Good day, everyone. Welcome to the Ichor Fourth Quarter 2023 Earnings Conference Call. I will now hand it over to your host, Claire McAdams, from Investor Relations at Ichor. Please proceed.

Thank you, operator. Good afternoon. And thank you for joining today's fourth quarter 2023 conference call. As you read our earnings press release and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in our earnings press release, those described in our annual report on Form 10-K for fiscal 2022 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. Our earnings press release in the financial supplement posted to our IR website each provide a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures. On the call with me today are Jeff Andreson, our CEO; and Greg Swyt, our CFO. Jeff will begin with an update on our business and then Greg will provide additional details about our results and guidance. After the prepared remarks, we will open the line for questions. I'll now turn over the call to Jeff Andreson. Jeff?

Thank you, Claire. And welcome to our Q4 earnings call. Our fourth quarter revenues came in at the upper end of our expectations at $203 million. This equates to sequential growth of 3% from Q3 within an otherwise stable demand environment. I'd like to provide some color on our revenue movements within the fourth quarter. First, the majority of the upside in revenue growth above the midpoint of guidance was essentially passed through. This is because during the quarter, we elected to take the opportunity to reduce inventory levels in order to drive strong free cash flow generation, which in turn was used to reduce our debt levels and ongoing interest expenses. We sold the inventory at zero margin. And so while this decision carries a number of benefits for our ongoing financial performance, it did have a negative impact on our Q4 gross margin. Further, our Q4 revenue forecast had incorporated expectations of improved mix compared to Q3, but instead, our revenue mix actually became less favorable and this had the largest impact on our lower than expected gross margin. Our build-to-print gas panel business, which is our lowest margin business, improved during the quarter to drive both the remaining upside to revenue as well as offset the decrease in our weldment business as our customers continue to focus on reducing inventory levels. While this unfavorable mix shift did have an impact on our gross margin, strength in the gas panel segment of the business is a very good indicator that we are coming off the bottom of the cycle. So in total, we witnessed a temporary low in gross margin performance in Q4 through a combination of unfavorable product and customer mix, the impact of inventory sales at costs and, to a lesser degree, continued E&O headwinds and slightly higher manufacturing costs. With OpEx just below the midpoint of guidance, operating profit was roughly breakeven. Interest expense came down quarter-over-quarter given our decision to deploy free cash flow towards reducing our debt levels. During Q4, we generated $35 million in free cash flow and reduced our debt levels by $32 million, while still adding $4 million to our cash balance. Given the lower profit versus forecast, with the slightly lower OpEx and interest expense and a higher net tax benefit, the net loss per share was $0.06. Now I'll turn to our outlook. There are many reasons to be optimistic about the growth ahead. First, we estimate that our exposure to memory WFE declined to just about 25% in 2023, which means we are well positioned to outperform industry growth as memory spending improves, in particular, within the NAND segment. Next, as our memory exposure has declined over the last few years, we have increased our exposure to a number of growing market segments of WFE, such as EUV lithography and FE gas panels for silicon carbide. As a result of our leadership in providing gas delivery for the EUV market, we added ASML as a third 10% customer for fiscal 2023. We anticipate that our EUV sales will continue to expand in line with unit shipment growth in the years to come. We are also pursuing opportunities to expand our exposure to the overall lithography market and believe we are well positioned to benefit from next generation platforms such as High-NA as well as win share in additional areas of lithography. We continue to shift production volume gas panels for the silicon carbide market and have been qualified on the next-generation epi systems. Our design wins for epi applications resulted in strong growth from our fourth-largest customer in 2023. And as the applications and market opportunities continue to grow in support of EV manufacturing in the years to come, we anticipate our silicon carbide exposure will continue to be a tailwind to our revenue growth. We estimate the silicon carbide market for gas delivery to be around $60 million in 2023 and expect it to double in the next three to four years. We are also seeing the emergence of new technology drivers and process inflections that require an increasing use of applications that are more highly dependent on the accuracy and repeatability of the gas delivery system. These include the growing use of certain etch and deposition techniques within advanced logic architectures, 3D DRAM and advanced packaging. We recently refreshed our investor presentation to reflect the increased use of certain of these growing applications such as selective etch, ALD, deep silicon etch, and more. We have a role providing fluid delivery to all of these applications. As EUV adoption continues to proliferate across multiple device types, our process tool customers are witnessing the need for more etch and deposition steps to help create smooth patterns and reduce line width roughness. Additionally, the growing importance of advanced packaging has revealed process challenges that require better film stress management, improved defectivity, enhanced uniformity, increased material selectivity, all of which are enabled by more precise control of gas and fluid delivery. Outside of semiconductor, specifically for our IMG business, we are also driving cross-selling opportunities at our historical gas panel customers as well as opportunities to offer Ichor’s components and capabilities to IMG's customer base in medical, aerospace and defense. As these new technologies and drivers evolve and proliferate, we see opportunities for Ichor to expand our revenue potential and continue to add breadth and diversification to our customer base. All of these factors build a strong story for Ichor's revenue growth as the industry recovery accelerates. But it's our proprietary products, including our next generation gas panel that we are most excited about as our key initiative to drive overall gross margin expansion within our business. We have been qualified on three applications and are now supporting our customers' evaluation tools that are shipping to a device manufacturer. Our latest investor presentation includes a slight adjustment to our target model to reflect the higher level of investments we are making in R&D in order to develop additional proprietary products, which we believe in turn can drive our gross margin north of 20%. We are focused on the development of proprietary products that support our customers' long-term technology growth roadmaps. These periods of lower demand provide both Ichor and our customers the ability to work on new qualifications. We continue to make very good progress in our key focus areas. These include our next generation gas panel and qualifications of our proprietary machine components. I'm very pleased with the progress of our new gas panel as we are now moving into qualifications at the device manufacturers. We continue to work with multiple customers and expect to add additional customer evaluations over the course of 2024. Our new gas panel contains about 75% proprietary Ichor content compared to around 10% today, which will drive significant expansion of our gross margin profile. In the next several months, we expect to ship gas panels that will support five additional systems for end-user customer tool evaluations. This is a major milestone for the program. Our best estimate of when production systems will begin is late 2024. In our proprietary machine components, we continue to win new qualifications across our customer base. The ramp is taking longer as we work through the inventory on hand, but we are qualified and expect this to positively impact our first quarter gross margin and continue over the course of the year. In summary, I'll remind everyone here today that our revenues tend to recover more sharply when industry spending rebounds. Furthermore, our business model and financial profile tend to generate significant operating leverage as revenues grow. Current industry expectations are that the business environment for WFE will persist at these levels through the first half of 2024. And given the modest mid-single-digit growth outlook for the full year, 2024 WFE will likely be more weighted towards the second half. Given our current visibility, we also expect our revenue run rate to continue around the $200 million level through the first half followed by the beginning of a revenue ramp in the second half. As we look ahead to an expected strong recovery year in 2025, we look forward to ramping revenues back towards the $250 million to $300 million plus level in 2025. We expect to be able to deliver significant earnings growth as revenue volumes increase, which is why we continue to make critical investments in our business in support of our future growth. With that, I'll turn it over to Greg to recap our Q4 results and provide further details around our Q1 financial outlook.

