Q3 2019 Earnings Call
Hi, all participants I know listen only mode later, well conduct a question and answer session and instructions will be given up dot time as a reminder, this call is being recorded.
Oh, no want to introduce your host for today's conference Claire Mcadams Investor Relations for Icor. Please go ahead.
Thank you Katrina good afternoon, and thank you for joining today's third quarter 2019 conference call, which will be available for replay Telephonically and I first website. Shortly after we conclude this afternoon.
He reader 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 which could cause.
Actual results could 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 2018 on file with the FCC and those described in subsequent filings with the FCC you should consider all forward looking statements.
Might have those and other risks and uncertainties. Additionally, we will be providing certain non-GAAP financial measures. During this conference call and our earnings press release contains a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures.
On the call with me today, our worst chairman and CEO , Tom or our President, Jeff Andreessen and Larry Sparks, our new Chief Financial Officer, Tom will begin with a recap of our results strategy and outlook and then Jeff will provide further detail regarding our growth initiatives before Larry then provides additional details of ours.
Third quarter results and fourth quarter guidance. After their prepared remarks, we will open the line for question I will now turn over the course to Talmers huh.
Thank you plan and welcome to our Q3 earnings call.
Today, we are pleased to report revenue and earnings at the high end of our expectations total sales of $154 million.
11% from the second quarter.
Incremental improvement across all aspects of their business.
Earnings of 30 cents per share.
30% from the second quarter.
Oh revenues grew sequentially for each of the top four customers revenues increased for gas pedal and chemical delivery businesses.
For Weldments.
For our precision machining business.
The incremental revenues of $15 million over the second quarter.
Primarily as result of an increase in our market share gains across all product lines and are easy shipments as we discussed on our last call.
Importantly for overall business the beginning of recovery.
Three spending also contributed to our shipment growth in Q3.
At this time I would like to switch gears and comment on the second press release, we issued this afternoon.
It is my pleasure to announce that Jeff and Dreesen will assume the duties CEO beginning this January .
Since our IPO nearly three years ago, one of my primary goals has been to build the strongest possible leadership team for our country.
Became excuse me for a company Jeff became President in April .
And has been doing a terrific job running the business and engaging with customers.
Guesswork.
Along with that of our executive team has made the encore organization stronger than ever.
Heading into 2020.
We continue to work closely with Jeff and the senior management team as executive Chairman.
Together, we'll work on our strategies to solidify I of course position has approved Premier company in the semiconductor equipment industry.
It's really very gratifying to returning over the CEO range to Jeff housing industry is at the start of a recovery.
Our forecast for Q4 is well ahead of what we expected a quarter ago.
At the midpoint of our guidance, we expect revenues to be up 20% over our strong Q3, reflecting outperformance compared significant outperformance compared to our other says two other suppliers in the industry.
The gross liquids to about $30 million of incremental revenues over Q3.
During the fourth quarter, all aspects of our business will contribute to this incremental growth.
Well have more revenue across gas panels, chemical delivery, weldments and precision precision machining and increased revenues from each of their top four customers.
As long as others have been reporting revenue growth in Q4 is also being driven by the beginning of recovery and capital equipment spending environment.
It's clear that the current level of foundry and logic investments has strengthened considerably in the fourth quarter.
And in addition, early signs of incremental memory spending lead us to expect a stronger year in 2020.
Looking back over the past five quarters, we have shown that we can operate with strengths and profitability during an industry downturns.
We have also communicated that our business will fluctuate through the cycle along with our customers.
While at the same time, we're executing on our strategy to expand our share of our served markets.
Each quarter, we have expressed our confidence that we would emerge from the downturn was with significant operating and earnings leverage.
That is in fact, evidenced by our Q4 earnings guidance of 43 to 51 cents per share.
Which at the midpoint is a 57% increase in earnings off of a 20% increase in revenue.
Impaired.
<unk> compared to our Q1 trough quarter, the midpoint of our Q4 guidance is 34% higher than revenues and 88% increase in earnings per share.
Assistant what I've stated objective to grow profits faster than revenue.
We are forecasting more than double the growth in earnings compared to revenue from the low point to the high point of 2019.
So with this being my last earnings call as CEO of like core I want to take a moment to reflect on the falling messages, which I've communicated consistently since our IPO.
