Earnings Call Transcript - ICHR Q4 2024

Operator, Operator

Good day, ladies and gentlemen, and welcome to Ichor's Fourth Quarter and Fiscal Year 2024 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.

Claire McAdams, Investor Relations

Thank you, operator. Good afternoon and thank you for joining today's fourth quarter and fiscal year 2024 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 2023, 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 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?

Jeff Andreson, CEO

Thank you, Claire, and welcome, everyone, to our Q4 earnings call. Thanks for joining us today. On today's call, I will briefly recap our year-end results, provide an update on our current outlook, and review our progress qualifying our proprietary products. I'll also discuss some of the gross margin headwinds that impacted our Q4 results and our margin expansion strategies ahead for 2025. On the top line, our growth accelerated in Q4 with $233 million in revenue exceeding our expectations going into the quarter. Revenues were up 10% sequentially after roughly six straight quarters of revenues hovering at the $200 million level. As a result, the year ended modestly stronger than expected, with 10% growth in the second half, and total revenues of $849 million, up 5% from 2023. Customer demand continued to strengthen throughout the fourth quarter requiring our weekly build rates to ramp significantly to levels that began to require additional resources. We believe this higher level of demand is indicative of a strong year ahead for our primary applications of Etch and CVD with broad-based demand strength continuing from both the advanced logic and DRAM markets and the beginning of a recovery in NAND technology investments. With Q4 revenues finally indicating the inflection point for more meaningful growth ahead, after a prolonged downturn in etch and deposition, we added significant machining resources in Q4 to address the increase in demand for both our build-to-print and our internally-developed machine products. Additionally, in preparation for increasing proprietary content as we cut these components into our gas panel builds, we are building stocking levels to support our gas panel integration sites. These resources are critical to support not only the top-line growth for our business, but also the increasing component content that we can supply internally, an important part of our gross margin expansion story. The gross margin headwinds in Q4 reflect the higher direct labor costs, which were not fully absorbed within the quarter, largely due to a longer-than-expected training process. We expect the residual impact of these higher labor costs to carry somewhat into the first quarter, but as Greg will discuss in his remarks, the vast majority of the labor and inventory charges that impacted Q4 gross margin were unique to the fourth quarter. So as we look ahead to 2025, I'll first reflect on the momentum that has been building over the last few quarters in advance of what we expect will be a solid growth year for Ichor within an increasingly positive mix profile emerging for wafer fab equipment demand, principally a higher mix of etch and deposition. You may recall that our visibility for growth and an inflection point in our revenue run-rate improved significantly between our Q2 and Q3 earnings calls. While the debate over WFE growth in 2025 intensified, we were talking about the beginning of an upgrade investment cycle for NAND. We were talking about an increase in etch and deposition intensity, boosted in large part by the additional process steps required by advanced logic devices migrating to gate-all-around architectures. We also talked about how the expected slowdown in WFE spending in China was a favorable mix-shift, setting up a strong environment for the U.S. OEMs to outperform overall WFE. And while the evolving WFE demand environment did in fact result in lower quarterly build rates for our litho and silicon carbide businesses as we move through 2024, we also talked about how our participation in advanced packaging and high-bandwidth memory through our chemical delivery business has largely offset these pockets of weakening demand. As we indicated via webcast in January, we believe this inflection point in our revenues is not a one or two-quarter phenomenon. We are investing appropriately for the growth ahead. In fact, demand has continued to strengthen quarter-to-date and we are very pleased today to be raising the high-end of the range of our revenue forecast for Q1. As we have gained clarity into the various margin impacts for Q1, we can also increase our gross margin outlook for the quarter and even more importantly for the full-year. We expect continued gross margin improvement throughout 2025 given our visibility for continued strong customer demand and increasing content from proprietary components. We believe the company can generate flow-through of 25% to 30% or more, enabling us to deliver gross margins in the 15% to 16% range by Q2 and exceeding 16% for 2025. This brings me to an update on our progress qualifying both our proprietary components for our existing gas panels as well as our next-generation gas panel. We have made steady progress in closing additional component qualifications over the past quarter and we'll be cutting these components into our manufacturing pipeline in Q1. We expect growth in our new products this year will be a key driver for margin expansion for Ichor in 2025. I'll start with our new component products. We are very pleased to announce today that our high-purity valves were qualified at a second customer during Q4 and we are currently progressing through qualification at a third customer. We continue to make progress qualifying our proprietary fittings which are components used in our weldment business. With our two largest customers already qualified, we are in the final stages of our third qualification. All three of our process tool customers have already qualified our substrates used in our gas panels. These are all critical components used in the existing gas panels that we assemble as well as our next-generation gas panel. These components will continue to ramp in volume as we cut them into our manufacturing pipeline. Now moving to our next-generation gas panel. As discussed last quarter, we delivered more than 50 of our next-generation gas panels during 2024. We achieved initial customer or OEM qualifications on four applications last year and many of the next-generation panels that we have delivered in 2024 are part of a qualification process with the end-device manufacturer, which are continuing into 2025. The timing of these qualifications is being worked between our customer and their customer. And in 2025, we expect additional qualifications to follow. We are also now engaged on two additional applications beyond the four we discussed previously. The key takeaway as it relates to our proprietary content strategy is that we expect to supply an increasing proportion of our bill of materials with internally-developed products, whether they are passive components that we no longer have to purchase for build-to-print gas panels all the way up to our fully-proprietary next-generation gas panel. While these internally-developed and manufactured products have required a meaningful investment by Ichor, most of the incremental R&D investments are behind us and our labor force is now in place to address higher levels of customer demand and accelerate our gross margin expansion strategies as we move through 2025. To summarize, our expectations of industry spending dynamics, the mix shifts of investment priorities in the coming year are very positive for Ichor's business. And regardless of the magnitude of WFE growth expected for 2025, we are confident in our ability to outperform the growth in WFE this year. Likewise, we are confident in our ability to demonstrate strong flow-through and deliver continued expansion of our gross margin profile as we enjoy a more robust customer demand environment while steadily incorporating increasing share of proprietary products into our production flow. With that, I'll turn it over to Greg to recap our Q4 results and provide further details around our financial outlook.

