Good afternoon, and thank you for joining today's second quarter 2025 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 year 2024, 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 and 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 Andreessen, our CEO, and Greg Swite, our CFO. Jeff will begin with an update on our business, and then Greg will provide additional details about our results and guidance. Jeff will make a few additional remarks before opening the line for questions. I'll now turn over the call to Jeff Andreessen. Jeff?
Thank you, Claire, and welcome, everyone, to our Q2 earnings call. Thanks for joining us today. This afternoon, along with our second quarter earnings release, we announced our CEO succession plans, which I will further discuss towards the end of our prepared remarks. Second quarter revenues of $240 million came in at the upper end of our expectations, reflecting a modest acceleration of customer demand into the first half of the year. With the Q2 revenue upside driven primarily by our lower margin gas panel integration business, Q2 gross margin of 12.5% was at the lower end of our expectations for the That being said, through most of the second quarter, we were on track to achieve the midpoint of gross margin guidance, and if not for the hiring challenges we experienced starting halfway through the quarter, which limited our output of machine components, today we would have been announcing Q2 gross margins of over 13%. We continue to face hiring and retention challenges, which has continued to impact our output volumes in the third quarter to date. Enramping internal supply is a key enabler of the strong gross margin flow through. Therefore, as we focus on securing the necessary headcount in our U.S. machining operation, we are proactively reducing costs elsewhere in the organization. As we reflect on the customer demand environment, industry and peer reports continue to indicate that 2025 will be a modest growth year for wafer fab equipment or WFE and with our first half revenues up 20% year-over-year we continue to expect our revenue growth this year will outperform overall WFV growth for 2025 so while revenue growth outperformance versus the industry is an expected highlight of our financial performance this year the most critical operational priority for I-Corps in 2025 is bringing our internal component supply fully up to speed in order to meet strong customer demand and increasing momentum qualifying our proprietary component products. This is what we absolutely must accomplish in order to see the benefits of the new product wins through the P&L via strong flow-through and gross margin expansion. Our new product strategy is taking hold and gaining traction. With continued new customer qualifications, as we successfully ramp our internal supply, we are confident that our strategies will materialize in stronger gross margins as we progress forward. In order to track our progress, here are some key benchmarks to look for from us over the next few quarters. The first is building momentum in our top line. Year-to-date, further expansion of our revenue scale beyond the current $240 million run rate has been stalled by a slowing EUV build, reduced investments by a major U.S. semiconductor manufacturer, and the continued lack of demand for additional capacity in some of our non-traditional markets, such as silicon carbide. In order to see our structural improvements to gross margin materialize, we need the additional tailwind of revenue momentum above the $250 million run rate, which is what we had planned for in the second half of 2025 as we entered the year. The next sign of progress will be continued qualifications of our new products by the end device manufacturers. And finally, progress will continue as we provide updates that we have scaled our internal supply to sufficient levels and that our output is aligned with our customer needs and cost targets. Turning to our momentum qualifying additional proprietary components with our key customers, in Q2, we made meaningful progress across multiple fronts, qualification, commercialization, and market expansion. Most notably, we achieved a major milestone with the successful qualification of our flow control product at a key end user this marks our first end user qualification for this product line which serves as a strong validation of its performance in high demand production environments we believe this success lays the foundation for broader adoption and additional end customer qualifications we also reached an important inflection point with our valve product line during the quarter we secured a third customer qualification and we're actively working toward a fourth that said we are intentionally pacing the fourth qualification to align with our internal capacity ramp this ensures that we can support volume demands without compromising quality or delivery commitments importantly we began shipping valves and production volumes this quarter, a key milestone in scaling commercial success and realizing the margin benefits of internal sourcing. In parallel, we are making steady technical and operational progress on two