Earnings Call Transcript - ICHR Q3 2020

Operator, Operator

Good day, ladies and gentlemen, and welcome to Ichor's Third Quarter 2020 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. Claire, the floor is yours.

Claire McAdams, Investor Relations

Thank you. Good afternoon and thank you for joining today's third quarter 2020 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, including those made about the impact of COVID-19 on our operations, 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 release, those described in our annual report on Form 10-K for fiscal year 2019 and Form 10-Q for fiscal Q2 2020 on file with the SEC and those described in subsequent filings with the SEC. As noted in those aforementioned filings, we remind you that the COVID-19 pandemic continues to create significant uncertainty in our industry, limiting our ability to provide longer-term forward-looking statements. 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 Larry Sparks, our CFO. Jeff will begin with an update on our business and a review of our results and outlook, and then Larry will provide additional details of our third quarter results and fourth quarter guidance. After their prepared remarks, we will open the line for questions. I'll now turn over the call to Jeff Andreson. Jeff?

Jeffrey Andreson, CEO

Thank you, Claire. Welcome to our Q3 earnings call. I trust and hope that all of you and your families are staying healthy and safe. Today, we reported another strong quarter of results with Q3 coming in above the midpoint of both revenue and earnings guidance. Revenues were $228 million, up 3% from Q2 and our sixth straight quarter of sequential revenue growth. Gross margin increased 60 basis points, operating margin increased 90 basis points and earnings per share grew 15% over the second quarter. We also had a strong cash flow quarter with free cash flow of $21 million for the third quarter. Our results for the third quarter demonstrate our continued execution of our stated objectives, to outgrow the industry and grow earnings faster than revenues. Year-to-date in 2020, revenues are up 55% and EPS is up over 120% over the first 9 months of 2019. The global wafer fab equipment, or WFE market, continues to be strong as we near the end of 2020, with full year growth expected to be up around 15% from 2019. We continue to see strong levels of demand from our customers. And at the midpoint of our Q4 guidance, we anticipate a seventh consecutive quarter of sequential revenue growth, and we also expect continued sequential increases in gross margin, operating margin and earnings per share. At the midpoint of Q4 guidance, our revenue growth this year will be 45%, approximately 3x the overall industry growth, and our EPS increase for the full year will be about double the rate of our revenue growth. I continue to be amazed by our employees and the supply chain partners who are working closely together to deliver such strong performance and a record sales year for Ichor in 2020. I want to thank our employees and partners for their incredible contributions as they keep our business operating at such higher levels as we navigate the challenges caused by COVID-19. In my prepared remarks today, I would like to focus primarily on how we are outgrowing the market and our strategies to continue to outperform industry growth. Larry will talk about our strategies to drive continued gross margin improvement, along with close control of operating expenses, to deliver significant leverage to the bottom line and continued free cash flow momentum as we move into 2021. First, regarding the impact of COVID on our operating environment. Our operational capabilities and supply chain have largely recovered from the significant constraints experienced earlier this year, but we remain vigilant and continuing to take all appropriate actions to protect our people and safely maintain business operations globally. While our revenues are not currently hampered by COVID-related constraints, we still see some unfavorable impacts on gross margin, which Larry will discuss in his remarks. Turning to the demand environment. Just as we anticipated 3 months ago on our Q2 call in August, we continue to see strong levels of customer demand through the end of 2020 with sequential increases in revenue during each fiscal quarter of the year. This is consistent with the forecast for a stronger second half, as we indicated in August. Importantly, our current visibility continues to indicate strong levels of demand from each of our largest customers into 2021. Industry expectations for WFE growth are currently in the 5% to 10% range. Our revenue outperformance in 2020 is a result of several factors, including market share gains, the relative strength of etch and deposition and their mix in memory spending improved this year over 2019 and the continued ramp of EUVs. As it relates to market share gains, we are benefiting from continuing market growth on top of last year's gains, which exited 2019 at the $100 million run rate and are growing with the market in 2020. We