Q4 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the I core systems fourth quarter 2019 earnings Conference call.
This time, all participants are in listen only mode.
Later, we will conduct a question and answer session and instructions will be given at that time.
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 I Corp. Please go ahead.
Thank you there.
Good afternoon, and thank you for joining today's fourth quarter 2019 conference call.
As you read our earnings press release, and as you listen to this conference call. Please recognize that both contain forward looking statements within the meaning of the federal Securities laws.
These forward looking statements are subject to a number of risks and uncertainties many of which are beyond their control, which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in our earnings press release. Those described in our annual report on form 10-K for fiscal year 2018 on file.
What's the FCC and those described in subsequent filings with the FTC.
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.
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 January said, our CEO and Larry Clark, Our CFO, Jeff again with a recap of our results strategy in outlets and then Larry will provide additional details of our fourth quarter results and first quarter guidance.
After their prepared remarks, we will open the line for question Oh.
I'll now turn over to call the Jack Henry said, Jeff.
Claire Watts.
Welcome to our Q4 earnings call. Today, we are pleased to report strong revenue growth profitability and cash flow generation ahead of expectations for the core.
Total sales of $189 million were up 23% from the third quarter.
With incremental improvement across all aspects of our business earnings per share afford it sounds.
Were up 60% from the third quarter.
We generated $28 million, a free cash flow in the quarter and ended the year with over $60 million and total cash for the full year 2019.
Generate a $45 million, a free cash flow and reduced our net debt position by over $40 million.
During Q4, we saw strong increases in demand among each of our largest customers and across all of our businesses gas delivery systems ramped significantly on the quarter.
We also saw strong growth across chemical delivery weldments and precision machining.
We also achieved a stronger level of revenues from our market share gains compared to what we expected going ended the quarter. We ended the year was $70 million of incremental revenues from the share gains we've discussed across each of our product launch.
The beginning of the recovery and industry spending, which we reported on last quarter accelerated in Q4 and has strengthened into 2020, which is evident in our results and on an outlook.
The industry upturn started late in 2019, beginning with an increase in foundry and logic spending and the initial signs of recovery in flash memory.
Recent industry reports indicate continued strength in foundry and logic into 2020, along with improving conditions in memory.
In January we provided a preliminary outlook for the first quarter sales well ahead of expectations today. Our outlook is strength is toward the upper end of that range.
With Q1 revenue currently expected to be in the range of $220 million to $235 million, our outlook reflects significant sequential and year over year outperformance compared to the overall industry spending environment.
Our earnings guidance also demonstrates growth and profitability significantly outpacing our growth in revenues.
Now I'd like to review the drivers for this outperformance and why we expect the trend will continue through the year.
We believe there are multiple factors driving our relative outperformance this year compared to the overall industry the first to share games.
We came into 2019 with a range of incremental revenues expected for the year from our market share gains and each quarter. We updated you on our progress.
As expected these incremental revenues ramped as we progress through the year and our Q4 run rate reached an annualized level of around $100 million.
These tailwinds at alone at least $30 million a business on a like for like spaces and 2020.
We will also benefit from the continued ramp of easier be lithography with year over year growth in shipments expected for both 2020 and 2021.
Furthermore, we expect additional share gains in each area of our business that will contribute to our 2020 revenue growth story and gas delivery, we see opportunities increase our share with our largest customers and we also see opportunity to gain share within a relatively under sort of customer base and Asia.
And Weldments, we continue to work on additional qualifications across our customer base and precision machining, we expect to finalize our qualifications this quarter and begin to see first revenues next quarter.
Another factor driving our relative outperformance in 2020 will be success in penetrating new customers, especially those in Asia in the area of chemical delivery.
The largest growth driver for our chemical delivery business remains our proprietary liquid delivery molecule or LDL.
The largest opportunity for this business is with customers in Asia to serve the vast majority of the served market for what processes.
In Japan, we're still in the early innings of penetrating new customers, but our partnership is working well.
Very well as we're quoting several applications already.
Our goal is to have first beta units delivered this year that will position us for a meaningful contribution from this region starting on 2021.
In South Korea, we're pleased to report that we recently shipped our first LTM beta unit to the regions. The largest so we now this is an exciting milestone achievement for the company and for our strategy to expand our footprint in Korea.
Meanwhile, we continue to work closely with our initial OEM customer in the U.S. on qualifying our LTM at additional chip manufacturers.