Greg Swyt, CFO

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 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. Fourth-quarter revenues were $233 million, aligning with the upper-end of guidance. This represents a 10% increase from the previous quarter and a 15% increase year-over-year. Gross margin declined to 12%, which was lower than our expectations by about 300 basis points. This decline was primarily due to the higher level of direct manufacturing labor costs we added during the quarter to support the higher demand level in the back half of the fourth quarter and the first quarter of 2025 that we were not able to fully absorb within the quarter. Additionally, we experienced higher-than-anticipated inventory charges associated with our year-end physical inventory procedures as well as unfavorable product mix with the majority of the current revenue upside taking place in our built-to-print gas panel integration business. Operating expenses for Q4 were slightly below forecast at $22.3 million. Net interest expense was $1.7 million, while non-GAAP net income tax expense exceeded our forecast at $900,000. The resulting net income per share was $0.08. Now turning to the balance sheet. Cash and equivalents at the end-of-the quarter totaled $109 million, an $8 million decrease from Q3. While our Q4 P&L generated over $8 million of positive cash-flow, our net investments in working capital during Q4 were $11 million, primarily in inventory given the revenue growth inflection in Q4. After $4.4 million of capital expenditures, free cash flow for the quarter was a use of $6.9 million. DSOs for the quarter were slightly lower than Q3 at 34 days and inventory turns increased from $3.1 million to $3.4 million. We reduced debt by $1.9 million during Q4, bringing our year-end balance of total debt outstanding to $129 million, down from $250 million a year ago. Our net-debt coverage ratio has declined to 1.6 times, down from 3.4 times a year ago. Now let us discuss our guidance for the first quarter of 2025. As Jeff mentioned today, we are increasing the high-end of our preliminary outlook discussed in early-January. With anticipated revenues in the range of $235 million to $255 million, we expect gross margin in the range of 14% to 15%. At the midpoint of the range or $245 million in revenue and 14.5% gross margin, this equates to roughly 25% flow-through from our Q3 baseline, less about $1.5 million of residual impacts ramping and training of our incremental machining headcount. Once these incremental cost headwinds are behind us, we anticipate returning to gross margins above 15% by the second quarter and flow-through in the 25% to 30% range. Q1 operating expenses are projected to be approximately $23.5 million, reflecting the seasonal impact of payroll taxes resetting, audit fees, and other variable compensation costs. Given that we expect to remain at similar levels beyond Q1, today we are also lowering our expected OpEx increase for the full year to an anticipated 5% to 7% compared to fiscal 2024. Net interest expense for Q1 is expected to be approximately $1.6 million and we expect this level to be relatively consistent through 2025 given recent announcements around a slowing of rate decreases this year. For modeling purposes, net interest expense for 2025 should be approximately $6 million. Our expected non-GAAP effective tax rate for 2025 is projected to be approximately 12.5%. For Q1 specifically, our EPS range of $0.20 to $0.32 reflects our expectation for 34.4 million in diluted shares outstanding. Operator, we are ready to take questions. Please open the line.