also have incremental market share gains this year in gas delivery, weldments and precision machining that add to our revenue growth outperformance during 2020. In the area of etch and deposition, which are the markets within WFE where we have the greatest fluid delivery opportunity, we believe these segments are outgrowing overall WFE this year due to the beginning of a recovery in memory spending. This factor is also evident in the expenses estimates for new semiconductor system sales by our two largest customers, both of which are outpacing overall WFE growth this calendar year. In the area of EUV, our revenue growth continues to reflect the steady ramp of expected systems being delivered in both 2020 and 2021, with EUV unit shipment growth outpacing overall lithography spending. With these being the primary drivers for outperformance in 2020, we believe we have the strategies in place to continue to outgrow the industry in 2021 and beyond. First and foremost is our strategy to focus on fluid delivery for semiconductor process tools, which is a growing market driven by the key technology transitions underway. In NAND, the industry is investing in the technology that will take them from 96 layers to 128 layers and, beyond that, to 256-layer devices. At each step in the process, there is more etch and deposition capital intensity. Same with DRAM as we go from 1Y to 1Z, then 1 alpha and 1 beta; and for logic for the transitions to 7-, 5- and 3-nanometer require more complex geometries and more precise critical fluid delivery. There is also an increase in the number of gases used for technology advancements in both logic as well as DRAM. In each case, as these geometries become more complex, the impact of defects is magnified, requiring faster etch rates and more precise control of the processes. The key takeaway as it relates to Ichor is that these advanced technology nodes require more deliberate fluid delivery content per system, particularly for logic and DRAM. Beyond etch and deposition, we expect EUV system shipments to continue to increase for the foreseeable future with steady increases in our EUV gas delivery sales run rate each year. What we have witnessed so far is that each of these key technology transitions across all three device types is driving increased opportunity for etch, deposition, and EUV as well as our content on those tools. We are also driving a number of initiatives to expand our geographic footprint and overall share of our served market by achieving increased levels of customer penetration in Asia. While the largest served market for gas deliveries is with our U.S. customers, the largest served market for chemical delivery is with customers in Japan and South Korea. We continue to work with our Korean customer that is evaluating our liquid delivery module. And in Japan, we are actively in discussions with several of the largest OEMs who are in the early stages of engagement. Both of these strategies should position us well for first revenues in chemical delivery in Asia starting in 2021. Which brings me to a review of the progress that we are making against our new customer qualification objectives for the year. In gas delivery, we're continuing to see incremental outsourcing in gas panels and subassemblies but made good progress in qualifying new products in our precision machining business and continue to work closely with our customers on gaining additional share in weldments as we leverage our global footprint. Each of these qualifications are contributing to our incremental market share gains in 2020. Finally, we continue to make progress on our strategy to leverage our engineering capabilities and IP portfolio to develop new proprietary products to drive longer-term expansion of our share of our served markets as well as to drive the operating model towards increased levels of profitability. We continue to invest in this area and are making good progress in the development of our proprietary next-generation gas delivery solution, and we expect to have our initial beta units delivered in the next 3 to 4 months. In summary, the team has done a phenomenal job managing through the operational challenges of 2020, and we are well on track to deliver a record revenue year far outpacing industry growth with earnings growing at about twice the rate of revenue growth. The midpoint of our fourth quarter revenue guidance indicates our expectation for continued sequential growth above Q3 and year-over-year growth of 23% versus Q4 of last year. While still wider than pre-COVID levels, we continue to tighten the expected revenue range as we gain more clarity around our supply chain and operational capabilities. We are also driving continued incremental improvements in gross margin and operating margin as we look ahead towards another expected growth year in 2021. We are steadfastly focused on making meaningful progress to our target model in a continued very healthy business environment, which brings us to Larry's discussion of our financial performance and further details on our outlook. Larry?