Thanks, Jeff. To begin, I would like to emphasize that the P&L metrics discussed today are non-GAAP measures. These measures exclude the impact of share-based compensation expense, amortization of acquired intangible assets, nonrecurring charges and discrete tax items and adjustments. There is a useful financial supplement available on the Investors section of our website that summarizes our GAAP and non-GAAP financial results, as well as a summary of the balance sheet and cash flow information for the last several quarters. In the fourth quarter, our revenues were $203 million at the upper end of guidance and up 3% from the prior quarter. With customer demand remaining relatively stable from Q3 levels, the majority of upside in revenues compared to the midpoint of guidance reflected pass-through inventory sales at zero margin as Jeff discussed. With the less favorable product and customer mix, the impact of the sale of our inventory at no margin, and some continued E&O and slightly higher manufacturing cost headwinds, our gross margin was 10.4%, which was well below our expectations. We anticipate a significant improvement in margins as we move through 2024. Q4 operating expenses were slightly lower than Q3 at $21.2 million and our operating income for Q4 was roughly breakeven. Our net interest expense was $4.7 million and our non-GAAP net income tax benefit exceeded our forecast at $2.8 million. The resulting net loss per share was $0.06. Now turning to the balance sheet. At the end of the quarter, our cash and equivalents totaled $80 million, a $4 million increase from Q3. We generated $37.6 million in cash flow from operations. And after deducting $2.3 million of capital expenditures, our free cash flow was $35.3 million. Free cash flow for the quarter was particularly strong given the $37 million sequential decrease in accounts receivable, which drove DSOs to only 30 days. Inventory decreased to $21 million during the quarter to end the year at $246 million and inventory turns increased to 2.8. During the quarter, we paid down $31.2 million of debt and our net debt coverage ratio currently stands at 3.4 times. Now let's discuss our guidance for the first quarter of 2024. With anticipated revenues in the range of $190 million to $210 million, we expect our Q1 gross margins will improve to a range of 13% to 13.5%. At this time, we expect Q1 operating expenses to be approximately $22.3 million. The increase reflects the seasonal impact of payroll taxes resetting, audit fees and other variable compensation costs. As we move beyond Q1, we expect OpEx to remain at a similar level as we are making targeted investments in IT and R&D. Net interest expense for Q1 is expected to be approximately $4.3 million. Looking beyond Q1, we expect our net interest expense to continue to decline as a result of our focused efforts on reducing our debt levels as well as an anticipated favorable reduction in our interest rate later in 2024. For modeling purposes, you should model interest expense for 2024 to be approximately $16 million. We do not expect to record a tax expense or benefit for Q1. For the full year, we are forecasting a non-GAAP effective tax rate of 5%. Operator, we are ready to take questions. Please open the line.