Our proprietary LTM product is just one example of our strategy to increase the engineering and I see content Pricor in order to drive longer term expansion of our share of our served markets as well is to drive the operating model towards increased levels of profitability.
We're also very excited about the potential for a next generation gas panel, we continue to make good progress in the development of this novel and proprietary gas delivery solution.
We have fully integrated our acquisition of a flow control technology and engineering group and we will continue to invest in this area and 2020 as we drive for having beta units available by mid year.
The addition of this technology combined with our expanded manufacturing capabilities will serve to expand our value add and margins has this next generation gas panel as adopt.
The next driver for our relative out performance will be evident in our increasing gross margins in operational leverage.
And the early stages of the industry recovery during the second half. The 2019, we faced some gross margin headwinds starting with the higher per unit overhead costs.
Margins started to improve from Q3, the Q4, but not as much as anticipated due to cost associated with enabling the steep increase in output.
These included factors, such as increased overtime hiring costs and expediting fees.
Looking forward, we expect gross margin improvement of about 100 basis points in Q1 and continued improvements thereafter.
I believe these improvements along with continued control of our operating expenses will drive strong operational leverage through the year.
Consistent with our standard objected to grow profits faster than revenue.
We expect to more than doubled the growth in earnings compared to revenue as we look at our Q1 expectations can pay compared to the same period last year.
We also expect this performance to be evident in our year over year, increasing profitability for 2020.
Before turning the call overtones, Larry for additional details on our fourth quarter results in our first quarter outlook I went off for a few comments on my recent transition to CEO.
With the industry entering that strong period of growth in 2020, along with a positive trajectory of our strategic initiatives to expand our upgrade our offering a differentiated and proprietary technologies and to expand our share of our served markets. It is very exciting time to be leading nine core.
I'd like to acknowledge the tremendous support and Mentorship I've received from Tom resource, which transition to executive Chairman.
Tom and I will continue to work closely together on executing our strategies to solidify I of course position as a premier company and the semiconductor equipment industry.
Larry.
Thanks, Jeff first I'd like to remind you that you know metrics discussed today, our non-GAAP measures unless identified as a measure as GAAP base.
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 very helpful schedule with summarizes our GAAP and non-GAAP financial results, including the individual line items for non-GAAP operating expenses, such as R&D and asked today can be found in the Investor section of our website for reference during this conference call.
Fourth quarter revenue of $189.4 million increased 23% from the third quarter and was up 34% from the fourth quarter of 2018.
This was our third straight quarter of sequential revenue growth.
Most of all in the fourth quarter was 13.8% an increase from Q3, but still negatively impacted by the overtime expediting fees and hiring costs associated with the steep ramp and output as Jeff described earlier.
With operating expenses, increasing 6% to support new product development and ramp execution operating margin improved 130 basis points over Q3 to 7.1%.
Our interest expense in the fourth quarter declined as expected to about $2.5 million.
Our tax rate for the quarter was 0.2% due to our geographical mix of revenue being higher in Singapore, where we have a tax holiday.
Planning rate for the tax over the next couple of years continues to be in the range of 10% to 13%.
Fourth quarter net income of $10.9 million was equal to 5.8% of revenue and 48 cents per share.
Now I will turn to the balance sheet.
Cash increased to $60.6 million at year end as a result of strong free cash flow generation during the fourth quarter.
Days sales outstanding were 41 days, an improvement compared to 45 days in Q3, but higher than average, reflecting the rapid ramp and revenues late in the quarter.
Inventory levels increased 20% in the fourth quarter support the strong increase in business levels, while inventory turns further improved to 5.6.
Now I will turn into our first quarter guidance. Our forecast is for revenue in the range of $220 million to $235 million, which is up 16% to 24% from Q4.
At the midpoint of our Q1 revenue outlook indicates 20% growth sequentially and year over year sales were up to 65% compared to the first quarter of 2019.
Our earnings guidance of 64 to 74 cents per share reflects strong operational leverage during this rebound in industry spending.
With revenues, 60% to 70% higher than a year ago period earnings per share expected to be up in the range of 150% to 200%.
Our earnings guidance reflects improved operating profitability as a result of the increased revenue volume and a higher gross margin.
As Jeff described we see gross margin improvement by about 100 basis points in Q1, as we returned to the more typical gross margin flow through historically on the 20% range. We also expect to achieve continued gross margin improvement through 20 Twond.