We are semiconductor equipment supplier concentrating on fluid delivery technology.
We believe that the semiconductor business will continue to grow faster than other industrial businesses and that we are very well position without chief customer accounts.
We are expanding our served markets through strategic and accretive acquisitions.
I continue to expand our product offerings and our customer base.
Through each of our strategic initiatives, we are expanding our share of all serve markets.
And through the cycles, we have delivered revenue growth outpacing the industry in a growing revenues faster growing earnings faster than revenues.
I feel we have done a solid job executing on our strategies and delivering on our message.
I believe you can count on I core to continue to deliver strong execution against our strategic initiatives as we enter a new period, so semiconductor equipment things.
I'll now turn the fall over suggests to provide an update.
On our progress made in the third quarter on our key business initiatives and then our new CFO , Larry Sparks will conclude our prepared remarks with the financial details about third quarter results and Q4 guidance, Jeff. Thanks, Tom.
I'll now provide you an update on our progress against our market share gain initiatives as well as add a few comments on our operating performance before I turn the call over Claire.
We're continuing to see incremental revenues for market share gains, which as expected were up another $5 million in Q3 over Q2.
In August we took about a $10 million haircut to our expectations for the years, bringing the total to $65 million. However, we now things that will be slightly higher than that at $67 million for the couple of million dollars of upside expected.
For Q4.
After silver straight quarters of incremental revenues from our share gains our annualized revenue exit rate as we enter 2020 will be about $25 million to $30 million higher than our 2019 revenues from these share gains.
Our gas delivery business gains are largely in place and will now fluctuate with demand for system shipments, which are now at the early stages of a resumption of growth.
And weldments the delay that we experience as our customer manage the supplier transition is largely behind us and we're now seeing the revenue ramp.
And precision machining, we talked about these qualifications, having the longer cycle times, but we are now in the final stages of multiple customer qualifications. We expect these qualifications will contribute to our 2020 revenue growth story.
The largest growth driver for our chemical delivery business remains our proprietary liquid delivery module.
Our partner in Japan is now actively marketing the product and while it is still in the early innings. We're optimistic that we will see first revenue in the second half the 2020 as a result of this partnerships.
We're very pleased to report the news that we expect to ship our first liquid delivery module beta units to our largest customer in South Korea and the fourth quarter. This is an exciting milestone achievements for the company to expand its footprint and Korea.
Meanwhile, we continue to work closely with our initial OEM customer on qualifying or liquid delivery module with additional chip manufacturers.
To summarize our incremental revenue growth and share gains initiatives have done well and have improved to contribute approximately $67 million of incremental revenues in 2019 and position us well for a stronger 2020.
Beyond needs, we continue to make good progress on the development of our next generation gas panel and a fully integrated our Q2 acquisition of the flow control technology and Engineering group, we continue to have dialogue with our customers and expect to have beta units available by mid year 2020.
The addition of this technology combined with our expanded operational capabilities will serve to expand our value add and margins as this next generation gas panel is adopted.
Before turning the call over to Larry to discuss our Q3 results and our Q4 outlook I would first like to welcome Larry to the team.
Larry brings a tremendous amount of financial operational and industry experience [noise].
Well he has only been here for us with us for about a month he has hit the ground running.
Secondly, I'd like to give some color on the gross margin headwinds we saw in the third quarter.
During the quarter, our customers began rebuilding their inventories of our Weldment a machine parts at a faster pace than expected, which resulted in a faster release of our higher per unit overhead cost associated with these parts our mix of each of these shipments was also a bit lower than expected and we had a higher mix of gas panels.
As we look to the fourth quarter, we expect margins to improve as we begin to see leverage of our fixed cost structure and capacity addition.
As we will be adding mainly variable costs as the industry recovery continues.
I'll now turn the call over to Larry to discuss our financial performance for the third quarter and provide our fourth quarter outlook.
Thanks, Jeff first I'd like to remind you that the PML metrics discuss today, our non-GAAP measures unless 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 I'd also like to note that a schedule, which summarizes our GAAP and non-GAAP financial results as well as key balance sheet.
And cash flow metrics and revenue by geographic region can be found on the investor section of our website.
