Q3 2020 Ichor Holdings Ltd Earnings Call
Good day, ladies and gentlemen, and welcome to <unk> third quarter 2020 earnings Conference call.
This time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this call is being recorded.
Now I'd like to introduce your host for today's conference Claire Mcadams, <unk> Investor Relations for our core cleared the floor is yours.
Thank you good afternoon, and thank you for joining todays third quarter 2020.
As you read our earnings press release, and as you listen to this conference call. Please.
Nice at both contain forward looking statements within the meaning of the federal Securities laws. These four.
Looking statements, including those made about the impact of Kobe 19 on our operations are subject to a number of risks and uncertainties many of which are beyond our control and which could cause actual results to differ materially from such statements.
These risks and uncertainties include those spelled out in our earnings release. Those described in our annual report on form 10-K for fiscal year 2019, and form 10-Q for fiscal Q2 2020 on file with the FCC and those described in subsequent filings with the FCC.
Noted in those aforementioned filings, we remind you that the COVID-19 pandemic continues to create significant uncertainty in our industry limiting our ability to provide longer term forward looking statements you should consider all forward looking statements in light of those and other risks and uncertainties. Additionally, we will be pro.
Fighting certain non-GAAP financial measures. During this conference call our earnings press release, and the financial supplement posted to our IR website. Each provide a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures.
On the call with me today.
Jeff Anderson, our CEO and Larry Clark our CFO.
Jeff will begin with an update on our business and a review of our results and outlook and then Larry will provide additional details of our third quarter results and fourth quarter guidance. After their prepared remarks, we will open the line for questions.
Now I'll turn over the call to Jeff Van Rhee said Yep.
Thank you Claire welcome to our Q3 earnings call I Trust and hope that all of you and your families are staying healthy and safe.
Today, we reported another strong quarter of results with Q3 coming in above the midpoint of both revenue and earnings guidance.
Revenues were $228 million up 3% from Q2, and our sixth straight quarter of sequential revenue growth gross.
Gross margin increased 60 basis points operating margin increased 90 basis points and earnings per share grew.
15% over the second quarter.
We also had a strong cash flow quarter with free cash flow of $21 million for the third quarter.
Our results for the third quarter demonstrate our continued execution of our stated objectives to outgrow the industry and grow earnings faster than revenue.
Year to date in 2020 revenues are up 55% and the P. S is up over 120% over the first nine months of 2019.
The global wafer fab equipment or WSE market continues to be strong as we near the end of 2020 with full year growth expected to be up around 15% from 2019, we.
We continue to see strong levels of demand from our customers and that's the midpoint of our Q4 guidance, we anticipate a seventh consecutive quarter of sequential revenue growth and we also expect continued sequential increases in gross margin operating margin and earnings per share.
At the mid point of Q4 guidance I, rather an abrupt this year will be 45% approximately three times, the overall industry growth and our U.P.S. increase for the full year will be about double the rate of our revenue growth.
I continue to be amazed by our employees and the source and supply chain partners, who are working closely together to deliver such strong performance and a new record sales year for high court in 2020.
I want to thank our employees and partners for their incredible contributions as we keep our business operating at such high levels as we navigate the challenges caused by cold at 19.
In my prepared remarks today I would like to focus primarily on how we're outgrowing the market and our strategy is to continue to perform outperform industry growth.
Larry will talk about our strategies to drive continued gross margin improvement along with close control of operating expenses to deliver significant leverage to the bottom line and continued free cash flow momentum as we move into 2021.
First regarding the impact of Kogut on our operating environment.
Operational capabilities and supply chain have largely recovered from the significant constraints experienced earlier this year, but we remain vigilant.
And continuing to take all appropriate actions to protect our people and safely maintain business operations globally well.
Well our revenues are not currently hampered by covered related constraints, we still see some unfavorable impacts on gross margin, which Larry will discuss in his remarks.
Turning to the demand the demand environment.
Just as we anticipated three months ago on our Q2 call in August we continue to see strong levels of customer demand through the end of 2020 with sequential increases in revenue during each fiscal quarter of the year.
This is consistent with the forecast for a stronger second half as we indicated in August.