Operator, Operator

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

Craig Ellis, Analyst

Yes, thanks for taking the questions and congratulations on the momentum that you're seeing in the business, guys. I'll start with Greg and then move on with one for Jeff. So, Greg, if gross margins in calendar '25 are going to be above 16%, which would be a 330 basis point increase year-on-year, can you just help us understand how much of that is a benefit from the new product progress that's being made, valves, gas panels, et cetera, volume versus the absence of some of the headwinds that might have been in play in 2024 like the inventory charges and some of the volume-related cost ramp-ups?

Greg Swyt, CFO

Hi, Craig. Let me address all your points. We mentioned aiming for 16% by the end of the year, and those headwinds will dissipate, exiting Q2. The internal branded products will also continue to see a 25% to 30% improvement in incremental flow-through. As we move into the second half of the year, we expect to see additional benefits. The challenges will subside, allowing us to exit Q2 in a stronger position. The internal branded products will keep performing well for the rest of the year, and by the second half, we anticipate growth to be in the range of 15% to 16%, with a solid performance expected in Q4.

Jeff Andreson, CEO

I would say, similar to what we've discussed before, some of the excursions we have won't happen again, but the new products are likely the main factor driving our performance. Considering that we're experiencing year-over-year volume growth, we will also benefit from the leverage of our core business, excluding some of the new initiatives. That's our approach moving forward. As we progress through the year, you can expect to see margins improve due to these factors and how they are integrated.

Craig Ellis, Analyst

That's helpful. Yes. So I would just infer from that that we've got maybe 45% of the benefit on products, 35% on volume, and 20% from the absence of some of the headwinds we had last year. That's real helpful, guys. And then the second question was for you, Jeff. It's great to see some confidence in demand being shown by just the build intensity quarter-to-date and what you're doing with the high-end of the range. As you look at calendar '25 for Ichor and think about the growth in the business, how would you force rank 3D NAND and its transition spend versus DRAM and high-bandwidth memory versus gate-all-around and foundry?

Jeff Andreson, CEO

I think that's a good question, Craig. I mean, obviously, I think we see foundry logic remaining pretty strong. I think you've heard TSMC's outlook, things like that. We don't see that going backwards. I think with gate-all-around, I think that might see some increase. DRAM, our view today is it's going to stay pretty steady and strong. So really maybe the inflection that we're seeing to some degree is really wrapped around some of the NAND increases that we're seeing in the beginning of this year for sure.

Craig Ellis, Analyst

Yes. And that would track with some of the things we heard last week too.

Jeff Andreson, CEO

Yes.

Craig Ellis, Analyst

Okay, guys. That's really helpful. Thank you very much. I'll get back in the queue.

Jeff Andreson, CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Brian Chin with Stifel. Please proceed.

Brian Chin, Analyst

Hi, good afternoon. Thank you for allowing us to ask a few questions. To start, it seems like you are indicating that revenue levels might remain at the Q1 levels for the rest of the year. I wanted to clarify if that's the impression you're giving. Additionally, you have mentioned pulling forward direct labor costs, which implies that you anticipate business could potentially improve. Are you being cautious regarding that stabilization outlook? Are you essentially preparing for higher responsiveness in the business by incurring some of these costs now?

Jeff Andreson, CEO

I believe that demand improved during the quarter. We needed to add resources as we anticipate this trend will continue in the first half, and we expect a slight increase in the second half. Therefore, we feel confident in adding these resources. It's important to note that our internal supply is becoming a significant demand driver, which is growing faster than other revenue streams as we begin implementing these changes. This is primarily where we need the additional resources, especially as we finalize the necessary qualifications to address inventory builds and demand. While I may not have fully addressed your question, we view the situation in Q2 as being quite similar to Q1, with a slight increase expected in the second half.

Brian Chin, Analyst

Okay. Got it. So some of that ties into the internal sourcing for some of the qualifications on existing gas panels?

Jeff Andreson, CEO

We certainly have a significant amount of resources allocated. In the second half of the year, as we mentioned, foundry logic is expected to remain strong. DRAM should remain stable as well, although our lithography business has faced some challenges. We anticipate a rebound in that area during the second half. Additionally, silicon carbide has been relatively quiet since the first half of '24, but we expect it to pick up again later in the year. There are other factors and market share gains we've achieved this year that should contribute positively in the latter half of the year.

Brian Chin, Analyst

Okay. This is a bit complex, but if there is an increase from etch and deposition, particularly regarding more legacy gas panel designs, how do you see that affecting the sequential gross margin trend throughout the year? Alternatively, do you believe that some of your other margin initiatives could help offset that, along with potential improvements in the machine component business?