The third quarter revenues of $154 million increased 11% from the second quarter and were down 12% from the third quarter of last year.
Given the headwinds discussed earlier, our third quarter gross margin of 13.5% decline from the second quarter. However, we maintain good control of operating expenses in spite of revenue growth at the high end of expectations.
Opex was relatively flat from the second quarter at $12 million and included the addition of approximately $500000 associated with the IP purchase that we completed in Q2 as we also absorb a small engineering team.
Operating margin was also similar to the second quarter at 5.8%.
Our interest expense in the third quarter remained flat at $2.7 million.
Our tax rate for the quarter was a benefit of 7% a pre tax income the benefit was due to an adjustment to our full year forecast as we now expect more income in Singapore, where we have a tax holiday.
Third quarter net income of $6.7 million was equal to 4.4% of revenue and 30 cents per share.
Now I will turn to the balance sheet.
Cash of $30.2 million decreased $11.3 million from the second quarter, primarily due to pay down of $14 million on our debt, which was partially offset by positive operating cash flows of $4.3 million.
Days sales outstanding a 45 days increased from 27 days in the prior quarter as a result of heavily backend weighted revenue quarter indicative of the higher run rate entering the fourth quarter.
Inventory decreased 2% from the second quarter or $2.7 million to $106 million at quarter end inventory turns further improved to 5.0.
Now I will turn to our fourth quarter guidance. Our forecast is for revenues in the range of $180 million to $190 million, which is up 17% to 23% from Q3.
Our earnings guidance of 43 to 51 cents per share reflects improved operating profitability as a result of the higher revenue volume and improving gross margin, while maintaining tight control over operating expenses.
We expect interest expense will be down sequentially to approximately $2.5 million, we expect our tax rate will be approximately 5% in the fourth quarter and shares outstanding to be approximately 23 million.
Operator.
We are ready to take questions. Please open the lines.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchtone telephone is there a question have been answered all your Mr. move your yourself from the Q. Please press the heskey.
Your first question is from Craig Ellis from B. Riley FBR. Your line is open.
Thank you for the protecting the question and Tom Congratulations on all you've accomplished but the company hi, Jeff Congratulations on the CEO announcement and Larry welcome aboard so quite a lot going on congratulations guys. Thanks, great. Thank you.
So Jeff I wanted as my first question just to follow up on some of your prepared remarks with product activity in some of the dynamics it sounds like from the comments around.
Gas to liberate wealth men scent precision machining that that some of the things may be lining up so we have comparatively stronger weldment and precision machining growth.
Heading into calendar 20 versus gas delivery was that a fair read of what you're converting.
No what I I think that.
Kind of our gas our core Cas panel business is growing about the same rate is our other businesses I I think specifically what I was referring to in Q3, we had kind of initial wave that just was a little higher ex the than we expected and as we've talked about.
With a downturn you've kind of have higher overhead costs that are in inventory and those just kind of started to flush out sooner than we had expected but I.
I don't think that we're going to see.
Of all our businesses are kind of growing relatively the same color obviously in the quarter, we saw higher gas panel.
Which was what took us up mid point [noise], So one of those things.
Just quickly one of the things we had mentioned on previous calls is that.
We have been gaining market share and I think you'll recall, we said that the first.
Types of product to come onboard in terms of new share would be gas panels.
And probably the last that would come onboard would be precision precision machining and then this is strictly or as a result of the amount of qualification effort required for those two different kinds of products.
So in some ways, we've been a little bit heavier in gas in our market share gains and a little bit lighter in persist precision machining, but that will.
Even out over there.
Coming months.
That's helpful and.
Larry sense.
Since you handled the financials I'll throw went out to with regard to operating expense clear message on good execution in the quarter and and we've got the guidance, but as we think forward to the first calendar quarter. We would typically look for FICA hi to put some upward pressure on operating expense, but is there anything else we need to bear in buying.
And as we look towards the new year, whether its French adjustments et cetera, thanks, very much guys.
Well go ahead, Jeff [laughter] he's been here every month, so maybe I'll just jump in so obviously, you're right you see the employer taxes come back in that usually upticks in the other thing that we're also looking at is.