We expect to see about a 10% sequential increase in non-GAAP operating expenses in Q1 over the 12.6 million dollar level in Q4, largely as a result of the typical seasonal increases related to U.S. employee taxes and audit fees as well as an increase in variable comp.
Station spending as a result of increased levels of profitability.
Together these are expected to add a little over $1 million of operating expense compared to the fourth quarter.
We expect operating expenses to fluctuate around this roughly $14 million level for the remainder of 2020, given the increased amount of engineering spending related to continued development of proprietary products and technologies.
Also reflected in first quarter EPS guidance ranges, our interest expenses in the range of $2.3 million to $2.4 million pre tax rate of around 10% and approximately 23.5 million diluted shares outstanding for the quarter.
Operator, we're ready to take questions. Please open the line.
Thank you at this time, we will be conducting a question and answer session. He would like to ask a question. Please press star one on your telephone keypad.
Confirmation total indicate your line is in the question Q.
You May press Star too if you would like to remove your question from the Q for participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star Keith.
One moment, please while we pull for questions.
The first set of questions come from the line of Mitch Steves of RBC capital markets. Please proceed with your question.
Hey, guys. Thanks for taking my question, obviously, a great Great guide there I'm just trying to have trying to get understanding for 2020 rigs you guys can't give annual guidance, we got a top customer talk about WFP being EPS call it 23% or so for fiscal year, 20, and you're going to gain some share in some markets. So is there any kind of qualitative you guys can give us.
And what the full year should look like as you consider going to come off a what looks like a 65% growth quarter March just trying to understand the seasonality into revenue line.
Yeah, Hi, Mitch.
Good question, we figured it would come out fairly quickly yeah, obviously, our largest customer came out and a and had a very a strong outlook for WFP next year also indicated that they believe given the strength and foundry and logic in the front half of the year that maybe the back half of the year might be.
Maybe relatively front half loaded I guess.
I mean, obviously, it's pretty difficult for us to see through to the second half the year, we we understand what others have said, but maybe I'll just offer a few areas. So one is we see a you know a relatively strong Q2. So we don't see a you know a again.
I wanted to Q2 fall off or anything like that so we see the front half is relatively strong.
In the back half of the year, we talked about on our call. As is you know we still think that a we're seeing the initial waves of memory spending improving.
We can see that through our Korean operation obviously directly.
I think as that continues into the second half that'll have a large impact on the second half a given our largest customers outlook I think they have some confidence that that that will continue through because there's a we're seeing the initial wave of that today. We also benefit from me you be and then then our third largest customer obviously is.
Hey, as smell so.
And they're seeing kind of the year kind of progress quarter over quarter grows so that that helps a little bit where the back half for the year plus our share gains.
That we will expect to get will probably be a little more backend loaded, whereas the ones. We have this year as you know there already in our run rate largely as we go so hard to really give you an absolute but you know our largest customer which is over half of our business has indicated that it might be slightly for.
And then have.
Front half loaded.
Does that help.
Yeah, So far I mean, just I want to fortune amounts of qualitatively it sounds like if Lam is right.
You guys, you, probably do a little bit better could you guys, you're benefiting from UBI am I getting the message correct I'm, making the assumption Atlanta numbers cry, Yeah, I, Yeah, I think that that what they deal with the you'd be ramping kinda through the years your correctly reading that and then the share gains just take a while to build up and then similar to this year they'll be obviously large.
During the second half of their than the first after the year for new share gains.
Okay and then just my second one so obviously aim at Atlanta been something like 80, 80% of revenue for you guys and how you're talking about kind of new wins outside of these two players is there any sort of order of magnitude you can give us for 2021 or any sort of I guess further outnumbered how much the new customers should take up as a percentage of revenue.
Material enough to call I'll say, 5% to 10% or is it really just gonna be a small small kicker for you guys and 21.
Yeah, I think deal that's a good question very difficult to quantify I I think if we hit if we had won some positions a in Korea or through our Japanese we could give you a little more color, but we're in the very very early innings, obviously it can be quite material. If we win one of the large Japanese.
Oh am said have some of the web processing tools.
As I said in my prepared remarks, we're really happy with our partnership in Japan. So having said that it takes quite a lot of revenue declined as surpass the 10% level, you know and so <unk>.