Jeff Andreson, CEO

Yes. If we shift more towards gas panels, there may be more potential upside, but this could slightly dampen our gross margin percentage. However, we're becoming more efficient with our overhead costs because we have the capacity to support numbers significantly higher than last year. I don't expect this to be as significant of an issue as it was this year since we were still in the qualification phase and our internal supply wasn’t fully operational. Now that we've turned a corner, I'm pleased with our progress, which should provide a tailwind to our margin, helping to balance out any impacts from product mix issues.

Brian Chin, Analyst

Okay, great. Thank you.

Jeff Andreson, CEO

You bet.

Operator, Operator

Thank you. Our next question comes from the line of Charles Shi with Needham & Company. Please proceed. Charles, your line may be muted on your end. All right. I think we may have lost Charles here. I'll go on to the next question. Our next question comes from the line of Krish Sankar with TD Cowen. Please proceed.

Krish Sankar, Analyst

Yes, hi, thanks for taking my question. I had two of them. First one, Jeff, last quarter you were very bullish on NAND recovering. Kind of curious how to think about your NAND shipments in December versus September, how do you think about it in March versus December and the cadence for the rest of the year?

Jeff Andreson, CEO

I would say that it wasn't a significant portion of our revenue. We're starting from a low base, but there's been a healthy increase in the fourth quarter, and a similar trend has continued into the first quarter, which I expect will likely carry on into the second quarter. Our visibility has improved, extending from a strong three months to possibly four or five months. That's how I would describe the situation at this point, given our visibility.

Krish Sankar, Analyst

Got it. Okay. That's helpful. And then when I look at your European semi-cap customers, obviously two large ones, one is the litho, one is the epi. Kind of curious on the epi customer in Europe, how are you seeing the revenue trend? Because I remember that was one of the fastest-growing. Do you think they could be a third-largest sort of 10% plus customer this year, or do you think it's still small?

Jeff Andreson, CEO

I don't believe they're going to exceed 10%. They've done an excellent job, and we've increased our market share beyond epi, which has contributed to our growth with that particular customer. However, I don't expect it to surpass 10%, although we do anticipate steady growth in 2025 compared to 2024.

Krish Sankar, Analyst

Got you. And then just one final question for Greg. I was trying to figure out, can you say what the improvement in gross margin is in basis points from last year to this year due to the proprietary gas panels?

Greg Swyt, CFO

That's provided a lot of information. Let's just say it's a significant factor in the increase of our gross margin. Clearly, volume contributes to our year-over-year growth, and we are not facing some of the issues we had in 2024. I would say it's likely one of the largest contributors to our year-over-year growth.

Krish Sankar, Analyst

Got you. All right. Thanks for that. Thanks, Jeff. Thanks, Greg.

Jeff Andreson, CEO

You bet.

Operator, Operator

Thank you. Our next question comes from the line of Tom Diffely with D.A. Davidson. Please proceed.

Tom Diffely, Analyst

Yes, good afternoon. Thank you for a few questions. So Jeff, most people now expect the WFE market to grow kind of mid-single digits this year your large OEM customers because you're more etch and dep related or growing above that. At this point, can you say whether or not you believe you'll grow faster than your OEM customers?

Jeff Andreson, CEO

I believe that depth and etch will certainly outpace the overall WFE market. Based on what we observe from our customers, it appears that they will experience faster growth as well. We anticipate that our growth will exceed that of the overall market slightly.

Tom Diffely, Analyst

Yes, that's helpful. When people discuss the NAND market, they mention it is recovering this year, which is positive news. However, could you provide some perspective on where NAND stands compared to other markets and how there may be significant growth in NAND over the next couple of years beyond just this year?

Jeff Andreson, CEO

Yes. When we look at our company, we see our revenue from this segment increasing from around 5% to about 7%, which is significant as our overall revenue grows. However, it still falls short of what we expect from DRAM and definitely from foundry logic. Over the past couple of years, memory has accounted for about 25%, including DRAM and NAND. We anticipate that this percentage will increase this year.

Tom Diffely, Analyst

And then maybe a quick one for Greg as well. When you look at the costs that you've layered in, the extra employees you've layered in cost you over the last couple of months and right now you have revenue maybe going up to $255 million in the first quarter, what is the revenue capabilities of your current infrastructure?

Greg Swyt, CFO

So of our - revenue structure?

Tom Diffely, Analyst

Given your current installed base of employees and physical footprint, how much revenue could you generate at this time without making significant additions?