You know as as we get through our phase were in emerging growth companies. So our SaaS Sarbanes Oxley that will be one of the things that may have an effect in Q1, we're still assessing math right now, but other than that I think the messages, we tightly controlling opex and when we added it's.
Because we need to add it in other words, so I wouldn't see a big uptick.
But there may be some modest upticks, obviously as you go into fourth quarter, you get a little bit of an uptick on the audit fees in Q1, you get a little more audit fees and so there will be an uptick but mostly around those types of things.
Got it thanks guys.
Thank you. Thank you.
Your next question is from Patrick Hall from Stifel. Your line is open.
Hi, Thank you very much and I also like to extend my congratulations.
So you Tom the success of our core he is a testament of what you've done for an extended period of time and Jeff I also want to wish you.
The best in your upcoming role as CEO .
Thanks, Pat Thanks, Patrick.
In terms of the B opex structure, maybe Oh I'm sorry in terms of the hobby flexible operating model that you have shown this resiliency through both the ups and downs.
But a lot of it as coming to pass through your core gas panel delivery systems business are there ways to further optimize both the weldments in precision machining since those acquisitions and you put a lot of working effort into you don't.
Fixing those models do you believe that there's additional moves you can make to optimize them further.
Patrick it's Jeff so its a really good question I would tell you that and downturns, we spend time optimizing and.
Where we're starting to grow out of this obviously you know we've got to add people or to the cost structure and whatnot and we will see better leverage out of those businesses than we did initially when we bought them. So we've had a for a couple of years now and so we're pretty happy where they're at and so.
We've always said the incremental margins associated with you know weldments and precision machining and some of our plastics growth are higher than the the average core business models. So yeah.
There's another element, Patrick which is that over time.
We expect to leverage, especially the precision machining also some of the weldments into the gas panel business.
Both as additional vertical integration, but even more so with additional value added differentiation. So.
We're just kinda beginning of the journey of taking advantage of these acquisitions and and.
We were looking forward to a adding more and more value with us.
Right. That's really helpful. As my follow up question in terms of the gas Kinda system you beat systems.
Customer has talked about a strong order flow that they saw it this quarter for delivery next year those are probably going to be for their next generation systems is there any different contracts or increase tapping on tends to be trends or is are you just going to benefit from the volume.
In 2020 .
So it's Jeff it that's a good question, yes, theres been some content shift between the two generations. We can't obviously tell you to specifically whether it is that's a customer but there's.
And we're also going to you know what we expect to see higher volumes as we go into 2020 in AG would be.
And and I would also note that our lead time as about two quarters before you know they typically would ship a tool for we ship or somewhere around five or six months prior their shipments typically.
We began should bring the new well begin shipping the new tool in the third quarter.
And in fact.
Some of the and.
Spoken heroes here over the quarter was the guys working on that in that.
As you know through understanding and watching.
The the introduction sometimes.
These products don't go all that supposedly into this is a so this is a significant.
Revision of the original he will be tool in <unk>.
Everyone performed really well in the coordination where they have CML was terrific. So.
We're really quite pleased about it.
Great and again best wishes top Nike banks Patrick.
Your next question is from Quinn Bolton from Needham <unk> Co. Your line is open.
Hey, guys I'll offer just as a group congratulations and since we had a number but wanted to interest to step back on gross margins inventory levels of have come down over the last four or five quarters I understand that you know you get some of this higher cost inventory flushing through cost to goods.
At the initial phase of the upturn, but wondering how quickly do you think you start to get.
The higher margin products flowing through revenue is that a quarter or is that two quarters, and then sort of related longer term question. If I look back to the peak of the 17 18 cycle your margins were.
Hovering around 18% and that before you had meaningful contribution from some of the Weldments and precision machine parts acquisitions is there any reason why you think you can't get back to those previous peak if not higher over the next upturn.
Well I mean, if we get to those levels that would be you know we would think we will get back to their obviously I think the mix change will be helpful to that as well. Your first question was how long will take to kind of normalize your overheads and it's we have different types of businesses. Some will take a little bit longer, but you know probably on average.
We saw a little bit in the third quarter, and we'll probably see a little bit more in the fourth quarter and it may or may leak into the first quarter to some degree.
Great and then a second question just looking at the end of 2019, we've I've seen a very strong uptick in.
