Good day, ladies and gentlemen, and welcome to Ichor's Third Quarter 2025 Earnings Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Claire McAdams, Investor Relations for Ichor. Please go ahead.

Thank you, operator. Good afternoon and thank you for joining today's third 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, as usual, are Jeff Andreson and Greg Swyt. We also have our newly named CEO, Phil Barros, joining us for today's call. Jeff will begin with an update on our business, and then Greg will provide additional details about our results and guidance. Phil will then make his remarks before opening the line for questions. I'll now turn over the call to Jeff Andreson. Jeff?

Thank you, Claire, and welcome, everyone, to our Q3 earnings call. Thanks for joining us today. This afternoon, along with our third-quarter earnings release, we announced that Phil Barros, our longtime CTO, has been named Ichor's CEO effective today. We are very pleased to have Phil joining us for today's call. Phil has been with Ichor for over 20 years and held executive roles spanning engineering, product management, sales, account management, and corporate development and strategy. He has been instrumental in the development of the company's product strategy, and I look forward to watching the company's success develop under Phil's leadership. Third quarter revenues of $239 million exceeded the midpoint of our expectations entering the quarter. Similar to the upside witnessed in Q2, we once again experienced customer accelerations of certain gas panel deliveries for dry etch and deposition applications into the quarter. There's no question that the demand environment for etch and deposition is strong and has strengthened year-to-date, particularly in support of leading-edge investments in gate-all-around and high-bandwidth memory. We believe the Q3 upside, however, reflected a pull-in of deliveries from the fourth quarter rather than an increase in overall second-half demand among our primary customers. At the same time, the demand profile for other served markets continues to weaken as we progress through the third quarter. While we've been discussing demand erosion affecting multiple applications for several quarters now, most significantly in the areas of EUV lithography and silicon carbide, what surprised us most during Q3 was the decline in our non-semi end markets. As we entered the third quarter, we began to see order rates coming down from within our IMG business. As a reminder, the primary non-semi markets served by IMG include commercial space and aerospace and defense. IMG's business also brings a strong contribution margin to our overall financial performance. So when we did not see IMG order rates recover to their planned levels inside of the quarter as we had expected in early August, this resulted in a 1 percentage point impact to our Q3 gross margin. As a result, our continued progress made during Q3 in ramping the capacity of our internally sourced components and meeting our hiring objectives was overshadowed by the gross margin impact of lower IMG revenue volumes. With our current visibility, we are expecting IMG to continue to run at a lower rate for the remainder of the year, which is reflected in both our revenue and gross margin guidance for the fourth quarter. Our Q4 forecast now reflects meaningful forecast revisions from our third and fourth largest customers, reflecting the continued slowing in system build rates for certain applications and end markets. Our operational focus continues to be on improving the cost of our internal component manufacturing capacity to align with our targeted product margins and increasing our output to fulfill our customer demand. In parallel, we are making steady technical and operational progress on our two additional proprietary component products, which are designed to expand our addressable markets for both flow control and valves. We are targeting our first beta unit for customer evaluation in early 2026. 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 reflect on the customer demand environment, there's no question that our 18% year-over-year revenue growth recorded for the first three quarters of 2025 demonstrates strong performance relative to overall wafer fab equipment or WFE growth. Our strong growth this year reflects increased demand from our two largest customers and a strengthening environment for etch and deposition, partially offset by declines in our EUV lithography business, our silicon carbide business and the closure of some of our smaller underperforming business units during the year. With the currently strong demand environment for etch and deposition expected to continue, the beginning of a recovery in these underperforming served markets for Ichor could very well result in Q4 2025 proving to be the trough quarter for this next phase of Ichor's growth ahead with Phil Barros as CEO. With that, I'll turn it over to Greg to recap our Q3 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, nonrecurring charges and discrete tax items and adjustments. There is a useful financial supplement available in 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. Third quarter revenues were $239.3 million, above the midpoint of guidance, up 13% year-over-year and roughly flat to Q2. The gross margin for the quarter was 12.1%. As Jeff discussed, while we made good progress in ramping output of our internally sourced products, the slowdown in our non-semi business impacted Q3 gross margin by 100 basis points. With operating expenses aligned with the forecast at $23.8 million, our operating income for Q3 was $5.1 million. Our net interest expense and net income tax expenses were likewise aligned with our expectations at $1.7 million and $0.7 million, respectively. The resulting EPS for the quarter was $0.07 per share. Our Q3 GAAP results reflect $18.3 million in restructuring costs related to the strategic consolidation of our global operations and consisted of inventory impairment and fixed asset charges as well as personnel transition and facility shutdown costs. We anticipate there may be additional charges in the fourth quarter and fiscal 2026 as we continue to execute on the strategy. Turning to the balance sheet. Our cash and equivalents totaled $92.5 million at the end of the quarter, flat to Q2. We generated $9 million in cash from operations, and our capital investments for the quarter were $7.1 million. Working capital changes reflect a consistent level of days sales outstanding and an $18 million decrease in inventory. Our planned CapEx investments for 2025 are still expected to total approximately 4% of revenue as we finish the build-out of our new Malaysia factory, which aligns with our strategy to consolidate our global operations and capacity in close alignment with our customers. In Q3, we completed the refinancing of the company's credit facility in order to reduce our overall borrowing costs. This refinance impacted our GAAP provision for other expenses during the quarter. We reduced the fixed amount of the revolver facility from $400 million to $225 million in favor of an accordion feature. We also extended the term of the facility another 5 years. Our outstanding term loan balance remained unchanged and at the end of the quarter was $125 million, and our net debt coverage ratio was 1.5x, well below any potential threshold for covenants. Now I will discuss our guidance for the fourth quarter of 2025. With anticipated revenues in the range of $210 million to $230 million, we expect our Q4 gross margins to be between 10% and 12%. In comparison to our earlier expectations for gross margin, about half of the reduction is due to the lower level of IMG revenues and the other half is due to the lower revenue from our third and fourth largest semi customers. We expect Q4 operating expenses to remain relatively consistent with Q3 levels at approximately $23.7 million. Net interest expense for Q4 is expected to be approximately $1.7 million. We expect to record a tax expense in Q4 of approximately $900,000, reflecting a full year non-GAAP tax expense of $5.6 million, which is unchanged from our prior expectations. As you update your models for 2026, our assumed effective tax rate is currently expected to be in the range of 15% to 17%. Finally, our EPS guidance range for Q4 includes a loss of $0.14 to a profit of $0.02, reflecting a share count of 34.5 million shares. I will now turn over the call to Phil Barros. Phil?