new proprietary component products, which are designed to expand our addressable markets for both flow control and valves. These next-generation offerings will allow us to serve a broader range of applications and customer needs, further increasing our value across the semiconductor supply chain. As we move into the second half of the year, we remain focused on expanding manufacturing capacity and aligning production to meet our targeted product margins. For Q3 specifically, with our current visibility, our revenue guidance remains in the same range as we provided for Q2 a quarter ago. The customer demand environment has remained relatively steady since May, and our full-year outlook is largely unchanged. The key differences between how we are looking at 2025 now compared to a quarter ago are, first, the Q2 revenue pull-in now indicates 2025 is likely to be a slightly front-half-weighted year, While the second half customer demand environment hasn't changed materially, I would also add that the accelerations of demand leading to a stronger second quarter have now slowed a bit in advance of an expected slower quarter in December for etch and deposition. Additionally, we are marginally less confident about a few areas of potential upside materializing within this calendar year. Next, and more meaningful to our outlook, we are taking a more conservative view to our expected hiring ramp in guiding gross margin, and for the third quarter, we are providing a similar range of expectations as we did for Q2. While we remain wholly confident that our strategy will materialize in steady progress towards our longer-term gross margin targets, we need to have improved visibility toward a more meaningful and sustainable top-line sequential growth in addition to achieving our product cost targets before we will significantly raise the bar on our expectations for gross margin expansion. While we currently expect to deliver sequential improvements to our gross margin for the fourth quarter even on similar revenue levels at this time we will refrain from guiding significantly stronger gross margins until we deliver the expected gross margin performance for Q3 with that I'll turn it over to Greg to recap our Q2 results and provide further details around our financial outlook Greg 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, amortization of acquired intangible assets, non-recurring charges, and discrete tax items and adjustments. There is a useful financial supplement available on the investor 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. Second quarter revenues were $240.3 million at the upper end of guidance, up 18% year over year and 2% lower than Q1. The gross margin for the quarter was 12.5%, an increase of 10 basis points from Q1, but at the low end of expectations largely due to hiring challenges, limiting our ability to achieve the expected ramp of our machines components with operating expenses roughly flat to q1 at 23.8 million dollars operating income for q2 was 6.1 million dollars our net interest expense was aligned with our expectations at 1.6 million dollars however our non-gap net income tax expense of $3.2 million came in well above forecast due primarily to the acceleration of the Pillar 2 tax into Q2. For the full year, our estimated income tax is currently $5.6 million compared to the $6 million estimates as of May. Therefore, while the full year tax estimate is largely unchanged, the acceleration into Q2 impacted EPS by seven cents. The resulting EPS for the quarter was three cents per share. In our gap results, you may note that year-to-date in 2025, we have been executing towards various strategies to consolidate and align our global operations capacity with our customers' largest global production and supply chain centers. Between Q1 and Q2, we recorded charges of $5.7 million for exit costs related to personnel, fixed assets, and facility-related costs. We anticipate there may be additional charges in Q3 and Q4 as we complete the analysis. Turning to the balance sheet, our cash-in equivalents totaled $92 million at the end of the quarter, down $17 million from Q1, reflecting working capital investments as as well as $7 million in capital expenditures. Our planned CapEx investments for 2025 are still expected to total about 4% of revenue. Our total debt at quarter end was $126 million and our net debt coverage ratio was 1.5 times, well below any potential threshold for covenants. Now I will discuss our guidance for the third quarter of 2025. With anticipated revenues in the range of $225 to $245 million, we expect our Q3 gross margins to be between 12.5% and 13.5%. We expect Q3 operating expenses to be approximately $23.7 million, and we expect Q4 OPEX to be at a similar level. Net interest expense for Q3 and Q4 are expected to be approximately $1.6 million per quarter. We expect to record a tax expense in both Q3 and Q4 of approximately $900,000, reflecting our current forecast for a non-GAAP tax expense of $5.6 million for the full year. Finally, our EPS guidance range for Q3 of $0.06 to $0.18 reflects a share count of 34.4 million shares. I will now turn the call back over to Jeff.