Importantly, our current visibility continues to indicate strong levels of demand from each of our largest customers into 2021 industry.
Industry expectations for WSE growth are currently in the 5% to 10% range.
Our revenue outperformance in 2020 as a result of several factors, including market share gains relative straight strength of etch and deposition as a mix of memory spending improves this year over 2019.
And the continued ramp of the ship shipments.
As it relates to market share gains we are benefiting from continued market growth on top of last year's games, which exited 2019 at at the $100 million run rate and our growing with the market in 2020.
Yep, we also have incremental share gain market share gains this year and gas delivery Weldments empiricism machine and add to our revenue growth outperformance story in 2020.
In the area of action deposition, which are the markets with nwfp, where we have the greatest fluid delivery opportunity. We believe these segments are outgrowing overall WFP. This year due to the beginning of a recovery a memory spending.
This factor is also evidence in that sense.
His estimates for new semiconductor system sales by our two largest customers both of which are outpacing overall WSE growth this calendar year.
In the area of UBI, our revenue growth continues to reflect the steady ramp up expected systems being delivered in both 2020 and 2021.
Would you be unit shipment growth outpacing overall, let's say October fees spent.
These being the primary drivers for outperformance in 2020, we believe we have the strategies in place to continue to outgrow the industry and 2021 and beyond.
First and foremost is our strategy to focus on fluid delivery for semiconductor process tools, which is a growing market driven by the key technology transitions underway.
And now on the industry is investing in the technology that will take them from 96 layers to 128 layers and beyond that to 256 layer devices.
At each step in the process, there is more etch and deposition capital intensity.
Staying with DRAM as we go from one Y to one Z then one alpha and one beta same.
Same for logic, where the transitions to seven five and three man I mean or require more complex geometries and more precise control fluid delivery. There was also an increase in the number of gas is used for technology advancements impulse logic as well as DRAM.
In each case as these geometries become more complex.
Impact of defects is magnified requiring faster at trade some more precise control of the processes. The key take away as it relates to I'd card is that these advanced technology nodes require more deliberate fluid delivery content per system, particularly for logic and DRAM.
Beyond etch and deposition, we expect ERP system shipments to continue to increase for the foreseeable future with steady increases in our easy gas delivery sales run rate each year.
What we have witnessed so far is that each of these key technology trends with transitions across all three device types is driving increased opportunity for etch deposition and you'd be as well as our content on those tools.
We're also driving a number of initiatives to expand our geographic footprint and overall share of our served market by achieving increased levels of customer penetration in Asia.
Well the largest served market for gas delivery is with went with it our U.S. customers. The largest served market for chemical delivery is with customers in Japan and South Korea.
We continue to work with our Korean customer that is evaluating our liquid delivery model and into Pan we're actively in discussions with several of the largest Oems that are in the early stages.
And are in the early stages of engagement.
Both of these strategies should position us well for first revenues in chemical delivery delays.
Delivery in Asia, starting in 2021.
Which brings me to review the progress that we're making against our new customer qualification objectives for the year and gas delivery, we're continuing to see incremental outsourcing gas panels and sub assemblies have made good progress in qualifying new products in our precision machining business and continue to work closely with our customers on gaining additional share in Weldments says.
However, our leverage our global footprint.
Each of these qualifications are contributing to our incremental market share gains and 2020.
Finally, we continue to make progress on our strategy to leverage our engineering capabilities and IP portfolio to develop new proprietary products to drive long longer term expansion of our share of our served markets as well as to drive the operating model towards increased levels of profitability.
We continue to invest in this area and are making good progress in the development of our proprietary next generation gas delivery solution and expect to have our initial beta units delivered in the next three to four months.
In summary, the team has done a phenomenal job managing through the operational challenges of 2020, and we are well on track to deliver a record record revenue year far outpacing industry growth with earnings growing at about twice the rate of revenue growth.
The mid point of our fourth quarter revenue guidance indicates our expectation for continued sequential growth above Q3 and year over year growth of 23% versus Q4 of last year.
Well still wider than pre kobin levels, we continue to tighten the expected revenue range as we gain more clarity around our supply chain and operational capabilities.