I think if you look back over the last couple of years, you'll see that the percentage of our two largest customers has come down a bit and that's really with the growth of our third largest customer and we also support am to some degree as well and so but I think what ill turn the needle as success engine.
And then ending in Korea, where we'll see that kinda other category grow a bit but it's hard to quantify now Mitch.
Got it perfect. Thank you.
Our next set of question come from the line of Sidney Ho of Deutsche Bank. Please proceed with your question.
Okay. Thank you and I have my congratulations to as strong quarter and guide.
In terms of Q1 guide you clearly things have gotten better sends a month ago that you. When you gave that that the initial guided but but that you gave the guidance prior to the Corona virus speak becoming a bigger concern curious how you think about how the site that risk and then what ways you may get impacted diary.
Neil indirectly and operationally are you, making any changes to accommodate that.
Oh.
Good question. So the Corona virus is a very fluid situation right now obviously.
What we've been at a we've had some we don't have an employee base in China. Just slight you know the first thing we did as a company was to ensure that we protected our employees and we've put some travel restrictions on and in anybody's. Its traveled to China. You know, we've we've asked them to say home for a week and things like that so our employee base.
Yes.
Protected I I think right now as we look at it they've extended the a Chinese new year by a week, we plan for Chinese new year for a full week, so weve front load our material receipts to keep the factories flown we have three or four suppliers that that.
Our materials that are impacted by this.
But right now it's hard for US too you know to quantify it I would say we have a larger revenue range. This quarter. So to some degree weekend a accommodate some delay in shipments having said that we we aren't seeing any demand reduction from our customers. So they will take everything that.
We can build obviously in these kind of ramp so.
At this stage, it's hard for us to to tell you exercise it if we get new news, obviously and its material we would like.
Great and maybe that's my follow up just wanted to follow but the previous question.
You talked about you expect the business to be relative to very strongly in Q2 I'm not sure. You mean revenues will be higher old flat, but if I. If I look at the strength that you're seeing in the first quarter and even second quarter. We'll all that's train show up in your customers tool shipments in the next one to two quarters, although some of that.
Good news kind of show up late in the year.
Well I don't want to be too specific about customers, but at what I will also answer that by talking about our lead time I would suspect that we ship gas panels somewhere between four and six weeks before a tool ship. So certainly some of what we see can hit in a quarter that we'll obviously materialize in our customers next quarter.
ER with the with the you be for example, it's it's almost six month lead time, and then you know in our components side of the business, it's probably somewhere in that level of four to six weeks too.
Okay, maybe a if I can squeeze in one more on the gross margin line.
You talked about some of the headwinds in your prepared remarks and also in the past and it's great to see you expect.
An improvement in Q1 by 100 basis points and continued improvement throughout the year, but based on your improving mix how should we think about a normalized level of gross margin at the current revenue level, maybe put that in context relative to last time, you where the symbol of red the level that we got it. Thanks.
Oh I'll take that so I think.
There's a few things that we have done this year. One is we've added capacity that's coming online in 19 that still.
Obviously, not fully utilized so that that impacts us a little bit the second thing as our plastics business is still not at the levels of revenue and margins than it was in say 2018. So we're still that that business is very links to memory and.
Specific customers and product mix is so we're seeing.
Still that's lagging behind the gas in other businesses that have ramped in the last couple of quarters, which is one reason why we we feel confident that we can say our margins will be improving through 20, because we do see as memory comes back.
That business should should improve as well.
The last thing that.
We mentioned in the prepared remarks, which I'll just reiterate here is.
Yeah, we are doing whatever it takes to get products to customers, which is including a higher levels of overtime that we expected included bonus programs around the holiday season on top of just a normal a holiday pay type things.
Crooners, we've been using outsourced labor companies were pretty much doing.
As it as the difficulty that we have now in that just general hiring marketplace with the strength of the unemployment and some of our key factory areas. You know we've had to go do some some things that are that do drive up our cost, which we'll still see some of that in Q1.
But I think a as we mentioned we expect by Q2 Q3. This will sort of worked its way out and we'll be at a kind of normal trajectory and then Sidney I might just to add you mentioned a strengthening mix.
When we come into these kind of ramps, it's really the gas panel side of the business that ramps and out ramps the components side and a and you know our gas panels kind of I've versus the average of our of our gross margin products is lower so that has a little bit too once that kinda levels out and then we.