Larry Sparks, CFO

Thanks, Jeff. First, I would like to remind you that the P&L metrics discussed today are non-GAAP measures unless I identify the measure as GAAP-based. These measures exclude the impact of share-based compensation expense, amortization of acquired intangible assets, nonrecurring charges and discrete tax items and adjustments. There is a very helpful schedule summarizing our GAAP and non-GAAP financial results, including the individual line items for non-GAAP operating expenses, such as R&D and SG&A, in the Investors section of our website for reference during this conference call. Third quarter revenues were $228 million, up 3% from Q2 and up 47% from the same period last year. We have experienced no additional COVID-related restrictions on our manufacturing sites. And as a result, we came in above the midpoint of revenue guidance due to continued strong levels of customer demand and excellent execution in a challenging operational environment. In spite of these challenges, we reported our sixth straight quarter of sequential revenue growth. We also achieved sequential growth in gross margin, operating margin, and earnings per share. Gross margin for the quarter was 14.6%, up 60 basis points from Q2. We continue to face COVID-19 headwinds, which impacted gross margin by about 100 basis points in both Q1 and Q2 and by about 50 basis points in Q3. While the heightened freight and material sourcing costs have largely normalized since the first half, we still face higher costs associated with ensuring the health and safety of our global workforce. We continue to make progress on our ongoing cost reduction programs in order to drive further incremental improvements to our gross margins in a continued healthy customer demand environment and expect about a 50 basis point improvement in gross margin for the fourth quarter. Operating expenses came in a little lower than we expected at $14.2 million, down slightly from our first half run rate primarily due to a shift in the timing of certain R&D program spending into Q4. Operating margin improved 90 basis points in the quarter and operating income was up 15% over Q2. The 15% sequential increase in operating income was at the higher end of our expectations and was partially offset at the bottom line by unfavorable foreign exchange impacts and a higher income tax rate versus forecast. Our effective tax rate of 12.8% for the third quarter reflects a catch-up in our year-to-date tax rate, which is closer to 12% versus our prior expectations of around 11%. The increase is primarily due to a higher mix of U.S. profits in our 2020 forecast. Our planning rate for tax over the next couple of years continues to be in the range of 10% to 13%. The higher tax rate as well as the unfavorable exchange rate impacted EPS by about $0.02 per share. Nonetheless, we reported $0.62 in earnings for the third quarter, above the midpoint of our guidance. Year-to-date growth in earnings per share has continued to double the rate of our revenue growth. Now I will turn to the balance sheet. As expected, we reported a strong quarter of cash flow generation in Q3 with $21 million of free cash flow contributing to the $22 million increase in our cash balance over Q2. Our expectation is to continue positive free cash flow generation in Q4. We ended the quarter with $79 million of cash compared to $57 million last quarter. Our debt balance of $204 million is down $2.2 million from Q2, reflecting the quarterly paydown of our term debt. We generated approximately $19 million of cash from the P&L and $23 million in cash flow from operations. Days sales outstanding were essentially unchanged from Q2 at 42 days, while inventory turns increased slightly to 5.4. Now I will turn to our fourth quarter guidance. With revenue guidance in the range of $220 million to $245 million, our earnings guidance is $0.59 to $0.77 per share. The midpoint of the EPS range reflects an incremental improvement to gross margin of around 50 basis points and about a $400,000 increase in operating expenses compared to Q3 primarily due to higher variable compensation and R&D program expenses mentioned earlier. We are forecasting ongoing interest expense of $2 million per quarter, and our tax rate for Q4 to be about 12.5%. We are assuming approximately 23.5 million diluted shares outstanding for the fourth quarter. Given that we are operating in a dynamic and rapidly changing environment with continued COVID-related restrictions and constraints in place, we expect to face some level of gross margin headwinds for the foreseeable future. That being said, we anticipate additional sequential improvements in gross margin as we move into 2021. Our key financial objective is to drive operational leverage and strong flow-through by combining revenue outperformance with continued increases in gross margin toward our target model. We expect to continue to drive gross margin higher through incremental cost reduction programs, growing our share within higher-margin component markets and increasing our content of proprietary IP within our products. Operator, we are ready to take questions. Please open the line.

