Ichor Holdings, Ltd. Price & Performance (ICHR)

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 Van Briesen, our CEO and Greg Swipe, 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 Andriesen. [indiscernible] Thank you, Claire, and welcome everyone to our 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 for results and our margin expansion strategies ahead for 2025. On the top line, our growth accelerated in with $2.33,000,000 dollars in revenue exceeding our expectations going into the quarter. Revenues were up 10% sequentially after roughly six straight quarters of revenues hovering at the $200,000,000 level. As a result, the year ended modestly stronger than expected with 10% growth in the and total revenues of $8.49,000,000 dollars up 5% from 2023. Customer demand continued to strengthen throughout the 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 CBD. 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 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 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 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 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 but as Greg will discuss in his remarks, the vast majority of the labor and inventory charges that impacted gross margin were unique to the 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 and earnings calls.

While the debate over WFE growth in 2025 intensifies 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 by webcast in Jan. 0, we believe this inflection point in our revenues is not a As we have gained clarity into the various margin impacts [indiscernible] 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 Ichor and exceeding 16% for 2025 even on modest revenue gains beyond which 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 qualification over the past quarter, and we'll be cutting these components into our manufacturing pipeline in We expect growth in our new products this year will be a key driver for margin expansion for I Core 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 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 2 largest customers already qualified, we are in the final stages of our third qualification. All 3 of our process tool 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 of our next generation gas panels during 2024. We achieved initial customer or OEM qualifications on 4 applications last year, and many of the next generation panels that we gained delivered in 2024 are part of a qualification process 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 2 additional applications beyond the floor we discussed previously. [indiscernible] 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 purchase for build to print cast panels, all the way up to our fully proprietary next generation gas panel. While these internally developed and manufactured products have most of the incremental R and 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 dynamic the mix shifts of investment priorities very positive for Ichor's business. And regardless of the magnitude of WFE growth, expected for 2025 Ichor, we are confident in our ability to outperform the growth in WFE [indiscernible] 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 results and provide further details around our financial outlook. Thanks, Jeff. To begin, I would like to emphasize that the P and L metrics discussed today are non GAAP measures.

These measures exclude the impact of share based compensation amortization of acquired intangible assets, non Ichor 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. Revenues were $2.33,000,000 dollars 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 and the that we were not able to fully absorb within the quarter. Additionally, we experienced higher than anticipated inventory charges associated with our year end 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 were slightly below forecast at $2,230,000,0.0 Net interest expense was $170,000,0.0 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 $109,000,000 an $8,000,000 decrease from While our P and L generated over $8,000,000 of positive cash Our net investments in working capital during was $11,000,000 primarily in inventory given the revenue growth inflection in After $440,000,0.0 of capital expenditures, free cash flow for the quarter was a use of $690,000,0.0 DSOs for the quarter were slightly lower than at thirty four days and inventory turns increased from 3.1 to 3.4.

We reduced debt by $190,000,0.0 during for bringing our year end balance of total debt outstanding to $129,000,000 down from $2.50,000,000 dollars 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 As Jeff mentioned, today, we are increasing the high end of our preliminary outlook discussed in with anticipated revenues in the range of $2.35,000,000 dollars to $2.55,000,000 dollars we expect gross margin in the range of 14% to 15%. At the midpoint of the range or $2.45,000,000 dollars in and 14.5% gross margin This equates to roughly 25% flow through from our baseline less about $150,000,0.0 of residual impacts ramping and training of our incremental machining [indiscernible] Once these incremental cost headwinds are behind us, we anticipate returning the gross margins above 15% by the and flow through in the 25% to 30% range.

Operating expenses are projected operating expenses are projected to be approximately $2,350,000,0.0 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 Today, we are also lowering our expected OpEx increase for the full year to an anticipated 5% to 7% compared to Net interest expense for is expected to be approximately $160,000,0.0 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 $6,000,000 Our expected non GAAP effective tax rate for 2025 is projected to be approximately 12.5%. For specifically, our EPS range of $0.2 to $0,.32 reflects our expectation for $3,440,000,0.0 in diluted shares outstanding. Operator, we are ready to take questions. Please open the line.