Get some inventory replenishment by our customers and.
Growth in the components side of the business that will be helpful. As well as we go through the year right. Now you can assume there's almost little to none of inventory build in other words, what we're building as does going into tools and on so theres not a replenishment to any material degree at our customers for the coming.
On inside the business inventory.
Great Thanks and congrats.
Thank you.
Our next set of questions come from the line of Craig Ellis of B. Riley and company. Please proceed with your question.
Yeah, Thanks for taking the questions and congratulations on the strength in the business and executing to such strong revenues, Jeff I wanted to ask a follow up question too. Some of your prepared remarks, you gave us a nice long list of factors that we're going to drive relative outperformance in calendar 20, I won't repeat them all but the question is.
Beyond their magnitude.
Where's your intention as you started with.
The 30 million that you mentioned from last year share gain.
Down through things like Nexgen.
Gas panel beta is that could hit mid year are those in order of magnitude or should we think about them in a different way than that.
Yeah, Hi, I wouldn't want you to walk away thinking I listed them in order of magnitude.
Last year, you know because we were in 19, we were in a downturn versus 18, we thought it was very important to provide you guys with a more clarity on our market share wins and so we updated you every single quarter, just because it was quite material to this year. This year, we will have another round of market share.
Our wins some of what I talked about my prepared remarks really is setting the stage for some 2021 and a lot of that isn't liquid delivery.
That I talked about anything that we do in Japan will be 2021 or more than likely the Korea will be either late this year into 2021. So.
Not all of what I talked about will affect 2020, exactly but it needs to get in place to drive yet again more share gains as we.
Go into 2021.
That's helpful. And then just following up the points on both Japan and Korea can you just help us understand what steps are after.
You're working in shipping in beta how can things play out from there what milestones would you be watching and and how quickly could could they evolve.
Yeah, I think you think about fast qualification of six to nine months and a more typical ones probably nine months 12 months 14 months something like that so you could think of it is a is a year lead time they have to run these.
If they transitioned to liquid delivery from something they've built and design themselves and they'll be a long qualification and then there will be qualifications by customer and so.
Obviously were qualified at one one customer we're looking to proliferate that at our U.S. OEM. That's adopted this and that's taken longer than we had expected to so I'd say think of it in nine to 12 month bucket.
Great. That's helpful. And then lastly, you mentioned as one of the growth drivers.
And expansion and you'd be shipments year on year, we can certainly see that from a from that European supplier. The question is you should we think about hi course revenue wrapping fairly linearly with any of the unit action that we see Gore is there a change in content or.
For materials or work coming that would cause there to be variability either way.
<unk> you know when these are pretty complex a units that we build I'm much more complex than a a process tool gas power. So their lead time to build is a lot longer so where we were I would say were slightly backend loaded to map to two are.
Customers, Dave, but anything we generally ship in the last six months is going to be in the first six months of the next.
Calendar year, our fiscal year for us.
For our customers because we deliver about five months before they can deliver a tools. So we do see kind of ratable increases, but we don't see any step functions during the year.
That's helpful. Thanks, guys.
Our next set of questions come from the line of Karl Ackerman Cowen and company. Please proceed with your question.
Hey, good afternoon, Larry and Jeff to two questions. Please.
Of the 30 million like for like increase from a programs you called out in 2020 relative is 19.
Is the LTM the largest component of that.
I ask so we just might have a better understanding what the opportunity might be.
If you were to expand your LD module to that South Korean customer and.
Presumably customer in Taiwan, a in late 2020 and 2021.
Well I won't be specific about it but I would tell you that now it's not LTM. That's the largest component of the carryover I mean, if you think about we exited at about 25 million and and share gains versus what we entered the year at so when you think of the 30 I think a lot of it as some of the gas panel business that we want.
On a weldments and to a lesser degree.
Some precision machining.
And then LTM, so not to not to quantify but LTM is not the biggest portion of.
The 30 million.
Got it.
Maybe going back to gross margin for a moment, a it's certainly like to see a recovery in her business on the topline but.
If we go back to last Upcycle in Lake 17, 18, a you know your implied gross margin guide for the March quarter, while good in improving yeah still a couple hundred basis points below what we were at like two years ago, obviously, you've made some acquisitions in the process Weve, but we've also kind of done these.
70 million of incremental share gains achieved this year so.
I guess is we think about 2020 <unk>.