Operator, Operator

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

Craig Ellis, Analyst

Congratulations on the nice results and outlook, guys. But Jeff, I just wanted to start by following up on some of your comments on the current environment. So it seems like three months ago when you got the crystal ball out, it was pretty accurate for the second half of the year, and I'm wondering if you can provide us any commentary on what you see as you look beyond the fourth quarter in the early calendar '21.

Jeffrey Andreson, CEO

That's a good question, and thank you for your kind words. Yes, I would say, based on what we're seeing today and through the outlook that we have, we see a continued strong quarter as we enter 2021. I mean obviously, it's too early to give specific guidance, but we do see a strong demand environment moving into the at least in the first half of next year.

Craig Ellis, Analyst

That's helpful. And then, Larry, you wrapped up your comments talking about some of the things that were going to drive gross margin higher in calendar '21: cost reduction, ongoing market share gains and then increased IP quotient and sales. Can you just help us understand the degree to which those can be at play as you go through the year? Are some of them more first half weighted than back half weighted? Or how do we think about their potential impact to gross margin in calendar '21?

Larry Sparks, CFO

I believe we've discussed several factors contributing to our cost reduction programs, which are ongoing each quarter, including general operating cost reductions and material savings. We expect to see some logistics savings in the first half of the year. Additionally, our plastics business is benefiting from the closure of our Union City facility and adjustments to our cost structure, which should reflect positively in the first half of next year. We are also gaining market share in weldments and precision machining, although the latter has a longer qualification cycle, meaning we expect progress throughout the year. Finally, our proprietary intellectual property is a long-term strategy, and while we’re seeing some developments with beta sites, we anticipate seeing significant improvements in gross margin in the second half of next year and beyond.

Craig Ellis, Analyst

Got it. If I can just sneak in another question. Jeff, What I was just going to say is we're very, very focused on this for obvious reasons. But we do continue to see improving gross margin. We have plans in place to continue to drive this back up. Yes. Good. And nice progress certainly in the back half here. If I could just follow up the gross margin question with an expense question, Larry. I would expect most companies would be facing some inflationary pressures in the first calendar quarter. But beyond that, is there anything we should be aware of as we think beyond the fourth quarter with operating expense?

Larry Sparks, CFO

I think there are a few points to consider. The insurance industry's impact is less significant, and we're seeing a favorable outlook. Additionally, as we engage with certain customers, we anticipate increased spending on R&D for beta units and other related investments. Generally, next year we will need to comply with SOX regulations, which will increase costs both internally and with our external auditors, who will likely charge more for their certification. I'm planning for this, and we will be assessing it over the next couple of months.

Craig Ellis, Analyst

Of course, they will. Guys, keep up the good work and the good operations.

Jeffrey Andreson, CEO

Thanks.

Larry Sparks, CFO

Thanks.

Operator, Operator

Our next question is from Sidney Ho with Deutsche Bank.

Sidney Ho, Analyst

I have two questions. First, when I look at your third quarter, it seems to be solid. However, compared to other suppliers in the supply chain, they appear to have more upside to the midpoint of the guidance. How would you describe the quarter's linearity in relation to your expectations? Did you notice any trends in the latter part of the quarter that might indicate a slowdown? Do you believe your main customers have caught up with their inventory, and does your revenue now reflect a more consistent demand profile?

Jeffrey Andreson, CEO

It's Jeff. I'll try to answer it. As companies transitioned from Q2 to Q3, we experienced varying levels of recovery. Assessing additional upside is challenging. However, I can say that the demand environment in this quarter appeared somewhat more consistent than before, though it wasn't perfectly linear. We did not see any downturn at the end of the quarter, and we maintain a strong, more linear outlook heading into Q4. Overall, the demand environment remains very positive.

Sidney Ho, Analyst

Okay. That's great.

Jeffrey Andreson, CEO

The last part of the question was around inventory. And so I would say with the gas delivery side of the business, there's not much in the way of any inventory build. Those are very customized products, and they generally cycle to their customers probably somewhere around 2 to 4 weeks once we deliver it. So very little inventory between the two. And I would say that we're seeing a very small amount of inventory build on the component side of the business, but it's very, very small still.