Thanks, Greg. Before turning the call over to Q&A, I'd like to say a few words about the CEO succession plan we announced today. I joined the company in late 2017 as CFO, and after first becoming the company's president, I took over as CEO just as the COVID shutdowns were beginning to roll out in early 2020. There's no question that the operational challenges of the past five years have been greater than at any period in recent memory, and I am immensely proud of our successes winning multiple new product qualifications after embarking on I-Corps' first ever branded product development strategy. During the same period, we have integrated five acquisitions and successfully completed the recapitalization of our balance sheet. I love this company, and I strongly believe that we have many opportunities to transform the company's profit generation as we continue to bring our branded products to market. I also believe that the time has come to begin the search for a new leader who can drive I-Corps to new levels of success. I-Corps is a strong leader in the industry, enjoying tremendous customer partnerships and an amazing team of employees around the globe. This strong foundation will be attractive to the next leader of I-Corps, and in order to ensure a seamless transition, the board and I have entered into a transition agreement where I will remain CEO until my successor is identified and then continue as a strategic advisor to the company and our new CEO to assist in the leadership succession process. We have an excellent board of directors, and I have full confidence that they will find an outstanding new leader for the company. Operator, we are now ready for questions. Please open the line.
Operator
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. We ask analysts to limit themselves to one question and a follow-up so that others have an opportunity to do so as well. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Brian Chin with Steeple. Please proceed with your question.
Hi there. Good afternoon. I guess, firstly, Jeff, definitely wish you all the best. It sounds like you'll be continuing on these calls, but as you wind your time down here, just wanted to thank you for that. And also, thanks for letting us ask a couple questions. Maybe to start with gross margins, can you unpack the dynamic that occurred kind of like mid-quarter in Q2 that took you off that trajectory? Maybe that could have taken you towards the midpoint or so of the gross margin guide, but maybe kind of unpack what happened there in terms of the hiring and maybe some turnover.
And then tied into that, I guess, is how that relates to sort of the uptick in OPEX sequentially above plan. yeah so um you know at the beginning of the quarter we were we were doing pretty good at bringing people in and then as you bring them in these are very unique jobs this is mostly our u.s operation in minnesota um a lot of them go into the clean room to do the uh post we'll call it post machining i'd say we did a pretty good job of getting the machinists we have a lot of machine parts but we couldn't get them all built they're all off shift and we had some turnover that was offsetting what we were bringing in so by about the middle of the quarter or so we just really hadn't netted as many people as we needed and it kind of continued towards the end of the quarter with very few folks we've changed some approaches to how we hire in the off shifts and shift differentials things like that so I would say entering this quarter it's a little bit better but it's where we would have wanted to be a quarter ago so it did start pretty good but then the retention side of it once they put on bunny suits and get in a clean room we weren't able to retain everybody that we we hired during the quarter got it and that's sort of the kind of the spike up in the opex and sort of coming back down in q3 well the fight up in the opex was a little unique around some of our we've we've had some higher health care costs we had originally planned there in the year, everything else was pretty much aligned with it. But it's not related necessarily to the hiring in Minnesota. And having said that, you know, most of our, had we stayed on the hiring trajectory that we saw in the first say month or so without the turnover, I think we would have been announcing pretty better than our midpoint of guidance is how we looked at it. So we've taken a little more conservative approach on our hiring ramp this quarter, and that's why the guidance is around 13 percent for gross margin.
Operator
Our next question comes from Krish Sankar with TD Cohen. Please proceed with your question.
Yeah, hi. Thanks for getting my question. And just same here, good luck. And you're definitely going to miss you and your insights. I have two questions. One is on demand. Just kind of curious, into Q3, where are you seeing the demand coming in from? If you have that visibility, is it coming from NAND? Is it China?