First where are we in the process of fully integrating cowell than talon. If those are not yet completed a second if classics had been margin dilutive.
Are all of your product businesses sacrosanct.
Where perhaps we might say, okay, let's try to reposition the business toward even more profitable areas like precision machining and.
And then third I guess what level of revenue would would probably be give us a allows to be comfortably within our long term gross margin margin model.
One long one I'll start and maybe Larry can come in so so what are the things that you're obviously you will refer back to probably 2018 kind of levels of gross margins. Since then we we've added about capacity is part about another 100 million dollar so.
You can think of the capacity that we haven't brick and mortars, probably takes us into the 1.1 $1.2 billion range. So that that has a cost to it.
And tell you grow into that so that's that's kind of one of the headwinds Larry talked about the plastics business, which is it's not growing in anywhere near the rate of the other businesses and once it does then we'll see that margin accretion and but but ticket to get back to 18, I'd like to like we'll need to hire.
<unk> component of our Weldments and precision machining business.
And right now in the initial front half of I'd say as the year the gas pedal businesses outgrowing now.
Understood I really appreciate that maybe maybe last one if I may just sneak one last one and just.
Tax rate I think you mentioned, 10% for Q1.
What do we think it's the right level for the full year. Thank you.
I think Tempur said is good we said between the 10 in 14% range, but I think tempur centers.
For now is pretty good it depends on that the mix, obviously, a product between the Singapore and a U.S. space, but I think 10% is good for now girl.
Our next set of questions come from the line of Patrick Ho of Stifel. Please proceed with your question.
Thank you very much and congrats on a nice quarter, Jeff maybe first off to start with some of the comment you made about the let what liquid delivery.
Stones, and your penetration into both Japan, and Korea as you well know that those are two Barry insular regions, who tend to prefer dealing with.
Local suppliers or even have their own internal supply I guess, what's been the key differentiator that one is allowed you to putting the door into how long do you believe it'll take before you know they sign on on a going forward basis on higher volume wise.
Yes. Good question, so you're right I mean, the Japanese market as a difficult one to penetrate which is why we've taken they the tactic of partnering with somebody it's a very well known a company and supplier to the Oems in Japan.
And it's a company called kits.
We recently were in Japan, semicon with them and so they're making very good progress and as I said in my prepared remarks, you know, where we're now getting requests for call. It quotes which really is a design why there's interest is a because it's much more modular it's much.
Smaller footprint and brings actually some improved technology not to mention much easier maintenance as it's been design. So that's the attractive nature, which as you know, bringing forward you know technology and cost and on a cost reduction for the car.
Customers first beta unit went out to a our largest customer in the largest Korean OEM.
And and so that that went out very recently and hopefully in the next month or so it'll be up and running on a tool and then as I think I said earlier.
On one of these questions as you kind of got to think of the qualification of nine to 12 months.
And then that's how you get qualified on the tool and then they'll go into a qualification at the customer level.
Great that's helpful way of saying, Japan, and Korea, it's the well make hopefully make very good progress this year that sets up a much stronger 2021 impact.
Right and maybe a quick follow up question for Larry in terms of the operating model, obviously, you've given some oh guidance and.
Outlook of improving gross margins and thatll be a key variable to improving the earnings leverage on the opex side of things, giving some of the investments you mentioned, it's going to be up a million dollars quarter ended the quarter.
And I guess some of the the investments that you're doing whether it's a ego in Japan, and Korea, as well as new product development.
Can you give a little bit of color in terms of opex, how you're going to manage that and how you're going to drive leverage on that metric.
On top of the improvement you'll see on gross margins.
Oh I think in general as I said, we expect to be in this $14 billion range. I mean, you have the seasonality of the taxes and other things in Q1.
We'll continue to spend money, where we need to on the R&D. It's a high priority is as Jeff mentioned not only for this year, but.
It has long as the longer term benefits in 2021.
As far as the sales in DNA line, we're watching that very very tightly.
We will be a in the process of our ERP implementation that that doesn't hit the pinedale probably until 2021 as we.
Kind of.
Start using the system, but a in general I think you know keeping in that kind of mid low $14 million range is where we want to be I think it's the right place to be and Oh still allows us to to make investments in R&D that we absolutely need is we hopefully.
It gets us penetration successfully executed here.
Great. Thank you very much.
Thanks, Pat Thanks.