Sidney Ho, Analyst

Okay. Great. Maybe my follow-up question is on your share gain opportunities, particularly in Korea and Japan. Can you walk us through what's happening in Korea? Do you have some qualifications in Japan? You were talking to a number of new customers. But then when you say meaningful contribution in 2021 for both of these, I'm just trying to see the profile. Is it going to be early in Japan? Is it going to be first half versus second half? Is it one customer, say, multiple customers? How do you think about the 2021 kind of revenue ramp for these two countries?

Jeffrey Andreson, CEO

Yes. Based on what I see today, I believe that if we secure a position, it will be in Korea first since we've been working on that the longest. We are currently evaluating their process tool, which could be significant because this particular customer has a strong standing in the claims business. In Japan, the progress is a bit slower. COVID restrictions remain very strict, meaning our partner still cannot hold face-to-face meetings. However, those restrictions are starting to ease. The conversations are ongoing, but it’s more challenging to introduce a first beta tool. We are engaged in several discussions with approximately three or four Japanese OEMs, and we hope to secure one of those designs to launch a beta. This will provide us with more clarity. I would anticipate that the earliest we may see movement in Japan would be in the second half of 2021.

Operator, Operator

Our next question is from Krish Sankar with Cowen and Co.

Sreekrishnan Sankarnarayanan, Analyst

Jeff, I had a couple of them. First one is, when I look at you and some of your peers, too, over the last five years, you guys have outperformed when WFE is up and underperformed when WFE is down. You said that next year, WFE could be up 5% to 10%. Without looking for any guidance, let's say it is true that WFE will be up 5% to 10%, is it fair to assume you could outperform in that environment?

Jeffrey Andreson, CEO

Yes, we have implemented strategies that will yield share gains this year and impact next year. We have long-term plans in place, and I believe we could outperform WFE again next year, especially with the anticipated recovery in the memory sector. We have solid visibility into the Korean market due to our operations there, and we are observing positive momentum in memory. Since memory heavily relies on etch and deposition processes, this is advantageous for both us and our customers. We hold strong positions in 3D NAND as investments in DRAM increase. Ultimately, our performance will be influenced by our share gains and other initiatives, as well as the memory recovery and its implications for deposition and etch, which our customers are keen on.

Sreekrishnan Sankarnarayanan, Analyst

Got it. That's very helpful. So it looks like it could be a $1 billion revenue year next year, hopefully. I have two other questions for you. One is, when I look at your guidance, and I'm not saying you are guiding for any such thing. But if you compare it to the prior quarter, you're kind of getting to similar revenue levels. But arguably, there's still a long runway left for memory. So going back to early part of 2018 when you're running at north of $250 million in revenues on a quarterly basis, so now is there a way you can quantify how much incremental share gain you've got or how much has been the market improving, EUV driving? Is there any way you can like help quantify what has driven above-market growth over the last two years? And then I've got a follow-up.

Jeffrey Andreson, CEO

Yes. While I won't provide a specific number, we did mention that we finished 2019 with approximately a $100 million run rate in share gains. If the market has grown by 15%, that would translate to around $115 million, while we accounted for about $70 million in our P&L for 2019. This represents a significant portion of our growth moving forward. Although we haven't quantified share gains for this year, we expect their full impact to be felt next year. EUV has been quite transparent, and as you know, our revenues have likely grown in line with the ramp-up of EUV, potentially exceeding it as our content increases with each generation. We believe we are well-positioned, and the chemical side of our business in Asia represents the next major step that, with some qualifications, could generate meaningful revenue in 2021 as well.

Sreekrishnan Sankarnarayanan, Analyst

Got it. And then just a final question, Jeff. Can you quantify what your dollar opportunity per EUV system is?

Jeffrey Andreson, CEO

We can, but we don't provide that information due to competitive reasons. It's a significantly larger unit and very specific to the tool, so it is multiples of a typical gas panel. However, we generally do not quantify that.

Operator, Operator

And our next question comes from Quinn Bolton with Needham & Co.