Our first question comes from Craig Ellis with B. Riley Securities.

I wanted to start by clarifying the gross margin line item in the fourth quarter and understanding how those dynamics influenced 2024. Greg, can you quantify the specific factors that contributed to the significant decrease in gross margin? Additionally, could you help us understand how these factors will evolve as we look ahead to 2024?

I'll let Greg chime in at the back end. But I think given the magnitude of the miss, I think I'd like to kind of walk you through it. I think, first of all, we elected to sell some inventory at cost. As we looked at our inventory in months of supply, we had some inventory that we were able to go ahead and sell. Had we built that, that piece would have generated about, say, $1 million of kind of incremental profit off the bottom. And so as that side of our business, really the depth of the component side has been down, this quarter’s mix was primarily kind of a much lower level of weldments than we had seen before. So that mix, offset by the gas panel mix was the largest driver. So as we look forward, I think in the gross margin that we've talked about, we see the mix staying relatively stable and coming out of this. And as you kind of look into next year, all of the key initiatives that we've been driving around internal supply and developing new products that we can integrate into our gas panels are going to help us recover some of this stuff. We also will see some normalization of some of the inventory reserves that have been bigger than we've seen in the past as well. And what I would like you guys to leave with, and I'm sure this question will come up again, is as we kind of recover the $225 million or higher, which is what we maybe see late in the fourth quarter or around the fourth quarter, that's kind of our outlook. At this time, we think we can get it back up to around 17%. So from 13 to 17, you're going to see increases as we kind of go through the calendar year. Hope that answered your question?

Yes. And then I wanted to follow up on your comments on the new gas panel product. And I like the fact that you've got that much higher content there, and that's going to be a gross margin tailwind, Jeff. As you start to ship that later this year, can you just help us understand how the mix of that newer product will feather in with all the existing product that's part of current customer programs right now? Said differently, how abruptly can that ramp to significant majority of gas panel mix?

As we are evaluating these qualifications, the first three applications we secured are primarily market share gains. These are applications we haven't previously had, and moving forward, I anticipate that later in the year, we will begin to see low single-digit revenue. It's really in 2025 when these qualifications will start to accumulate across multiple customers and we will see significant growth. Additionally, many of the internal components within the gas panel, which is fully configured with about 75% of our content, can still be applied to the legacy gas panels. Currently, there are numerous components such as valves, fittings, and substrates that we can still qualify. This internal supply will begin to grow throughout the year. While the qualification process has been somewhat slower due to our inventory position and outstanding orders, it will contribute positively to our performance in Q1 and beyond. The revenue from these components is expected to reach tens of millions of dollars, and you will see the impact of these before we achieve the full integration of the gas panels, which will affect our gross margin in 2024.

