growth. It changes quite a bit between those companies. And of course, since, for example, Applied Materials announces off cycle, a lot of the conversation doesn't necessarily even include them at this point. So bottom line is that all 3 those things are having -- we're seeing an impact from all 3 of those things. I fully -- because I just said, I think, those will be mitigated over time. I even went to I think, some conversation about what the deferred revenue as the business starts to turn around to the extent that they still have deferred revenue in Japan and other places, at that point that will be a help for our shipments, because I've already mentioned that deferred revenue leads to shipments being more than revenue when a growth pattern and vice versa in a downturn. So that will be around, but the effect of it will change.

Got it. And then just a quick one for you, Jeff. Tax is now about $30 million. Where do you feel you're comfortable? What do you think you need to run the business?

I mean, part of being down $30 million is, we say, we were doing some share buybacks opportunistically and I didn't want to really tap the revolver. But I would say at these levels, we've kind of $30 million to $40 million is quite comfortable. And as the business grows, I think, we've kind of proven we can operate around that $50 million level, even at the $1 billion revenue run rate. So we're not uncomfortable at these levels.

Got it. And if growth demanded more cash, you could pull down the revolver?

Oh, yes, we have plenty of room on the revolver. We also are expecting Q4 to be a good cash flow generation. Obviously, when you get a little back-end loaded, you get some receivables that remained relatively flat. We'll turn those into cash in the fourth quarter.

Our next question comes from the line of David Duley with Steelhead.

I guess, first a clarification. Could you give us the percentages of revenue from your largest customers in the third quarter?

We haven't provided that, but let me note if you go back to where they ended up last year at the annual basis, they're somewhere around 90% in total with Lam being much bigger than the other portion. So they're not changing much with the exception that Tom talked about our third largest customer has been growing quite nicely. So they're actually becoming slightly less, but we don't disclose that.

Okay. And then Tom, what gives you the confidence that early next year that you will see a snapback or a sequential growth again in the overall industry? What in markets do you see improving? Or what are you hearing from your customers that gives you confidence that, that is going to, in fact, happen?

Well, yes, the -- I don't think I used the word snapback and I wouldn't use those words. However, the -- I do believe that we'll begin to see increases on a quarterly basis and sequentially it increases in our revenue. And part of that is just the fact as we've been talking about the -- to the extent there are inventory corrections, they will be taken care of in a reasonable period of time and that will help our revenues to the extent that our customers start to see some, even slight increases in their revenues, the whole conversation around deferred revenues then turns that into a positive instead of a negative. And so you don't need much of a turnaround. And we'll see a little bit bigger end of it, same reason why we're seeing a bigger -- slightly bigger downturn during this downturn period. We do see, and I've said this a lot, we have pretty good vision into the next quarter that our customers have. Obviously, when we were looking at Q4 from the Q3 perspective, we ended up seeing an awful lot of things being pushed out into the first half of next year, which gives Q4 a much lower level than we might have thought even 3 months ago. However, those pushouts are still there. And so there have been a lot, both at the, say device manufacturing level and also at our customer level, a lot of business being pushed out of Q3 into Q4 and then even more aggressively out of Q4 into the first half of next year. And we see a lot of it sitting there, so it gives me reason for some optimism.

And which markets do you think will grow? In markets do you think will recover early next year that you're referring to?

Dave, it's Jeff. I mean, I think, when we look into the first half of next year, we're expecting improvements in logic and foundry. And I think 3D NAND will still be kind of running at these levels. But I think maybe even some DRAM uptick in the first half. It's hard to tell you, that's going to be quarter 1 or quarter 2 at this stage.

Our next question comes from the line of Tom Diffely with D.A. Davidson.

Just following up on the last question. If you see the market next year grow energies from foundry and logic and go down a little bit in percentage from memory, what impact, if any, does that have on your business?

In general, we're able to perform reasonably well regardless of whether say, memory, or logic or foundry is in favor at any particular time. And the reason is that we have quite a bit of business with both LAM, which is more memory-centric and also Applied Materials, which is more, say either Intel or TSMC-centric. And so one or the other of those is going to be doing quite well. And it's a little -- things will change a little bit, but -- and I suspect when you add them all together maybe memory is in fact the most important of those 3. So we'd certainly feel better if that was leading the charge. But as long as there's something moving forward, we're going to get a very good advantage of it.

Okay, great. And then Jeff, just to clarify, you talked about some cost-reduction programs you're going to have. But it sounds like at this point, there is no programs that would actually impact your revenue, just more of a expense control?

Oh, no, I think, we talked about the beginning initial first revenue and some of the $100 million opportunity we've been talking about. And so while it's relatively small, there is a little bit and that's -- you got to start and then that's good -- it leads to larger run rates as we go into Q1. So near-term, it's very -- it's still pretty de minimis.

Yes, we are definitely starting to see some of that in Q4. The issue is kind of simple. The important thing is to get going on it, and obviously, these things are going to go through the year. And if you were to see our charts that's low revenue -- a very low revenue in Q4 and then building in Q1 and more building in Q2. By the time you get to Q4, you're talking about $100 million, we're going to have to be somewhere in the $30 million to $40 million worth of business in Q4 because the first quarter and the second quarter are going to be less, that's how any ramp works. And so the important thing is to get going and that's what we're happy about that we're seeing. To be really straightforward about it as much as I can, and Q4 is kind of a tough revenue -- tough quarter to see these things from pulling into Q4, simply because a lot of players in the industry, including us and probably our customers, I don't know, end up taking quite a bit of time off at the end of Q4, when you get a situation like today's situation, where revenues are not a size we'd like them to be. And so I wouldn't expect to see a big positive surprise at the end of Q4 for that reason alone.

Okay. That's helpful. And Jeff, at the end of the day, what do you think the impact of 606 is on revenue this year? It sounds like there are puts and takes along the way.

Well, I can speak on our behalf. It's -- it was almost nothing because we generally ship to OEMs. So we don't ship to our end customer in Japan or something like that, where we would have to defer until they're qualified and accepted it. So for us, it's not much. And I think, you can probably read through the other filings. They have some color on how they're handling that going forward.

Ladies and gentlemen, that concludes our Q&A session. I would now like to turn the call over to Tom Rohrs for closing remarks.

Thank you very much for joining us on our call this quarter, and we certainly look forward to updating you on our Q4 call, which will be in February. Thank you very much.

Ladies and gentlemen, that concludes today's call. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.