Quinn Bolton, Analyst

Great. I had a kind of follow-up on the share gain opportunity. You've said for a while now that you thought the precision machining parts was going to take a little bit longer, and it sounds like that's proving out to be the case. But wondering, as you sit here today, are you starting to see better traction on the precision machining parts side of the business? Or do you think those share gains and the revenue opportunity is still ahead of the company?

Jeffrey Andreson, CEO

No. 2020 includes some share gains that we have achieved from our precision machining side of the business, which are significant. There are qualifications currently deep in the cycle that can lead to wins worth several million dollars in the future. The earliest we might see these impacts is late Q4, but they will mainly influence 2021 rather than 2020. We continue to leverage our operational capabilities on the weldment side of the business to capture all available opportunities and drive incremental market share gains, which we have done effectively this year.

Quinn Bolton, Analyst

And I'm sure I can't get you to quantify it, but roughly, do you think the revenue opportunity for precision machining is accelerating in 2021, or is that opportunity just growing in line with WFE?

Jeffrey Andreson, CEO

Oh, we expect it to exceed WFE. As we secure these positions, they will build on each other. As you know, our precision machining is typically related to gas flow, which creates consistent demand. Once we secure that demand, it tends to remain for a long time, and it’s highly tailored to each specific process tool. This aligns with the strategy that Larry discussed. We aim for that segment to grow faster than the overall industry growth, which is also where we see margin improvement.

Quinn Bolton, Analyst

Great. For my second question, it seems that both you and your customers are experiencing some strength in the NAND segment of the business. Your comments suggest that you have good visibility for the memory sector to remain healthy in the first half of 2020. However, I'm curious if you believe this has now reached a more stable level that will maintain current levels into the first half. Is the momentum appearing to grow as you assess the quarterly run rate in the first half of 2021 compared to the fourth quarter of 2020?

Jeffrey Andreson, CEO

Yes. I think we've seen very good growth from first half of 2020 to 2021. And I would say, based on what we're seeing just out of our Korean operation, that we see a similar positive and slight positive growth in that side of the business as we go into 2021. In particular, that application, as we've said before, is pretty NAND centric. So that's good to see, that spending start, again as well. And we do see DRAM investments both in the fourth quarter and going into the first quarter of next year in that particular region where we have pretty good visibility. So I think you've seen the pricing environment stabilize, and that usually triggers the recovery in memory. And I think we'll see a good, strong year in memory next year. Whether I can pick the peak, probably not close enough to it. You'd have to kind of ask our customers who are close enough.

Quinn Bolton, Analyst

Got it. Got it. And then last one for Larry. Larry, cash flow. It has been pretty strong over the last couple of quarters. I think you're sitting on nearly $80 million in cash, and it sounds like you project cash to go up again in the fourth quarter. How should we think about that cash? Do you think of the opportunity to get a little bit more aggressive with paying down debt now that the COVID is hopefully, at least, stabilizing? Do you keep that cash on the balance sheet just given uncertainty or perhaps fund M&A? How should we be thinking about cash as we head into '21?

Larry Sparks, CFO

I believe we are maintaining our flexibility with the resources we have available. Our revolving credit facility provides us with some leeway, and our strategy is to hold onto it for now since the borrowing costs are around 4%. We want to remain prepared for any potential M&A opportunities while continuing to focus on our operational execution. If we find ourselves with excess cash in the future, we may consider different options, but for now, we plan to keep things stable. We're satisfied with our current debt levels and are pleased that we've been able to generate strong cash flow, which we aim to replicate in the fourth quarter.

Operator, Operator

Our next question is from Mitch Steves with RBC Capital Markets.

Mitch Steves, Analyst

I had a few. But I wanted to start on the gross margin line first. Just looking at the guide, you're talking about a 50 basis points improvement from September to December. But prior to this, when you're kind of like at the $240 million range sort on revenue, I mean, your gross margins are up like 16%-plus. So I'm just curious if that $15.1 million implied guide includes a 100 basis point impact from COVID, if you're going to start to see some improvements there. Any sort of information would be helpful.