You know, I understand you already said that EUV is lower and probably Intel WFE is lower but I'm just kind of curious where do you see the incremental demand coming from I'm gonna add a follow-up yeah I think what would you say incremental or the strength of demand into the second half is is what you probably or I think assuming I think foundry logic still strong high bandwidth memory you. We can see it. I'd say maybe the advanced packaging has plateaued. And then I think the NAND is continuing. We can clearly see that the NAND investment is continuing into the back half. I mean, when you look at us pulling about $5 million forward, you know, it's slightly down in the back half. And probably the biggest changes really have probably been around, uh again a little bit of a reduction in our um litho business uh which is well understood and build volumes are down and then um i would say a large u.s oem that continues to push out some of their um capex investments here in the u.s and i'd say everything else kind of held its own got it got it and then on the gross margin side you know i'm just kind of curious because you know this quarter I understand the machining employment is an issue last quarter so the proprietary content I understand some of this is probably own
execution versus what you can manage but bigger picture is there any other issues you see on gross margin in other words are your big semi-cap customers trying to put more pricing pressure on you compared to in the past given that their customer base is consolidating or as any of the filter down or do you think this is all manageable and just like as you termed it last quarter growing pains I would say our inability to execute and get the ramp to meet the customer demand that we have in front of us is hitting us both in the profitability we could get with the revenue numbers that we were projecting as well as as we talked about on the last call we're still buying some
externally that we're eventually going to make those two will move the needle fastest. I would say pricing pressure is always there. It hasn't really changed very much over the last year or so. It's always something you try and work on with your customers, reducing their costs and stuff. I would say from a tariff perspective, that's getting passed on. It's a lot better understood now. And so I think that that is well understood by our customers, that that's something that'll be passed on. Thanks, Jeff. Thanks, Chris.
Operator
Our next question comes from Craig Ellis with B. Riley Securities. Please proceed with your question.
Yeah, thanks for taking the question. And Jeff, I'll echo the sentiment of the other two analysts just expressing thanks for all the help over the years and wishing you the best as you evolve to the role at some future time. Yeah, you're welcome. I wanted to just go back to the last line of inquiry because it sounds like there may be some issues just impacting your ability to deliver product at the time that you'd like. And so the question is, are there any market share issues that you've seen arise, either as a result of some of the things that surfaced in 1Q or any of the hiring or retention-related issues that you're seeing in 2Q? Well, I'd say from a market share, it's largely, you would think about it, the internal supply. when you're still buying some externally we're not capturing that market share until we get the operation ramped up and so that's where we're seeing it I would say kind of what we would call on our external revenue we're not seeing any shifts there got it and then I just wanted to go back to the demand view and the fact that we might be down a little bit second half half on half I thought we had heard from another large front-end company, a view that WFP this year was evolving to a higher level, more positive level, when potentially leading towards 10% WFP growth versus 5% your revenues would track well versus that. But I'm just trying to reconcile the dissonance between those two and wondering if there's any help you can divide?
I don't know that we disagree with them. I think we've always kind of thought it was going to be 105 or better. I think the wild card seems to be China again is a strength which will benefit as our customers sell end users and things like that. But our growth year over a year is still outpacing that level of WFE. so I don't know that it's materially changed. I will tell you there's a wide range of expectations out there. Some are higher than the kind of the five percent to ten that have been discussed on prior calls. Thanks, Shai. Okay.
Operator
Our next question comes from Charles Shai with Needham & Co. Please proceed with your question.
Hi, Jeff, Greg. Hey, Jeff. Similar to other analysts, I really enjoyed our conversation on the calls and in other various meetings with you over the past few years. I appreciate that.
Yeah, maybe a question about the remainder of the year, the outlook, looks like you are basically saying versus 90 days ago, there is some conservatism, that's an incremental conservatism out there. One thing you said really caught me. I think you said there were some upsides for the fiscal year you thought that would materialize but looks like it's not. Sounds like it's more about revenue and may I ask what were the upsides you were expecting a little bit earlier this year that you're not seeing?
Yeah, good question. And I think what we've seen soften, we thought we would start to see build rates in our EUV business start to go up in the fourth quarter. We haven't seen that yet. And I would say we've seen, and you know we don't see all the sell-through, but we've seen some of the US OEM stuff shipped out of fiscal year 25. And so those are probably the two biggest catalysts to, I don't know, it's about a $5 million haircut in our outlook from a quarter ago. so versus 950 or 960 roll up that's a pretty small range there could be things that pop up into the fourth quarter and we'll give you an update on that on the next conference call but those are the two big moving pieces we've seen since the last call god I got it so a little bit little a little bit deaf and edge sounds like that's not worth that upside is that no longer really seen at the So Jeff, the other question, you said you now expect the second half going to be slightly
lighter than first half. I would think before Lam reported, I would agree with you about that, but now Lam has a huge Q3 guidance upside and they no longer see second half being really lighter than first half. and if I look at AMAT and other customers of yours, I'm kind of scratching my head a little bit, because almost no customers of yours are actually seeing second half being lighter right now. So how do I spread the differences off here, and any insights there? Thanks.