Foundry logic spending and I think there's going to be Oh, I am so great fourth quarter and on the foundry side. If you look out to the first half of 2020 do you see any pause in that foundry logic side of the business, where you think a combination or maybe if you do do you think a combination of share gain.
Change and the memory business recovery and can sort of offset any potential pause you might see in Q1 or Q2 on the foundry logic side of the business.
Hey, So I guess, what we're seeing is.
We see a pretty strong foundry logic this quarter, we don't get all the visibility at the customer as we get passed a quarter sound, but it seems to have some carry into the first quarter, but we're seeing some early signs of memory recover.
In a in the business as well so we would agree that if.
And I think in general most people think foundry logic or is gonna be relatively flat on an annual basis 19 to 20 and so.
If memory does recover then we'll see growth year over year.
Okay, great. Thank you.
Your next question as from Sidney Ho from Deutsche Bank. Your line is open.
Great. Thank you, let me echo the congratulations to all three of us well.
Do you want me to questions just wanted to follow up with the last question how much of an improvement in gross margin should we expect in Q4 and how much do you think your gross margin would have been in a normalized situation, where you don't you don't flushed through the high cost products, assuming the products and assuming no revenues, it's the same level and that didnt.
It doesn't really change in other words are there any one time charges in data we should be aware.
No I don't I don't think they're earning what you would call onetime charges in Q3 other than the fact that you know we had an earlier save pull of inventory into our customers factories and we had expected. We don't guide margin as you know Sydney. So specifically, we will see it improve off.
This this level into next quarter I think what I would tell you is that we've already commented on opex going up just slightly from Q3 to Q4, so you'll see that there'll be some recovery there and then as we continue the kind of normalize or overhead rates and get that through the piano will start to see the March.
And accretion.
Improved quarter over quarter, and obviously the revenue level.
Higher it goes better it goes for us on the incremental basis, though.
Okay.
My follow up question is on the share gain opportunities I think you mentioned 67 million for the year that would imply somewhere around 20 $325 million in Q4 as you look forward to next year is staring seasonal impact we should think about Oh is it more more like up into the right and the question is more about to slow but to me.
And just as a follow up to that in the past you talk about in four or five different areas of Ophone shaking opportunities can you help us understand one of the here is you have seen the share gains this year, what I think everything got pushed out to next year and and how that profile may change in 2020.
Yes, Sydney.
A couple of things one is using your number.
And we knew that the share gain was going to start small in the first quarter and then ramp up so using your number for the fourth quarter obviously.
25 million times, four is 100 million, which is more than the 67. We did this year. So we will continue just based on the wins.
We already had we will continue to see additional revenue from those gains.
I've already mentioned that we've been.
Let's just say.
A little slower in terms of getting those wins on the precision machining and I mentioned the reason why because of the challenges of the qualifications on those products and you can understand that sense, it's vitally important to the flow of the gases control the actual activities inside the chamber. So so.
This is this is a very critical items.
And so we have not really seen much of that hit the score card yet.
And we would expect to see that next year, so that would be in addition.
Having said that we've also said that you gain share during the downturn when people have time to do the qualifications.
And it was part of our stated strategy from the beginning of the downturn that we're going to work really hard to gain share and I'm really pleased with a the amount we've captured and be the affected had in terms of helping us through the downturn and more importantly, the ongoing.
Going impact it has as we move forward.
There's more to come.
But I don't suspect you will see kind of a separate share gain initiative that we spoke of quarter after quarter.
I guess the final question was.
And then basically I think.
We've answered it already slightly but.
The share gains across all the different product lines.
And.
Just because the some of the precision machining hasn't hit the revenue line, yet doesn't mean that we hadn't been working on we've been working across all the product line. So.
But that's gone well there'll be some more I think we we you know we won't be spelling out though for you we won't be saying.
20 million this quarter 50 million next quarter et cetera et cetera.
I think that was a good exercise and keeping you both up to speed on what our initiative was and it was good for us.
In terms of you know really committing to it and then managing and measuring ourselves off that success.
Great I appreciate it maybe last question here I think you indicated that in your press release. They did beginning of the recovery in memory capital investment what is your current expectations in terms of timing of that and can you give us a little more color what you've seen that gives you that confidence debt.