Our next question is from Brian Chin with Stifel.

To clarify the gross margin, we are projecting around 14% for Q4, with the non-GAAP figure at 10.4%. If we assume no revenue growth affects the gross margin, that would only contribute about 30 basis points. There are still several hundred basis points to consider. Can you provide clarification on how the increased inventory reserves and less favorable mix, among other factors, contribute to this difference?

When you examine the product and customer mix, I would estimate that about two-thirds of the challenge stemmed from that. The gas panel business and the build to print segment, as I mentioned earlier, have our lowest margins compared to our higher-margin products. We did not achieve the mix we aimed for at the beginning of the quarter. In terms of the pass-through, consider that to be approximately 50 basis points or 1 million, if my calculations are correct. Additionally, the other headwinds we faced, which were between 13% and 14%, reflect where we ended last quarter versus our goals for this quarter. This was primarily due to higher-than-expected excess and obsolete inventory and a slower ramp-up of certain internal supply parts, which should recover again in the first quarter.

Yes, it does. To add to that and also address my second question, regarding the reasoning behind the pass-through, it seems to prioritize cash flow over profit and loss for that quarter, which leads me to my next point. Looking at your customers' balance sheets, it’s evident their inventory is improving, yet they still hold two or more quarters' worth of inventory. However, when examining the excess of your products, including gas panels, finished goods, machine components, and raw materials, how significant is that excess? Is this part of the reason for your confidence that the destocking will mainly conclude in the first half?

I think you got a couple of parts. So first, this decision that we made specifically was around parts where we saw the usage, the months of on hand, to be well out beyond a year. And so we took advantage of that to generate cash pay down. And it did have a P&L hit, we would have had to wait a while before we could consume that. So that was a little bit around time, value and money and our ability to pay down some debt and the fact that it would have taken us a while. So the second part of your question is really around what's our confidence that will be through kind of our customers' burn down. I think it obviously varies by, I'll call it, kind of business segment within ours. I think, in general, gas panels, they're done, right? Like most of this is going to be in the weldments and machine components side. I think it will carry to some degree through even this year. Our inventories are at about half our peak year inventory turns. So we're clearly carrying excess inventory that we're looking to ensure that we can burn it down. So we see a path for how we get back to more normalized turns, but it may take just a little bit beyond the end of this year to get there.

Our next question is from Charles Shi with Needham & Company.

First off, congratulations on winning the Applied Materials Supplier award. I have a question, Jeff, about the '24 revenue progression. It seems like you're suggesting a run rate of around $200 million for two quarters. Until June and December, do you think you can reach that $250 million? That's quite a significant increase. Are you expecting September to fall somewhere in between? The reason I ask is that one of your two largest customers, Lam Research, recently mentioned a modest recovery, although they anticipate a stronger finish to the year. It appears that in Q3, they are not expecting much of an uptick. Are you noticing any early signs of recovery in Q3? It feels like you're hinting at this in your description of the year. Can you provide any insights on that?

That's a good question, Charles. As I mentioned earlier, we're aiming to reach those levels of $250 million to $300 million, which is really looking ahead to 2025. I want to clarify that I don't expect Q4 to hit $250 million; I think it will be more in the $225 million to $230 million range based on our current visibility. For Q3, I anticipate it will fall somewhere in between. It's important to note that we're still managing inventory reduction, which will affect our results since we're dealing with longer lead time parts that will drive growth in gas panels. However, we remain confident that 2025 will be a strong growth year for us and our customers. I expect that some of this progress will need to happen in the latter half of this year to support the beginning of their fiscal years and revenues. I hope this clarifies our outlook for the year.

Maybe the other question I have would be, I mean, between the two largest customers, I think that the prior person ahead of me asked about the Lam Research still carrying a good amount of inventory. Applied Materials, it looks like their inventory level seems to be relatively okay. Do you see a differential in terms of your revenue coming from Lam versus Applied that this year as your revenue to Applied is slightly better than them? The reason why I ask this is I really just want to figure out where the upside of your revenue from the two largest customers is more likely to come from which customers?