The next set of questions come from the line of time, they fully of D.A. Davidson. Please proceed with your question.
Yeah. Good afternoon, so sticking with the cost questions I'm curious how does it take to find in train and employee so they can replace and from running overtime right now and then how do you balance, creating a lower cost workforce that way versus having the flexibility you get through just.
The tea.
Yes, good good question so.
I'd say the area that were foremost, obviously, most challenged and finding employees and we've been doing a pretty good job, but generally the U.S. unemployment rate is very unemployment rates pretty low. These are also skilled workers there's different levels of these skilled workers certainly on the weldment side of the business.
There's a portion that can come up relatively quickly and weeks. There's advanced hand welders for example that need to just have experience. Similarly on the machining side, there's very very few kind of pure entry level jobs. So we do have to find machinists was experience and we have to find some welders.
With experience so.
And we've been we've been ramping fairly fairly well, we will not eliminate overtime, Tom we will keep a certain amount of overtime. Because you know we do need to have some flexibility.
So we are willing to carry some level over kind of right now, it's very very high in certain areas of business.
I think Tom just a follow on I think the to the extent that in most of our factories now we are going all out hiring.
So it is a as Jeff mentioned the overtime rates are really to lie which do two things. One is just the economics of it but the other is just the employee.
The level of strain we put on employees. So everybody is committed to getting the product out to the customers they need it and we're doing that but.
We're working to more almost every factory now we are all out hiring was extra recruiters and.
Hiring bonuses another thing so we're committed to getting to a more normalized view around around headcount and that does involve some temporary workforce in some level of overtime, but clearly not to the levels. We're sitting here today.
Well it sounds like a high class problem there.
So Jeff Yes curious you know you talked a lot about how right now you're just really scrambling to meet the the customers demands for their shipments at what point do you think we'll get to stage, where you start to build inventory at your customers as well.
Hi, I would say, we would expect very little of that this quarter I think we'll start to see that next quarter and.
As is kinda, we've been alluding to the ramp is very steep so everything that we kind of deliver is getting put on a tool. So.
Eventually will catch up our capacity and we'll we'll be able to replenish the a inventories that are customers want to have.
On site that their businesses, so, but I think any meaningful.
Effect of this will probably be in the second quarter.
Okay give me if I were Larry you said that you had been adding capacity I'm. Just curious are you adding capacity across the board are there certain areas, where you gotta capacity.
Well, when you talk capacity and brick and mortar, we're adding very little of that but there's some theres some fixed assets and welding stations and some CNC machine seems like that for machining, but brick and mortar buildings were okay. Its people that is.
Is what will increase our so I don't yet people sort of across the board and then machines in the Weldment area and precision machining <unk>.
Thank you.
Thanks.
Next question from the line I've got to Richard of Northland Securities. Please proceed with your question.
Yeah. Thanks for taking my question just a quick housekeeping one what we sure.
Share gain revenue when the in 2000 and.
And 19.
We said 70 million for the year with the full run rate of about 100 million, which means we're going to say about 30 million of that on a year over year basis increase into 2020.
Oh, Okay, so kind of plug in that number in.
Youre welcome business before the share gains was down about 33% in 2018 versus your your big customers, which were down Ken.
Calendarized about 20% to 23%.
You tend to overcome performing underperformed in cycles in the cycle you know, what's what does your visibility and kind of whats downstream from you guys. Do you have a sense of what you know you ever very short channel, but what the channel inventory might be have your lead times stretch.
Oh, so good question.
When you say channel inventories, you're talking about inventories that we that we have at our customers that we've delivered that they have stock it's very little if almost nothing in gas panels for sure.
And it's a we haven't really started any replenishment as which I said on the last caller.
So.
From a channel I think the channels pretty lean in other words, what we ship I think is getting consume fairly quickly. So the first time, we'll see any kind of channel inventory build is probably in the second quarter.
And then have you had lead times stretch out in terms of.
Your customers thing rather than typically four or five weeks, it's been longer or is that pretty much actually isn't it.
Well I mean, we have contractual lead times that we try to meet certain aspects are places in our business. They are stretching a bit we're trying not to stretch them out obviously when you ramp like this you worked very closely with your customers just to really understand the forecast horizon. So we do.
I have better visibility as I said, even on the last call like a into Q2, we have pretty strong visibility and that helps us plan better and keep our lead times generally close to where they are out but they have stretched a little.