Is that already showing up and you would result, perhaps in some of the longer lead time products.
The simple answer is yes, I mean, we you know as we acquired a business in Korea were a little closer to the memory.
Big customers as you know and so we were seeing a and by the way that business was as we've talked about you know when the.
First quarter, you know we added as it does probably two or three times, what it did last quarter. So it's been the timing Sinbad there, they're definitely tied to memory and particularly Threed NAND. So what we've seen now as early stages of Threed NAND investment.
Great. Thank you congrats and all the good resulting guy in all sold on the new roles that you guys have great. Thanks you.
The next question is from Karl Ackerman from call. It line is open.
Hey, good afternoon, Tom it's been great getting to know you since since your IPO and I wish you all the best and your future endeavors and Tom a Larry certainly congrats on your new positions of him of influence.
A few high May a question on gross margins. The first last quarter you spoke about some mixed headwinds from your plastics business as well as of the fact that some of the share gains and gas.
Initially at lower margin I guess, the same time, you spoke about how weldments would add ballast to margins into the December quarter.
So maybe just provide a bit more color on the various sub components and how they formulate your view for margins in the December quarter as well as early 2020 and have a follow up.
Yeah I mean.
So let me just go one or the time and hopefully a cover so our plastics business is going to big from our view now is is still not recovering to the level, we're seeing on our gas distribution business. So to some degree that headwind is still in place in the fourth quarter as well, which is not helpful to the gross margin, but we are starting to see.
The early stages of that revenue growth coming back to more normalized it's just not happening as quickly as on the gas distribution side I think the point, we made about gas distribution is is when our average margins you know we're.
In the mid teens, you know we have things that are higher and things that are lower so one gas grows a little faster its incremental flow through is less than weldments, and particularly are probably our highest flow throughs on precision machining. So.
All of those have begun now it took us a little while to get through the ER the transition from one supplier to another one.
But our Weldment, a new weldment shares are starting to grow.
Maybe not as much as we anticipated at the beginning of the year, but they are going to be incrementally positive to the gross margin and so as we come through the next two quarters and with higher revenue growth will see margin accretion from those so I hope that answered all your questions.
It does Tom on outsourcing.
I believe of the initial 75 million of incremental share gains the weldment in plastics portion ramp.
It was dependent on or predicate on a recovery from the memory market. So.
When should we see be ramp of the Weldments business. The ex next year and would you say that opportunity is the same size or is it just much much larger than expected 90 days ago.
So it's Jeff So plastics is is really tied to.
Today.
A large component of that as foundry logic. So that's what drives our plastics business in general particular, LTM is tied to a logic customer or other plastic or businesses are tied.
To.
Two other applications that are more in the foundries space and so plastics memory will be helpful. At some stage when Threed NAND gets going we do have some piece parts and components that we manufacture that that'll that'll grow on the Weldments side, you know when we made the acquisition in Calwell several years ago.
Was primarily a focused on our largest customer which has a very heavy.
Portion of their business to memories. So as memory goes that business will grow quicker, having said that we have by adding our second largest customer weldment position, we have a much more balanced.
Now.
Relevant business as as that grows across more applications.
Thanks, Jeff one more if I may recently, China Big fun revealed that phase two will focus on etching machines in film and testing cleaning equipment.
Given your unique position within the supply chain I'm curious how you.
Or your teams see the development of indigenous China technology on etch and CVD equipment as well as their ability to improve yields on existing manufacturing processes and whether their desire to develop their own equipment is additive to your model next year or two thank you.
Well [noise].
There's a lot of different ways to go about.
Trying to answer that question.
A a lot of it is tied to.
The different geopolitical.
Trade wars, and whatever going on and to the extent that count countries tried to prioritize their internal manufacturing I think we're at a state right now where that seems to be the case and there's no doubt.
That they're a couple of very good.
Manufacturers inside of.
Japan.
One of them that had done a lot of MOCVD tools, which are not very interesting to the bulk of the semi space has some capabilities in etch tools. So we'll expect to see that.
Although to be honest with you I expect that to be pretty small.
Second to have some.
Really good and interesting.
Capabilities and the clean space.
We don't have our products are art today, not really tied into the clean space, but we think they could be through the liquid delivery modules. So.