Thank you. We'll now be conducting a Q and A session. May be necessary to pick up your handset Thank you. Our first question comes from the line of Craig Ellis with B. Riley Securities Ichor.

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 1 for Jeff. So Greg, if if gross margins in calendar 25% are going to be above 16%, which would be a three thirty 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, etcetera. 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 the volume related cost ramp ups? Hi, Craig. Okay. So Let's see if I could get to all your points there. You asked quite a bit. To get to the we said the 16% by the end of the year for the full year, The headwinds will go away. As we said, those will exit right? So those won't materialize as we get through The internal branded products, right, that's going to continue. On the 25% to 30% improvement on the flow through. From an incremental standpoint.

Then as we get into the second half, as we get stronger, that will benefit as well. So tailwinds will go away. That will benefit us exiting the headwind, sorry. Tail headwinds Q2. The Israel branded products will continue to benefit through through the rest of the year And then as we get through the second half, we expect those to be in the the 15% to 16% and stronger in And Craig, Ichor would tell you, it's similar to it's Jeff, sorry, similar to what we've talked about in the past. Past, I'd say, obviously, some of the excursions that we have won't repeat. But really the new products are probably the largest driver. And then then given that we're seeing volumes up, year over year, then we get kind of the leverage as a core call it the core business excluding some of the new stuff. And so that is how we'll do it. And obviously, you'll see these margins accrete as we go through the year because of this and how they layer in. That's helpful. Yes. So I would just infer from that that that we've got Maybe 45% of the benefit on products 35% on volume and 20% from the absence of some of headwinds we had last year.

That's real helpful, guys. And then the second question was for you, Jeff. It's great to see 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 3 d NAND and its transition spend versus DRAM and high bandwidth memory versus gate all around and foundry. I think that's a good question. Craig. I mean, obviously, I think we see foundry Ichor remaining pretty strong. I think you've [indiscernible] 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 increased 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 the year for sure. Yes. And that would track with some of the things we heard last week too. Okay, guys. That's really helpful. Thank you very much. I'll get back in the queue. Thank you.

Thank you. Our next question comes from the line [indiscernible] with Stifel. Please proceed.

Hi there. Good afternoon. Thanks for letting us ask a few questions. Yes, maybe firstly, in terms of it sounds like you're Jeff, you're talking about at the moment revenue levels kind of staying At sort of the level, maybe through the balance of the year And so 1, I wanted to clarify that sort of the impression you're giving because and then kind of secondly, you did pull forward those direct labor costs, which sort of suggests that you expect business maybe even to Ichor up. And so are you being sort of conservative in terms of that stabilization outlook? And what you're really doing kind of putting more and higher levels of responsiveness into the business by prepping some of these costs now?

Obviously, I think the the way to think about it is demand strengthened in the quarter. We needed to add resources because we see this staying pretty sustained in the first half. With a modest, I would say at this stage, our view of the second half is up modestly. So we're comfortable adding the resources in. I don't think it the thing that you guys can see is we talk about internal supply, that's a whole another demand driver that I would tell you is outgrowing the rest of the revenue in the company as we start to cut these things in. So that is largely where a lot of these resources needed to get into as we completed some of the qualifications we needed to get in front of inventory builds and some of the demand for that.

So So I don't know if I answered your question entirely, but I think for us, we see we're not guiding but we see it pretty similar today. To with a modest increase in the second half. Got it. So this is some of that ties into the Internal sourcing for some of the qualifications on existing gas panels?