Yeah, well, one is I think it's a relatively small moving number versus our last time, And I think some of this is really about the timing of when we ship, okay? So we ship about a month before they can recognize revenue. And I would say we had a pretty healthy tail end of the quarter, which is why you saw the $5 million pulled in. Had that not pulled forward, then this is mostly about timing. We'd be pretty equally weighted. And our customers don't – remember, our customers don't have exactly the same profile of earnings, earnings revenue, excuse me. Each one's a little bit different. So I'd say we're pretty aligned to what we see at each one of those and what they talked about.
Thank you. Maybe the last question, I think you didn't really bring it up this time. It's about tariffs, especially the steel and aluminum related tariffs. Are you seeing any impact or any change in your view on the degree or magnitude of the impact?
Yeah, it's in Section 232 is what you're talking about. It's 50%. The original 232 has got duty drawbacks. So we work with our customers and we pass it on and then they are able to draw it back for whatever leads to US. The second wave that started in, I think, April, you can't do duty drawback. And that's where we're seeing it and passing it on to the customers. I would say the regulations are much more clear now. It's not 100% of the value that comes in. It's driven by weight and the percentage that's non-U.S. source metals. And so we've done a lot of work on that area. And so we're working to reduce the impact across our supply chain and customers. So it hasn't changed, but I think we have clearer views of how to manage it.
Thank you. That's all from me.
Operator
Our next question comes from Tom Disley with DA Davidson. Please proceed with your question.
Yeah, good afternoon. Thank you for a couple questions here.
Jeff, curious, you know, the issues that you're seeing with both the hiring and the retention, is this a new issue or is this something you battle constantly? i would say um we have ramped our machining operation in minnesota uh in the past i mean go back seven eight years we've had different cycles and um and this has been a little bit more challenging because uh we were chasing machinists now we have what we would call post machining operations so a lot more assembly work and things like that where you're in the clean room and they're off shifts so we run 24 by 7 there so they've been a little more challenging than the last two ramps I would say is it just a
matter of you know I guess finding the people who are willing to do the job specifically or is it you know higher wages or what are the options here well wages we can measure and adjust for and we do that annually and then well if we look at it during the year if we see any kind of compression in skilled workforce.
A little bit, but not a whole heck of a lot there. I would say it's the off shift and it's the clean room and a bunny suit and all that stuff. And so we've done a better job at ensuring they understand what that's really like before they take the jobs and move into it.
Okay, got it. Makes sense.
Then as a follow-up, Greg, you know, one of your peers talked about a pretty big tax impact from the one big beautiful bill this year and you kind of touched on it very briefly but i'm curious as you go through that new bill uh are you seeing any meaningful tax implications going forward um hey tom good question um not on the near term uh mainly because of our where we are in our tax position in the u.s we will not see at least for a period of time any material benefits on on the various factors that we could take the benefit on like appreciation things like that so there is no benefit for us at least in the near term that we're anticipating okay yeah that'll flow through the pnl because of the nols we'll take advantage of it and use it later.
So, yep. Okay. Makes sense. Thank you.
Operator
Our next question comes from Christian Traub with Craig Hallam. Please proceed with your question.
All right. Jeff, good luck on. You know, a year ago we talked upside plus type of, you know.
Well, I, well, one is I would say it is not something that we can't attain. I would say we, we have to attack it and it's too late. what one is the passive components is primarily where we've been getting the qualifications and the valves and the substrates and fittings and along the way those will move us up but until we actually get some level of the flow controller and our prepared comments we actually now have one of our first full integrated I core content gas boxes that got qualified it and at our customers and customer. So as that now kind of goes into production and the timing of their production ramp, which is not clear to us right now, that is what's going to move us up into the flow controllers because you don't need $100 million of those to move the needles. Those will be our highest margin, highest IP content product going forward. So no, 20% is still, I hate to use the word bogey, it's the target for the company to get to.