In many ways, that's an interesting space to us.
But again this particular company those successful and kind of fed at nice those splash Sean.
And the stock market. They they are not that large either so the bottom line as is.
I in my opinion to reputable companies.
Chinese.
Fabs will use as much of their equipment as they can buy they don't think it'll be all that much compared to the spending of a fab.
I think there's a flip side to that story, which helps us dramatically which is the.
Kind of a corollary trade war between Korea and Japan.
This one is actually probably even more meaningful in that there's a lot of activity going on in Korea today to try to replace Japanese based product with American based product and.
Beyond a semiconductor this goes for any type of product coming into Japan, <unk> coming into Korea.
So this is a great opportunity for less Tokyo electron product, where we have very little share as you know.
And more opportunity for Lam and and applied materials, where we have.
You know very large share.
So I think this particular activity will far over away or whatever we might lose from an edge tool.
In China coming from an indigenous supplier.
Very helpful. Thank you gentlemen.
Thanks.
Your next question is from Mitch Steves from RBC line is open.
Hey, guys. Thanks for taking my question really just had two pretty high level. So just the first one is just kind of.
Ponant cost when you go to seven nanometer and below kind of these new equipment products is there any sort of a content change story or pricing story when it relates to create the higher end tools and then secondly, do you guys kind of think you can get to high teens gross margins long term again remember that was kind of a higher end target and we got there for a couple of quarters is that back on the table assuming.
But there is a memory Rico memory recovery.
For 20.
Yeah first of all the as you go too.
Different nodes.
There's not a discernible difference in component costs for our products.
It goes without saying as as you marched down any maturity curve, you're growing its back to be getting lower component costs.
As people, you know grow and develop and mature.
But.
It's it's not something that is oh here come seven.
Nanometer and you know all the sudden prices are going to be shrinking et cetera.
So so I wouldn't I wouldn't worry too much about that what was your second question, Chris Farley and it's the second one just gross margin yeah. So I'm just let me let me answer it this way let me answer it this way so.
We have a business model the business model says our long term goal is 19% to 20% gross margin, we're not changing that.
And we certainly believe during upturns and margins will improve and as a bunch of the things that we've been working aren't as I said before start to hit the scoreboard margins will improve.
And that will that happen over some time, which is why we call that a long term model.
To be blog.
First quarter of 2018, almost two years ago now we did have some very high margins.
And and and fundamentally that was a.
A huge jump in volume I think we did 183 in the fiscal fourth quarter of 17 and to 60 in the first quarter of 18.
And so a lot of that came from just incredible amounts of overhead absorption and labor stretching et cetera et cetera.
As opposed to something that was a long lasting having you know so the bottom line is that the business model of 19 to 20 dose is corrected and we're marching towards that every day.
Okay. That's helpful. Just one really small one just is 12 million to 13 million kind of the normalized opex, we should assume.
Or is it or is there going to be some more.
Or would that increase if revenues increased let's say, 20% well I think if you're talking about the fourth quarter. The 13 number is way too I mean, I I would say as we look at next year, we have to.
Become Sox compliant and where we're looking at potentially in ERP upgrade we might get to that higher end at some point in the air.
Got it okay. Thank you thanks Mitch.
Next question from Tom Diffely from D.A. Davidson I was hoping.
Yes, good afternoon, and congrats to everybody and Tom we're going to Miss your industry streak talk going forward.
She was projected Phil.
A couple of questions here is the first one I'm on the share gains just to confirm when he gets to the steady state of 100 hundred 20 million dollar run rate a adept plan going forward do you expect that business to ramp, which you know the rate of your other business ramping or does it ramps slower or faster what do you think.
Yeah, the natural ramp is from there.
You mean, the market share gains we've been talking about Uh huh.
Yeah. So once you get that those market shares in place Yeah, I mean, I think I think on the gas panel side.
There there there are in place I mean, we're going we're going to now flex with the market on those there may be another leg at some point, but the ones. We've won we won pretty early in the year and so now they are floating with the market I think.
I think there there are certain components, particularly I think when memory recovers, we'll see a little bit faster growth in both the precision machining and weldments versus when memories kind of run them sideways. So that'll be helpful. When that occurs and like we said we think we see some of the early signs of.