And then in terms of you know the last down cycle as you sort of started to underperform. Your customers. What were the first signs of that can you just give a little bit of colors to.
Uh-huh because going into the last cycle. You you you felt like you were going to attracting customers exactly in that Didnt happen and I just want to make sure sure I sort of understand is there something different here or will that be a point, where all here. We go again.
Well that is that it's a question.
So I mean, when you look at last year, obviously, you know the overall WSP market declined.
And remember around 20, 20% 12, 15 like that anyway, you got to remember that memory, we have a high exposure in memory. So we get hurt a little more on the down so memory was down about 40% year on year, so that affects us because our largest customer is highly.
Concentrated into to memory. We also he was a much bigger component and 2019 and so while we get to benefit from that is kind of a percentage of revenue were much smaller than the typical process to oil and gas panel.
But you know as for triggers you know I think we're seeing a <unk> what we really saw a memory was really comes down to pricing and inventory and things like that so we keep an eye on that right now with seem to believe those are moving in a positive direction for 2020.
So just let me follow on little bit. So one of the things made last year clearly from the Oems interest in the middle of the summer we were getting a lot of indications that it was a flat business and as part of that and the fact that the downturn was as many quarters as it was we know for for a fab.
That they were draining out their inventories. So I think you saw a little more of that impact on US then would be normal I mean, as even what they probably would be comfortable with but no. One saw the second half 19 that that ends up happening. So I think you see a little bit of that kind of over rotation and 19.
On the inventory and then you have a steep ramp which as Jeff mentioned.
They pretty much we're shipping you know gas panels and products that they want so they can immediately ship the tools. The second half of this year we should.
Definitely start seeing that that inventory get kinda back to normal level at least a request for them to replenish those inventories that they drag last year.
Got it thank you for your patience.
You bet. Thanks.
You know a woman killer.
Final question comes from the line of Quinn Bolton of Needham and company. Please proceed with your question.
Hi, Congratulations this is Charlie on behalf of Quinn, Bolton, Jeff and Larry Congratulations on the strongly south and our guidance for the next quarter. So I want to back up a little bit asked a question.
Yeah, the quantity plenty in probably this perspective. So if you are aligned with your largest customer who said I'll be happy about 20% some.
Plus minus and little bit front half loaded when I think about your gross margin does I mean does slow it looks to me maybe there's some headwinds for your gross margin profile. If we look into the second half of the year, but well I think about that the company up the mix in the second half its.
Probably a little bit more memory loaded than foundry logic.
Do you see I'm kind of tailwind for your gross margin in front that us back maybe there's a little bit difference in terms of your custom mix product mix, if memory and stronger than logic in the second half.
Yeah, we well I'm not going to talk specifically about you know price customer level pricing, but theres, obviously different gross margins for different as you know parts of our business I'd say the gas panel business is generally the lower margin business versus weldments precision machining and our plastics.
Business so.
So from a from a tailwind I think what we've tried to delight you guys knows what well see gross margin improved this quarter, we expected to approve again next quarter and then given the revenue levels. I think we have plans in place to continue to improve the gross margin for the year, we don't.
I guess panel that goes on a a tool destined for foundry or logic versus etch, it's more about how many gases they use versus.
You know versus a difference between the customer like we don't we price them. All the same it doesn't matter who the customer is the end customer to our customers. So.
Do you see like the higher content of block or high margin business like the components of machining weldments going a little bit higher yet memory ramps up in the second half or is that.
Well, Yeah, I'd say, we would expect are kind of our higher margin component businesses to probably grow a little faster by mid year to the point. We made is right now gas they'd be the gas delivery side of our business is ramping.
Clearly the fastest and so it is kind of outstripping some of the other components from a mix perspective, so once those kind of normalize and we get the inventory rebuilds that would be a nice headwind I think as we cross midyear.
All right. Thank you very much.
Yeah.
We have reached the end with the question and answer session now I'd like to turn the call back over to Jeff Andreessen for any closing remarks.
Thank you for joining us on our call this quarter I'd like to thank our employees and suppliers for their tireless efforts and tremendous support of decor during the steep ramp and business I'd like to thank our shareholders for their continued appreciation for our business execution and strong earnings and cash flow performance through the.
Industry cycles, we look forward to updating you on our Q1 call in early May.
Thank you.
This concludes todays conference you may disconnect your lines at this time. Thank you for your participation.