We're also driving continued incremental improvements in gross margin and operating margin look ahead towards another expected growth year and 2021.
We're steadfastly focused on making meaningful progress toward our target model in a continued very healthy business environment.
Which brings us to larry's discussion of our financial performance and further details on our outlook Larry.
Thanks, Jeff first I would like to remind you that the piano metrics discussed today are non-GAAP measures unless I identify the measure as GAAP based.
These measures exclude the impact of share based compensation expense amortization of acquired intangible assets nonrecurring charges and discrete tax items and adjustments.
There is a very helpful schedule summarizing our GAAP and non-GAAP financial results, including the individual line items for non-GAAP operating expenses, such as R&D and <unk> in the investors section of our website for reference during this conference call.
Third quarter revenues were $228 million up 3% from Q2 and up 47% from the same period last year.
We have experienced no additional covert related restrictions on our manufacturing sites and as a result, we came in above the midpoint of revenue guidance due to continued strong levels of customer demand and excellent execution in a challenging operational environment.
Despite these challenges we report our sixth straight quarter of sequential revenue growth.
We also achieved sequential growth in gross margin operating margin and earnings per share gross margin for the quarter was 14.6% up 60 basis points from Q2.
We continue to face COVID-19 related headwinds, which impacted gross margin by about 100 basis points in both Q1, and Q2 and by about 50 basis points in Q3.
Well, the heightened freight and material sourcing costs have largely normalize since the first half, we still face higher costs associated with ensuring that health and safety of our global workforce.
We continue to make progress on our ongoing cost reduction programs in order to drive further incremental improvements to our gross margins and a continued healthy customer demand environment and expect about a 50 basis point improvement in gross margin for the fourth quarter.
Operating expenses came in a little lower than expected at $14.2 million down slightly from our first half run rate primarily due to a shift in the timing of certain R&D programs spending into Q4.
Operating margin improved 90 basis points in the quarter and operating income was up 15% over Q2, the 15% sequential increase in operating income was at the higher end of our expectations.
And was partially offset at the bottom line by unfavorable foreign exchange impacts and a higher income tax rate versus forecast.
Our effective tax rate of 12.8% for the third quarter reflects a catch up in our year to date tax rate, which is closer to 12% versus our prior expectations of around 11%.
The increase is primarily due to a higher mix of U.S. profits in our 2020 forecasts are planning rate for tax over the next couple of years continues to be in the range of 10% to 13%.
The higher tax rate as well as the unfavorable exchange rate impacted EPS by about two cents per share. Nonetheless, we reported 62 cents in earnings for the third quarter above the midpoint of our guidance you're today growth in earnings per share has continued to double the rate of our revenue growth.
Now I will turn to the balance sheet.
As expected, we reported a strong quarter of cash flow generation in Q3.
$21 million of free cash flow contributing to the $22 million increase in our cash balance over Q2.
Our expectation is to continue positive free cash flow generation in Q4.
We ended the quarter with $79 million of cash compared to $57 million last quarter, our debt balance of $204 million is down $2.2 million from Q2, reflecting the quarterly pay down of our term debt.
We generated approximately $19 million of cash from the PML and $23 million in cash flow from operations.
Days sales outstanding were essentially unchanged from Q2 at 42 days, while inventory turns increased slightly to 5.4.
Now I will turn to our fourth quarter guidance.
With revenue guidance in the range of $220 million to $245 million. Our earnings guidance is 59 to 77 cents per share.
The midpoint of the P.S. range reflects an incremental improvement to gross margin of around 50 basis points and about a $400000 increase in operating expenses compared to Q3, primarily due to higher variable compensation and R&D program expenses mentioned earlier.
We are forecasting ongoing interest expense of $2 million per quarter, and our tax rate for Q4 to be about 12.5%.
We are assuming approximately 23.5 million diluted shares outstanding for the fourth quarter.
Given that we are operating in a Dan NAMIC and rapidly changing environment with continued covert related restrictions and constraints in place we expect to face some level of gross margin headwinds for the foreseeable future.
That being said, we anticipate additional sequential improvements in gross margin as we move into 2021.
Our key financial objective is to drive operational leverage and strong flow through by combining revenue outperformance with continued increases in gross margin toward our target model we.