Yes, certainly from a resource perspective, a fair bit of it. Actually, [indiscernible] In the second half, like we talked about, we see foundry Ichor pretty strong through the year DRAM pretty stable through the year. But remember, our Litho business has been down. We see that coming back towards the second Ichor. Silicon carbide, for example, is been pretty muted since the We see that starting to materialize second half. So there's other things and share gains we've earned this year that will help us in the back half for Okay. And this is a little tricky, but if you did see upside materialize from etch and deposition and let's say it's on more legacy gas panel designs, How are you thinking about that impact on sort of the sequential gross margin progression through the year? Or do you think some of these some of your other margin initiatives can sort of help to balance that out as well as maybe seeing improvement in machine component business as well.

Yes. What I would tell you is that if our mix goes heavier to gas panels, which I think is your question, if there's more upside to that than it would have a bit of a muting on the percentage of gross margin. Having said that, starting to get to the stage where we've got kind of we're utilizing our overheads and all that much more efficiently because we do have capacity in place that can support numbers well above Right from the '22 timeframe that we were marching towards. So I don't think it will be as big of an issue as we've seen this year because we were still trying to qualify, we hadn't got our internal supply really going too strongly. And now as we turn this corner, I'm pretty happy with where we've gotten to on that. So that should help us call it add a tailwind to the margin that would offset any of those product mix issues.

Okay, great. Thank you. [indiscernible] Thank you. Our next question comes from the line of Charles Sey with Needham and Company. Please proceed. [indiscernible] Charles, your line may be on muted on your end. Right. I think we may have lost Charles here. I'll go on to the next [indiscernible] Our next question comes from the line of Chris Sankar Ichor, with TD Cowen. Yes. Hi. Thanks for taking my question. I told them first 1, Jeff, last quarter you were very bullish on NAND recovering Kind of curious how to think about your NAND shipments in Dec. 0 versus Sept. 0 think about it in March 0 versus Dec. 0 and the cadence of the rest of the year.

I would tell you that Well, 1 is it wasn't a huge part of our of our revenue. Obviously, we're starting off a pretty low base and growing, but it was a pretty healthy uptick in the a reasonably similar level into the which I would today. I would tell you that visibility for us now is probably gone from three months really strong to four maybe five. So That's kind of how I would call it at this stage given our visibility.

Got it. Okay. Helpful. And then then when I look at your European semi cap customers, obviously, you have 2 large ones, 1 is the EPI. Kind of curious on the EPI customer in Europe, How are you seeing the revenues trend? Because I remember that was 1 of the fastest growing Do you think they could be a third largest or a 10% plus customer this year? Or do you think it's I think they're not not going to crest 10%. I would tell you that they've done a terrific job. We've expanded our share beyond Epi, which has helped us kind of grow market share in that particular customer. And so but I don't think it'll crest, but we do see it growing nicely.

In 2025 from Got you. And then just 1 final question for Greg. I think the question came up earlier. I was just trying to figure out, can you just state Last year to this year, what is exactly how many basis points improvement in gross margin is coming from the proprietary gas panels?

That's given up a lot of information. Let's just say it's a pretty large component of the gross margin accretion.

Obviously, volume helps us year over year and and and just not having some of these excursions that we incurred in 2024 Ichor. So but I would say it's probably 1 of the largest of our Accretion.

Activities that we have year over year. Got you. All right. Thanks for the thanks Jeff. [indiscernible] You bet.

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

Please proceed.

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 they're more etching-depth related or growing above that, At this point, can you say whether or not you believe you'll grow faster than your OEM customers? I would say [indiscernible] obviously, we think definitely, as you indicated, is going to outgrow total WFE and I think as we look at our customers based on what you guys see, I won't talk specifically other than some of the analysts' estimates is that they will outgrow it. We think we can outgrow that just a bit So Okay. That's helpful. And then when people are talking about the NAND market and how NAND is recovering this year and that's great news, but you may be put into and how maybe over the next couple of years, there's quite a bit more growth than just this year left in NAND?

Yes. I mean, like guess, when we look at what we're doing as a company, we're kind of seeing it go from 5 ish percent of our revenue to about 7% of our revenue.