Thank you, Greg. First, I want to thank the Board for their confidence and Jeff for his mentorship and most of all, our employees. You make everything we do possible. It's an honor to lead the company I've been part of for nearly 22 years into the next phase of growth. While I may be new to the CEO role, I am not new to Ichor, our business or our customers. So I want to outline the strategic priorities that will drive us in our next phase of growth. 2026 will be a year of transition for Ichor. We plan to realign our global footprint and cost structure to strengthen our long-term profitability while leveraging the benefits of our recent strategic investments. We are focused on improving our product margins across all of our product verticals. These initiatives are aimed at driving our earnings growth faster than our revenue. As one of the key architects of our proprietary product strategy, I fully believe it's the right strategy for Ichor. Our focus is now on smoother execution, completing customer qualifications, transitioning our products to volume and delivering new products to give Ichor and our customers a clear competitive edge. We believe in the long-term fundamentals of our markets, driven by AI, high-performance logic, and advanced packaging. These inflections are reshaping the industry and will drive sustained growth in our core WFE markets. But our goal is not to simply grow with the market, it's to outpace it. At our core, we are an engineering company. We create value by engaging early with our customers to solve their most critical problems. These partnerships enable us to drive sustainable growth by developing products and solutions that Ichor is uniquely positioned to provide. Finally, our machining business drives the highest contribution margin across our product portfolio, and we will stay focused on expanding it across both our semiconductor and non-semiconductor markets. I see tremendous opportunities ahead, and I have complete confidence in our team's ability to continue to outgrow the markets we serve. With that, I will now open the call for Q&A.

Our first question comes from Brian Chin with Stifel.

Thank you, Jeff, for your help over the years, and welcome, Phil. I look forward to speaking with you more. Maybe first question on the environment and some of the updates here on the call. Can you quantify the revenue shortfall from IMG in Q3? How much is IMG sales expected to decline in 4Q? What's driving the decline? And what's the prognosis for returning to Q2 revenue level sometime next year?

Yes. So it's Jeff, Brian. Yes, I would say entering the quarter, it was down a couple, $2.5 million or so from what we expected, and most of that was in their higher-margin businesses. And then going into Q4, it's going to drop again a similar level, stabilize, we believe, and then start to recover in the first quarter. I would say maybe by the second quarter, we'll be back to where we thought we would be about now. That's the IMG story. What was the second part that I can't remember?

And part of that was sort of what drove the decline?

It's interesting. Some of this has been due to a business that operates at a run rate in a sub-tier. However, the largest part was new programs where the funding hasn't yet come down to us from the prime contractor. It's not lost; it's just a matter of timing for when it arrives. Some of it has already come in and been incorporated, and a few more parts will begin to integrate as well. However, these won't impact the fourth quarter significantly; they will start contributing to growth in the first quarter.