That spending coming back.
Okay, and then from the initial hundred million projection back for five quarters ago.
Just wanted to confirm it was just market driven declines and not a huge losses are programs that drove the decrease in the subsequent increase.
So the answer is yes, and then I'd say in the Tom already talked about it. It's just taken us lot longer to qualify some of the precision machining componentry. So some of that decline was just that being delayed but we're still working on those and actually progressing much better than than this time on our last call and then the other the other.
Sure.
Part of that business as you know LTM as a little lighter as we said versus what we wanted to to achieve this year and our liquid delivery module. So that will pick up steam next year. Two is our customer start to qualify additional customers and there's a success in Korea, we're really happy with the progress.
In Japan.
That we're seeing in the first three months of our partnership.
Okay, and then I guess when you look at prospects of nice ramp over the next several quarters are you find it to be a tougher market to ramp up your employees.
Little bit [laughter].
Now we're at a 3.6% unemployment in this country.
And then a poor is probably at that same level are lower so.
And.
This is clearly a situation where there's more.
Opportunities then able bodied workers. These days, so it's a little bit harder, but we have ways of doing it and at this point in time were very satisfied with all of.
With the success, we're having in terms of getting the people in the right place at the right time.
Okay and then the other half of that was during the slowdown we're able to maintain kind of the skilled will be in.
I see that you needed.
Absolutely absolutely.
And.
Well during may slow down we don't take.
Reduce the head count dollar for dollar with the slow down or <unk> or in the same ratio.
There's a certain degree of people who were not you know who are key to the processes and number of people who are very important to getting more.
Materials, and engineering and processes running properly they those people we never let go of.
Great Alright, congratulations everybody and thanks again, thank you. Thanks.
Our next question is from Goswick shrink from Northland line is open.
Yes, thanks for taking my question.
Going into the downturn you can have underperformed if your customers normalized inventory and.
You know.
That you're going to outperform on me Peter.
Into a little bit him an upturn can you talk a little bit about where are your customers are with their inventory and sort of when you think there normalize to their run rate of shipments it's hard to disaggregate that from share gains. Yeah. We were just talking about this.
Obviously a.
And in many ways, it's a little bit hard pressed to understand exactly where the customer inventory levels are.
I know as we were going down you folks with US where are the inventories in terms of the customers and some of them, we know and some of them, we didnt, having said that.
It is normal that they would be rebuilding some inventories however.
We were just talking about this and I think where where things are right now is.
Most of what we will build this quarter will go into shipments and a very small amount of it will go into rebuilding inventory.
And to the extent that.
The ramp continues that that percentage and ratio might change.
But this quarter, we don't anticipate a great deal of our product going onto their shelves I think most of the product we shipped to them will go into their tools and out to the customer.
Got it and then Tom we talked about value added products and I was just wondering if you can kind of walk through.
When you expect to start.
Beta testing those getting them to customers hands and when we might expect.
A ramp of of new programs with a more value added.
Higher margin content, hey, Thank us good question, it's Jeff.
Our first prototypes won't be available until about mid year and then.
It's a long cycle of getting those designed into products that our customers. So I don't want to lead you to believe that next year is going to have some big bubble because of this it may be a several year journey because it's a it's a pretty novel approach to some degree of having said that and we've talked about it before RK.
The ability.
That we've added a with Weldments and machining, there's more components that we can sell to our customers.
That we buy today. So we're focused on that too. So while we're also talking about our next generation gas panels. We're also starting to position other components that we can manufacture out of those sites to increase our value that we actually manufacturer Chinese gas Pam.
Which will be helpful to the margin.
Oh, Okay. So just to regurgitate, you're going to in the near term you.
We're going to drive content per box longer term, you're going to thrive value per box.
Yes, that's a good way of thinking about it.
Okay alright, thank so much congratulations thanks guys.
I'm showing no further questions at this time I would now like to turn the conference back to Mr. Tom Guard.
Well. Thank you all for joining us on our call this quarter and I'd also like to thank our shareholders employees customers and suppliers.
For their contributions state court during my tenure here.
Next quarter, you'll have Jeff and Larry update you on our Q4 results and thank you and we'll look forward to great quarter.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.