Sizable as our revenue grows too. But it's still not getting to the size of what we think View RAM will be and certainly not [indiscernible] we think for the last couple of years, we've been memory is about 25%, DRAM and NAND. We see that getting larger this year. As a percentage of our revenue, certainly. And then maybe a quick 1 for Greg as well.

When you look at the costs that you've layered in, the extra employees you've layered in, cast you over the last couple of months, And right now, you have revenue maybe gone up to $2.55,000,000 dollars in the What is the revenue capabilities of your current infrastructure? [indiscernible] of our Yes. Just with your current installed base of both employees and your physical footprint, how much revenue could you process at this point?

Meaningful additions.

Yes, from a facility point of view, clean rooms all that capacity is well north of 400. Right? And today, we try and mirror our headcount being added as close to the demand profile What you guys see is external revenue. We have a view of what we're cutting in and components and stuff that adds to that.

But we're still, I would say, well below that hundred plus capacity. So it's really people dependent. Right now, I would say once we add the bulk of the resources that we're seeing in and if we have a modest back half, it will be very little incremental people, we can probably do it with overtime and things like that.

All right.

Maybe 1 last quick question. Do you have any components that you processed flying around in space right now?

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.

All right. Thank you, guys.

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

Great. Thanks I just most of my questions have been answered. I just have a question on gross margins, clarity. Did you guys talk about gross margins being greater than 16% as you exited the year? Or did you say that gross margin would be greater than 16% for I don't know if I heard that right.

I think we're trying to Paul, so exiting exiting the year on a run rate north of 16% Ichor. [indiscernible] And then full year 16% Ichor. Well, you're at 16% Ichor.

And then what do you think optimal gross margins with increased proprietary products are as maybe as we look to 26% Ichor let's say WFE goes up again, how good could gross margins get?

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 $26,000,000 will be a stronger year than 2025 from a growth perspective. But 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. And 2026 if the quarterly run rates kind of get up and up over [indiscernible] Because we need to have that to absorb some of our infrastructure.

Great.

No other questions. Thank you. You bet, Christian.

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

Hi, Jeff. Hi, Greg.

Thanks for taking my question.

Just on your new products progress, the gas panel deliveries at you had in 2024, I think you had specified at $50,000,000 Was that consistent with your expectation?

I think last quarter, you're targeting something around 55 Yes, I said more than 50.

So yes, it was pretty much aligned. You always get few movements here and there, but We came in just about where we thought we would be. And so we Got it. Most of these evaluations are active at Device 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 Okay.

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

I would say that as we're shipping to their customer evaluations, we would call them commercial shipments. I mean, they're designed, they're putting them on a tool. Maybe the first half of those or less or something were probably what you would call kind of evaluations at our customers that are putting them onto their tools for the first time. But once they make it to a customer, we kind of treat them like a commercial shipment. And I would tell you that that is a much smaller component of our internally supplied components, that's a bigger number. So we're still in the early innings of the fully integrated new gas box. Got it. And you commented on this in the Jan. 0 presentation, but Do you still see no incremental impact from the export controls And do you have any preliminary thoughts on tariffs?

Yes. I was glad to see them delay for thirty days on tariffs. The rules were just to be clear, the rules were very to me ambiguous. Most of Mexico is where we would have felt that we have very little that we procure out of China anymore. So any inbound tariffs from China are de minimis for us. It's mostly around Mexico. Most of what we build there comes from The U. S. We were not very clear yet on what that is going to be. Having said that, I don't know where that will end up. I'm sure the rules will start to get more clarified. But it certainly it moves into our cost plus gas box business. It gets passed forward. Okay. And then other question was the China export. I think all of that's been baked into our visibility that we have. There's been no other downtake. Obviously, some customers have talked about the overall impact of their business, which has already been incorporated in any outlook we've provided Thanks a lot.

All right.

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

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 We look forward to our next quarterly update in or our earnings call. In the meantime, feel free to reach out to Claire directly if you'd like a follow-up with us. Operator, that concludes our call.

This concludes today's teleconference. You may disconnect your lines at this time.