Jeff Andreson, CEO

From a facility perspective, our clean rooms and overall capacity exceed 400. Currently, we aim to align our added headcount with the demand profile. What you observe as external revenue is informed by our insights on component cuts and other factors that contribute to that figure. However, we remain below that 400 plus capacity, making it largely dependent on staffing. I anticipate that once we bring on the majority of resources by Q1 and assuming a modest second half, the additional personnel needed will be minimal, and we may manage with overtime and similar measures.

Tom Diffely, Analyst

All right. Maybe one last quick question. Do you have any components that you processed flying around in space right now?

Jeff Andreson, CEO

Yes, of course. We do. Obviously, we have some business with SpaceX and so most of what we build for them goes up and doesn't come back.

Tom Diffely, Analyst

All right. Thank you, guys.

Jeff Andreson, CEO

You bet. Thanks for asking.

Operator, Operator

Thank you. Our next question comes from the line of Christian Schwab with Craig-Hallum Group. Please proceed.

Christian Schwab, Analyst

Great. Thanks. I just have a question on gross margins for clarity. Did you mention that gross margins would be greater than 16% as you exited the year, or did you say that gross margin would be greater than 16% for calendar '25? I'm not sure if I heard that correctly.

Greg Swyt, CFO

I think we've had kind of all. So, exiting the year on a run-rate north of 16%, Christian. And then full-year at that 16%.

Christian Schwab, Analyst

Full year at 16%. And then what do you think optimal gross margins with increased proprietary products are as maybe as we look to '26, if, let's say, WFE goes up again? How good could gross margins get?

Greg Swyt, CFO

Well, what I would tell you is that our model today is 19 to 20. And I think in general, the direction we're getting in communications is that '26 will be a stronger year than 2025 from a growth perspective. I would certainly think given where we're at, cutting in certainly our passive products are really making good progress. Even with those, I think we can get pretty close to that in 2026 if the quarterly run-rates kind of get up over maybe 300 at least because we need to have that to absorb some of our infrastructure.

Christian Schwab, Analyst

Great. No other questions. Thank you.

Jeff Andreson, CEO

You bet, Christian.

Operator, Operator

Thank you. Our next question comes from the line of Edward Yang with Oppenheimer. Please proceed.

Edward Yang, Analyst

Hi, Jeff. Hi, Greg. Thanks for taking my question. Just on your new products progress, the gas panel deliveries that you had in '24, I think you had specified at 50. Was that consistent with your expectation? I think last quarter you were targeting something around 55.

Jeff Andreson, CEO

Yes, I mentioned more than 50. So it was quite aligned. There will always be some fluctuations, but we arrived pretty much where we expected to be.

Edward Yang, Analyst

Got it.

Jeff Andreson, CEO

And most of these evaluations are active at device of customers now. And so at that stage, our customers are managing that process. And unfortunately, we haven't had any close yet, but we're optimistic that those will happen in the early part of 2025, certainly in the first half.

Edward Yang, Analyst

Okay. So were these all still for qualifying or did you have any commercial shipments?

Jeff Andreson, CEO

I would say that as we are sending products for customer evaluations, we refer to them as commercial shipments. They are being designed and incorporated into tools. Initially, there may be fewer of these shipments that are primarily evaluations at our customers who are using them on their tools for the first time. However, once they reach the customer, we consider them as commercial shipments. I would mention that this constitutes a much smaller portion of our internally supplied components, which is a larger number. Therefore, we are still in the early stages of the fully-integrated new gas box.

Edward Yang, Analyst

Got it. And you commented on this in the January presentation, but do you still see no incremental impact from the export controls? And do you have any preliminary thoughts on tariffs?

Jeff Andreson, CEO

I was pleased to see the delay on tariffs for 30 days. To be clear, the rules were quite ambiguous. Most of the impact would have been felt in Mexico, as we no longer procure much from China. Therefore, any inbound tariffs from China are minimal for us. Most of what we produce there comes from the U.S., and we are still not clear on the details. I can't predict where this will ultimately lead, but I expect the rules will become clearer over time. This will affect our cost-plus gas box business, which will be passed forward. Regarding the China export situation, we have already accounted for this in our visibility, and there's been no additional downturn. Some customers have mentioned the overall impact on their business, which has already been factored into our outlook.

Edward Yang, Analyst

Thanks a lot.

Jeff Andreson, CEO

All right.

Operator, Operator

Thank you. There are no further questions at this time. I'd like to pass the call back over to Jeff Andreson for closing remarks.

Jeff Andreson, CEO

I want to thank you for joining us on our call this afternoon. I'd like to thank our employees, suppliers, customers and investors for their ongoing dedication and support. We look forward to our next quarterly update in early May for our Q1 earnings call. In the meantime, feel free to reach out to Claire directly if you'd like to follow up with us. Operator, that concludes our call.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.