Larry Sparks, CFO

No, we've discussed the $15.1 million and we still face about a 50 basis point challenge due to COVID, specifically related to PPE and the need to hire additional staff. We are adjusting our shift strategies and making other changes. This situation is likely to persist until there is a vaccine or a significant shift in social distancing protocols and other necessary measures. Therefore, we anticipate these challenges will continue at least through the start of 2021. Additionally, we have mentioned before how we have gained a considerable market share in gas panels with our second largest customer, which has altered our product mix. As you may know, gas panels generally yield lower margins compared to our corporate average. This shift in share presents a headwind, not necessarily in absolute dollar terms, but certainly in terms of percentage. We also added a lot of capacity between 2018 and now. We've talked historically about having brick-and-mortar capabilities to go north of $300 million in revenue per quarter. And until we get there, we're sort of ready for the growth, but it does create a little bit of a headwind for us on margins. And then finally, I think the other thing we've talked a little bit about is the plastics business, and we're working on rightsizing the cost structure and working on some products that will improve that as well.

Mitch Steves, Analyst

Understood. Turning to ASML and the comments regarding the EUV ramp-up, they have indicated that some units scheduled for 2020 were postponed to 2021. I am interested in the scale of this ramp. ASML has typically been a mid to high single-digit customer for you. Will this continue to enhance as a revenue percentage, or will DRAM grow at such a pace that ASML won't become a larger customer for you next year?

Jeffrey Andreson, CEO

Yes, it's Jeff. Mitch, I believe ASML is quite open about their operations. However, it's important to remember that we usually start building about five months before they can deliver, as we get involved early in both the production and qualification processes. The projects we are working on in the latter half of the year are aimed at addressing the earlier phases. While I can't disclose specific details regarding the customer, we are anticipating consistent growth as we head into next year. ASML should be viewed as a steady growth contributor, but for them to become a 10% customer, they would need to increase significantly from their current position. Given our outlook, if we consider the midpoint of our guidance at around $900 million, that represents a substantial target for them to achieve. Therefore, they will need to expand considerably.

Mitch Steves, Analyst

Okay. And then just last one just in terms of the DRAM versus NAND side. I mean there's been a clear debate on the NAND side that for kind of its level, it can't much higher than this. And then DRAM side, you're starting to see some green shoots, whatever you'd like to call it, in terms of improving demand there. So maybe you can just help us understand what you guys think '21 looks like for you guys in terms of what end market, DRAM or NAND, in terms of scale of revenue growth is going to look like.

Jeffrey Andreson, CEO

Yes. So just to be clear, we don't get to see all of the applications for the gas panels that we ship, so we're not the perfect one to ask about magnitude of DRAM versus NAND. We get more visibility in Korea because we have an operation there. So we do see both investments in 3D NAND picking up and DRAM picking up in that region. But I'm probably not the best one to call it for the full year next year.

Operator, Operator

Our next question is from Tom Diffely with D.A. Davidson.

Franco Granda Penaherrera, Analyst

This is Franco on behalf of Tom today. I have a few questions. So I want to start on the last topic that you talked about, the DRAM side. I know that in the past, you've kind of expressed your desire to gain more exposure on DRAM, particularly with your liquid delivery module gaining traction in Asia. Can you perhaps give us sort of an update on the progress on this effort?

Jeffrey Andreson, CEO

So yes, to be more specific, liquid delivery is not specifically a DRAM application. It can support any wet chemistry application, so it is versatile across various applications. Currently, we are qualified with one major customer through one of our OEM partners in the U.S. We also have a beta process underway in Korea with one of the larger clean manufacturers. In Japan, as I mentioned during the call, we are still in the early stages, but I am quite pleased with the engagement level we are experiencing with some of the major OEMs in Japan through our local partner.

Franco Granda Penaherrera, Analyst

Okay. No, that's helpful. And then I have one for Larry. You talked about the R&D pushout. I guess do you have any details on that, on what the pushout was regarding to? And then when you're looking into 2021, how should we think about your R&D investment?