Got it. Okay. So that can tie into sort of the budget lock that we have and the continuing resolution in terms of frozen budget levels and whatnot.

Yes. It could be, but I can't on that. I don't know what's taken so far, probably.

Got it. Maybe the second question. In terms of your top 4, and there's been kind of more weakness on maybe your two smaller of the four customers that kind of is lingering here maybe into the end of this year. What sort of optimism do you have? There was something in the press release that sort of suggested some optimism that business levels improve first half next year. Can you maybe provide a little more color on what kind of visibility you have months and quarters and kind of what gives you a sense that the business trajectory can come back in the first half next year?

Yes, that's a good question. As we entered the third quarter, the primary change we noticed was the softness in IMG and the business levels from our smaller customers. However, we are beginning to see signs of recovery leading into the first quarter. The recent news about removing the 50% ownership threshold is expected to have an impact as well. While it's late in the quarter to fully assess this, we can observe the core depth and etch market starting to improve. I'm not ready to provide guidance on first quarter revenue, but we are fairly confident that we are seeing the lowest point in the fourth quarter.

Maybe the last question is for Phil. Adjusting for the lower IMG mix in Q3, it seems like gross margins may have risen by about 60 basis points quarter-on-quarter were it not for that unfavorable mix. Firstly, was this improvement related to better operational execution regarding the internal component supply ramp in Minnesota? More broadly, reflecting on your comments about the transition year, what can the company do in the next 6 to 12 months to sustainably enhance the execution around internal supply and product yield? This would help lay a solid foundation for significant gross margin improvements, especially once revenue returns to the $250 million per quarter level.

Yes. I'll start off with the answer, and then I'll hand off to Greg to talk about the $250 million number. What I'll say is the new products, we are on track or on track to what we projected last quarter in terms of our improvements that we talked about last quarter. So well on track there. We have key initiatives to continue to increase our gross margin on those products, in particular, getting our valve product line to our product margins where we want it to be. We're very close to those and should see that early next year. So we'll continue to see those grow over the next couple of coming quarters. With that said, I'm going to hand over the $250 million question over to Greg. If you don't mind, Greg?

Thank you, Phil. Brian, your first question was about the Q3 miss. We discussed IMG, but there was a recovery in the machining business from the previous quarter. The overall miss was mainly due to IMG. Looking ahead, as Phil mentioned regarding the machining business, we anticipate reaching the mid-teens in the second half. For the past few calls, we've stated that we expect to achieve a $250 million run rate and maintain those mid-teens as we implement our machining strategy to increase volumes and improve efficiencies.

Our next question comes from Charles Shi with Needham.

Jeff, I really appreciate working together for the last couple of years and wish you well for your next chapter. Phil, welcome aboard. Looking forward to more conversation with you. So maybe the first question I want to ask a little bit more near term, some of the commentary would hope you clarify a little bit. You talked about the Q3 revenue benefited from some of the pull-ins and you talked about some of the Q4 revenue decline. There are some downward revisions from #3 and #4 customers. Are those two things correlated, meaning was the pull-in into Q3 done by the #3, #4 customer? Or are they not?

Charles, thanks. It's Jeff. No, I would say, generally, they're unrelated. I mean the pull-in actually was offsetting some of the softness in IMG, but I would say largely, that was at our largest customer.

Great. So Jeff, I want to get your thoughts a little more specific on next year's expectations, not just about Ichor, but the overall WFE trend. I think your customers have mentioned that the first half of next year may be at a similar level as the second half of this year, while the second half of next year could experience a stronger upward shift. Do you agree with that? And specifically looking at Q1, considering your second half '25 run rate actually decreases a bit based on your guidance for Q4. Does that still hold true?

Well, it's Jeff. I would tell you that we anticipate a stronger second half of the year next year, with growth likely beginning around midyear. The reduction in China by 50% may also benefit the first half somewhat. However, our perspective is that the latter part of the year will be stronger, and we expect an even better 2027 as we look ahead to the next couple of years.

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

I'll echo the thanks to Jeff and the good wishes and the welcome to Phil. Look forward to being in conversation going forward. I was hoping I could pick up on some of the questions thus far. So it sounds like as we look into 2026, we can expect 100 basis points or more of gross margin expansion just as IMG normalizes. But from there to the 15% at $250 million in revenues, Greg, how would we build that layer cake? What are the specific contributors, whether it be something in weldments, something in gas panel, et cetera? Can you help us just understand how we go from 12-ish percent up to 15%?