Right, right. And then as we look to this.
Yeah, I would say if you go back a quarter, we had some operational issues. And by the way, hiring is operational. But when we're down to getting the people in place to meet the demand, it's not production and getting the cost down and all that. we were making progress along all of the fronts that we have been attacking since the you know the beginning of the year and so those are progressing well i think once we get the people in place we still have some we still have some time to go i wouldn't say all of our products will be at our target cost until probably into the first quarter of next year but you know substrates are doing very very well and they're very close and the fittings are are moving in the right direction so it's valves is what we're attacking and
this is the first quarter of production shipments for those our next question comes from Edward Yang with Oppenheimer please proceed with your question Jeff just wanted to wish you all the best really appreciated learning from you you'll be missed thank you my question you mentioned events packaging plateaued in response to an earlier question I just wanted to unpack that a little bit more is that end market driven or you know are you seeing market share if between your customers no I think most of the biggest side of
that is an advanced packaging plating tool that we do and that that has had a tremendous amount of growth both sides of that and the cleaning tool that we support have had great high trajectory growth for maybe the last two years and I would say they're just starting to slow now as the capacity is coming online in those areas so we don't believe that there's any kind of share shift there today. I mean, our share is not as big as it is in gas panels, that's for sure. Got it.
And it sounds like one of your public competitors also talking about increasing, you know, their own internal content, local content, you know, sounds like a familiar strategy. Just wondering, as both you and this competitor become more vertically integrated, are there any cross exposure or possibility of displacement where one or the other of you two sell to each other?
We sell to each other today certain areas because they build boxes and they got a component that's qualified for us and they buy it from us. We buy heaters from them. So that's been occurring for years and years and years between the two of us.
But yeah, I have noticed their comments have been a little more aligned with the branded strategy that we have and bringing products together I think it's a that's what the market is looking for okay thank you do that our next question comes from Brian chin with people please proceed with your question I thought they're just on back earlier earlier in the queue um yeah just one clarification Jeff the I think you sort of suggested that if i heard correctly that into the december quarter maybe consistent with some of your customer patterns december could be lower than september and that the second half
would be a little bit down from a first half weighted spending and are we talking kind of like mid single digit decline half on half yeah i i don't even know if it's low single digits is what I would I would say it's it's about five million off of 480 something so it's it's one percent it's it's very it's very close to flat you know if we have a similar quarter you could almost assume that it's timing okay I missed some of that but something you said like a one percent
decline in December quarter something I would say that that's probably in the timing of just when our customers are building things versus us got it um and then just to i also wanted to touch on the flow control qualification that is kind of a a milestone relative to the important part of the insourcing strategy and you said sort of customer's customer can you give a sense of that that's sort of like a logic or or d-ram application well what i would i would i say and i think we've we've we've not said who the customer is but we have said that these are almost all targeted on advanced logic uh opportunities okay got it maybe just one one last quick thing because i'm back on the can you give us it sounds like from listening to the other uh questions that you know some of some of the the slots that may have pushed into you know out of the year in some cases kind of side into maybe DRAM advanced packaging, something like that?
I'm not sure I'd follow. You're just talking about this office at the North America IDM, I would say. That's probably logic.
Okay, got it. Yeah, no worries. I appreciate it.
Operator
We have reached the end of our Q&A session, and I would now like to turn the floor back over to Jeff for clues and comments.
I want to thank you for joining us on our call this quarter. I'd like to thank our employees, suppliers, customers, and investors for their ongoing dedication and support. Our upcoming Q3 investor conferences include Oppenheimer's virtual conference next week, followed by Needham Semiconductor Conference, Jefferies in Chicago, and finally B. Riley's Tech Conference in New York. After that, we look forward to our next quarterly update in early November for our Q3 earnings call. In the meantime, please feel free to reach out to Claire directly if you would like to follow up with us.