Larry Sparks, CFO

I think that, in general, for some of the new programs, there hasn't been a specific delay in R&D. It's primarily about the timing of when we’re bringing in consultants and engineering materials. So it's not tied to a particular product. Looking ahead to 2021, we anticipate that our operating expenses will continue at about half the rate of revenue growth. Regarding R&D, we expect that portion of R&D and OpEx to remain consistent. As we introduce new products, we will be prepared to invest in the necessary resources to effectively launch these products and improve our margins. You can expect R&D to be a significant area of growth within the 50% revenue growth model.

Operator, Operator

Our next question is from Patrick Ho with Stifel.

Patrick Ho, Analyst

Jeff, maybe just going back to the mix of your business as you look at the December quarter. Obviously, demand continues to be strong. That's probably going to increase the number of gas delivery systems. But can you talk about a little bit of the mix of weldments and precision machining? Are they increasing at the same rate? So you're going to see the same, I guess, percentages of the business you saw in the September quarter? Or is the mix shifting a little more to some of the other products aside from gas delivery systems?

Jeffrey Andreson, CEO

Yes, Patrick, that's a great question that I'll break down into three parts. This year, we're projecting around $900 million based on our Q4 guidance. Our previous peak was in the low 800s. We've gained approximately $115 million in market share, in addition to the overall market growth. The gas panel segment contributed significantly to that market share gain. However, over the last quarter, we were satisfied with the performance and growth from both our precision machining and weldments segments. Now that we've successfully secured that last significant piece on the gas side, we expect to see an improved mix for the component part of the business. While I can't provide specific figures, this aligns with our plan for increasing gross margins. Our strategy has been to grow faster than the market, and we've performed exceptionally well so far. The qualifications for precision machining take considerably longer, typically measured in months, compared to the faster timeline for weldments. We are consistently seeing wins in the weldment area. In precision machining, the qualification process often involves a family of parts, which leads to larger increments. Overall, I am pleased with the progress of both business segments.

Patrick Ho, Analyst

Great. And maybe just as a follow-up to that, Jeff. The two of us have been in this industry a long time. With the precision machining business, the qualification that you just said take a longer time. Are there ways for you to qualify multiple, I guess, components or parts on that side of the business? Or is it usually kind of step-by-step you have to get this qualified first and then it goes to step B and then, I guess, step C to get other parts qualified?

Jeffrey Andreson, CEO

No. You can get a family of parts qualified provided they're very similar in manufacturing. If there's any significant changes in the manufacturing process, you might have to do them differently. But some of the qualifications we're doing now are for, I call them, part families. So there'll be many, many part numbers.

Patrick Ho, Analyst

Great. And final question from me for Larry. Inventory turns still pretty stable. But some of your leading customers have talked about, I guess, kind of building a little bit of inventory for themselves given the demand environment as well as the uncertainty in the market. Has that impacted your procurement of inventory on your end?

Larry Sparks, CFO

No, I don't think so. I believe we were at 5.4 turns. We're not seeing, as Jeff mentioned, significant inventory growth. While some may discuss it, we aren't experiencing much of it. Generally, we want to maintain our turns range and increase it slightly, but we have not observed any significant change in behavior.

Jeffrey Andreson, CEO

Yes. The inventory that customers are holding indicates we are still in a good demand environment. While we feel positive about our position, customers cannot simply build inventory on their end. We are increasing our consignment-level inventory. Even though our overall inventory decreased, there was actual growth in certain areas. We've managed to become more efficient in our manufacturing process and effectively support our customers' inventory needs on-site.

Operator, Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I'd like to turn the call back to Jeff Andreson for closing remarks.

Jeffrey Andreson, CEO

Thank you for joining us on our call this quarter. I'd like to thank our employees, suppliers, and customers for their support and strong execution in this operationally challenging environment, but with strong growth here in 2020. We look forward to updating you again on our next earnings call in early February. In the meantime, we are scheduled to participate in virtual conferences hosted by Stifel, RBC, UBS and D.A. Davidson, as well as a Virtual CEO Summit during Q4. Operator, that concludes our call.

Operator, Operator

All right. Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you, everyone, for your participation.