Sure. Thanks, Craig. So it's a couple of things, and it's still continued on the conversation around improving our proprietary products. And that's going to be, as Phil has mentioned, our key strategy to drive. And so as that moves through the year, that will be one of the biggest levers that we have. Phil also, in his comments, talked about our global operations footprint that we are rationalizing as we move through that. We'll see some improvement later in the year, but not incremental, that will be more of a '27. But we're working on driving efficiencies that will help move that through. And then not only on the branded product and the leverage of our factories, but driving incremental revenue from our machining business, which garners obviously a higher product margin than our integration business and getting that mix up as a higher percentage of the business.

Our next question comes from Krish Sankar with TD Cowen.

This is Robert Mertens on for Krish. I think you had previously mentioned some friction in your hiring process for the machining business. Could you just provide an update on where you are in that business in terms of current capacity and that which would be needed to service demand in a more normalized demand environment?

Yes. We talked last quarter that we need to get the hiring up in our Minnesota factory in particular. We have met those hiring targets. As we see increased demand for those products, though, what we will be doing is increasing our capacity by bringing on both our Malaysia footprint as well as our Mexico footprint, building some of those same products.

Great. That's helpful. And then last quarter, you mentioned qualifying a third customer in your internal valve system and were engaged with the fourth customer. Do you have any update at this time? You can provide us on where you are in the qualification phase and sort of the rate of adoption you're expecting for these customers going internally sourced products?

Yes, that's what I was alluding to in my comment on the last question. In particular, we believe that fourth customer will come online in the first half of next year in terms of our valve supply.

Our next question comes from Edward Yang with Oppenheimer.

So just to clarify, are we past all the hiring and retention challenges in the U.S. machining operations? And it's nice to hear you got the hiring up. How are you able to hit those targets?

Yes. I think we talked about in the past about different incentive programs we put in place in order to get the hiring programs in line. We are on track. We've met all of our hiring requirements for our Minnesota factory. What I will say is as we see these products expand, we will be duplicating resource requirements in lower-cost regions as well.

Okay. I have a follow-up question for you, Phil. How does your previous perspective as CTO help you address some of the execution issues we've encountered, particularly those related to manufacturing? When you mention 2026 as a year of changes, does that suggest a greater emphasis on R&D compared to manufacturing or operations? Or am I misinterpreting that, considering your transition from the CTO role to CEO?

Yes, I agree. Jeff has previously mentioned some of the challenges we've faced while transitioning from a services-based business to a products-oriented one. From my viewpoint, as one of the architects of our products business, it's crucial for us to enhance our operations related to our products as we progress. A significant milestone for us in 2026 will be ensuring that our product transitions are seamless moving forward.

Yes. I would just as a comment on Phil. Phil has obviously been in so many different roles within the company, but he has been deeply engaged in driving the alignment of cost targets with what we need to do. And so it's not new to him by any way, shape or form. This has been a real big team effort, and he's been a critical player in that.

Our next question comes from Christian Schwab with Craig-Hallum Capital Group.

With Q4 being the trough for the year as we're kind of thinking about 2026, would you expect year-over-year growth in '26 versus '25?

Yes, definitely. But that's our current view without guiding the whole year next year is I think we are anticipating growth. I mean we've just said that Q1 should be better than Q2. Q4 is the trough, and then it may be relatively flattish in the front half. We'll see how that works out. Generally, as you know, Christian, things start to pull forward. But we do see right now in alignment with what others are forecasting, customers are telling us back half of the year is going to be very strong.

So with that in mind and getting to the target of $250 million then run rate in the back half, is the internal plan to be able to hit the mid-teens gross margin goal in the second half of '26, I mean?

Yes, Christian, that is the plan. That's what the operations is putting together right now.

Okay. Great. And then my last question then, we discussed an aspirational goal of vertical integration driving a gross margin of 20%. Is that still the aspirational goal that you guys have in mind?

Yes, that is still our long-term goal. Flow control is really going to be the key for us to move from mid-teens to a 20% gross margin.

And congrats, Phil, on your new job. And Jeff, best wishes.

Thank you, Christian.

Thank you.

This now concludes our question-and-answer session. I would like to turn the floor back over to Jeff Andreson for closing comments.

I want to thank you for joining us on our call this quarter. I'd also like to thank our employees, suppliers, customers, and investors for their ongoing dedication and support over my last 8 years at Ichor. Phil and Greg will look forward to our next quarterly update in early February for our fourth quarter earnings call. Operator, that concludes our call.

This now concludes our conference for today. Thank you, everyone, for your participation. You may disconnect your lines, and have a wonderful day, ladies and gentlemen.