Probably some stuff I can't specifically answer at a customer level. But certainly, our two largest customers had different profiles. And I would say largely around where they were positioned primarily in the memory market. I mean, we do know our largest customer at a very, very high level of market share in the 3D NAND. That recovery is something when that comes back, then you would actually probably see that side of our business accelerate faster than foundry logic. Having said that, foundry logic, we view as remaining fairly strong into next year. We don't see a massive drop-off in China shipments, and we're not getting any of those signals from our customer base as well. So beyond that, I don't want to get too specific around customer profiles.

Our next question comes from the line of Krish Sankar with TD Cowen & Company.

This is Robert Mertens on the line on behalf of Krish. I guess just the first one is, if you had any additional color on the expectations for the component business this year. I know inventory levels have seemed to be a headwind. But if you’ve seen any change over the last few months? And then on top of that, just sort of what the tailwinds from design win ramping would look like this year or if that's more of a calendar '25 story?

The component side of our business is showing consistent expectations quarter-over-quarter in the first half for machining. We anticipate this will begin to change soon. Weldments will likely last a bit longer due to their higher inventory levels in the value chain moving forward. Overall, our components business, which was about 20% to 25% of our operations back in 2021 and 2022—closer to 25%—is currently running in the mid to high single digits. This gap in our mix needs to be addressed to help us progress towards our goal of achieving a gross margin around 20%. We expect that to happen in 2025 as we build on our new design wins and the recovery of our component mix with gas panel 2.0. Regarding the wins we've had so far, I would estimate them to be in the tens of millions of dollars, and we foresee a considerable increase in these, which will assist us in bringing our gross margin back to 17% when we exceed 225 by the fourth quarter.

And then maybe just one more. I know you talked through the next-gen gas panels. I just want to make sure I heard correctly that with those evaluation systems and shipments, you were thinking maybe a low single digit millions in the later half of this year and then the more material revenues should be next year. Did I hear that correct?

You heard that right. We are qualified, and depending on our customers' success and how quickly they adapt if the market begins to grow, I expect that number will improve.

Our next question is from David Duley with Steelhead Securities.

I was wondering if you could elaborate just a little bit more on your silicon carbide opportunity. I think you have one customer now, and is there a possibility to sign up new customers in the next few quarters? And are there other opportunities for you guys outside of epi in silicon carbide?

Yes, there is still opportunity for us in the deposition side. While it may not be similar to what we have with our current customer, there are other companies involved in different processes with whom we have had some initial discussions. I believe the larger opportunity lies in the implant side of the business, where discussions are ongoing. We recently won a small weldment business, which serves as a starting point with one of the implant suppliers, and we plan to pursue that further. This could lead to significant growth beyond our initial customer in epi silicon carbide.

Do you think you can win further epi customers because there's like, I think, four or five of those guys?

I believe there are three key areas we are focusing on. This year, we’ve just begun discussions that started late last year, and we haven't conducted thorough evaluations yet. It's not out of the realm of possibility, but it is likely that this will be a revenue driver for 2025 rather than 2024. For 2024, we would need to approach it similarly to our new gas box initiatives, which are just the start of our conversations about potential opportunities. When we engage with our customers, they recognize the extensive capabilities we offer as a company, including gas panels, weldments, and machining, alongside our ability to manage a significant portion of their supply chain. This understanding helped us rapidly secure our first application, which has since evolved into multiple generations of tools with our initial customer.

Now I guess the other question I have is if your large OEM customers are communicating with you about preparing for the ramp in your core business for the second half, or if it's just the usual rolling forecast. I'm curious if there's a bit more substance behind the enthusiasm for the second half.

I would say it's maybe less about the rolling forecast and more about the conversations we're having in preparation of the growth that they see kind of coming out of Q4 and into 2025. So I think it's a very consistent message out of our top four customers. Thank you. As Charles kind of noted, today, we won an award from Applied Materials for a supplier excellence award in quality for 2023. This is quite an honor to be recognized by the company and the contributions we have made to our customer over the past year and looking forward to future years. So it's always great to see these awards occur. I want to really thank everybody for joining us on this call this quarter. I'd like to thank our employees, our suppliers, our customers, our shareholders, for their ongoing dedication and support as we continue to navigate this highly dynamic business environment. We look forward to updating you again on our Q1 earnings call scheduled for early May. Operator, that concludes our call.

Thank you. This concludes our call for today. You may disconnect your lines at this time, and we thank you for your participation.