We expect to continue to drive gross margin higher through incremental cost reduction programs growing our share within higher margin component markets.
And increasing our content proprietary IP within our products.
Operator, we are ready to take questions. Please open the line.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing star keys.
One moment, please while we poll for questions.
Our first question comes from Craig Ellis with B. Riley Securities.
Craig you May ask your question.
Hi, Thanks for taking the question and congratulations on the nice results not what drives that.
I just wanted to start by following up on some of your comments on the current environment. So it seems like three months ago, when you've got a crystal ball out it was pretty accurate for the second half of the year and I'm wondering if you can provide just any commentary on what you see is should look beyond the fourth quarter end or early calendar 2001.
No. Good question and thank you for your kind words, yeah, I would say based on what we're seeing today and you know through the outlook that we have we see a continued a strong quarter as we enter 2021 I mean, obviously, it's too early to.
To give specific guidance, but we do see a strong demand environment, you know moving into the at least into the first half of next year.
That's helpful. And then Larry you wrapped up your comments talking about some of the things that we're going to drive gross margin hiring calendar 21 cost reduction ongoing market share gains and then an increased IP quotient in in sales can you just help us understand the degree to which those can can be.
At play as you go through the year or some of them more first half weighted than back half weighted or how do we think about their potential impact to gross margin in calendar 21.
Well I think some of the things we've talked about that clearly the cost reduction programs continue quarter by quarter I'm, just general operating cost reductions areas of materials savings. There's some logistic savings activities. So those will those will show up in the first half we.
Also mentioned last time, our plastics business, a with the shutdown in our Union city facility inside of a rightsizing cost structure. There we expect that in the first half of next year that we'll see some of that benefit.
We continue to gain share in the Weldments and precision machining areas are those oh in just isn't machining in particular, those do take little bit longer as we have a longer qualification cycle.
So we'd expect those to to kind of go throughout the year and the last thing around that the proprietary IP. That's a longer play a multiyear play Jeff's talked about some of the the penetration that were working with some of the beta sites and other things, but I think to see a meaningful movement in gross margin.
You'll see that a second half of next year and particularly in the years to follow after that.
Got a we do I can just sneak Oh go ahead I was just going to say is is where we're very very focused on this for obvious.
Obvious reasons, but we do continue to see you know.
Improving gross margin we have plans in place to continue to drive this back up.
Yeah, Good nice progress certainly in the back half your if I could just follow up on the gross margin question with an expense question, Larry I would expect most companies would be pacing higher FICA and may be just fringe costs in the first calendar quarter, but beyond that is there anything we should be aware of as we think beyond the fourth quarter.
Within operating expense I.
I think there's a there's a few things smaller effect of insurance as you can imagine in this environment the insurance industry is.
Sort of giving us some pretty sizable increase outlook. The other thing is our R&D programs as we as we penetrate some of these customers we would expect to be spending a little bit more in R&D for some of the beta units and other.
Investments there, but in general I think we also have next year as you're probably aware we have to be Sox compliant that.
That drives costs, both inside the company and then with our external auditors, we would expect that they will charge us more to certify that I'm I'm expecting that and yeah, we'll be sizing that over the next couple of months here.
Yes of course they will.
Hi, guys. Thanks for the help and keep up the good work on the good operations.
Thanks.
Our next question is from Sidney Ho with Deutsche Bank. Please.
Please state your question.
Thank you for taking my questions I have two questions. The first one is if I if I kind of look at your third quarter, its a solid quarter.
But it is a little bit.
If I look at other supply.
Suppliers in the supply chain they have some more upside to the midpoint of the guidance. So my question here is how would you describe the linearity of the quarter persists. Your expectations did you see anything in the latter part of the quoted that would suggest some slow down and do you think your main customers have caught up with inventory and your revenue without really reflects a more steady.
The state demand profile.
Hey, Sydney, it's Jeff I'll try to answer it one is I I think is companies came out of Q2 and into Q3.
We were all at various degrees of recovery. So when you say a little bit more upside you know, it's it's hard hard to judge that what I would tell you is that the.
Demand environment and the profile of the quarter was I'd say slightly more linear than we've seen but it's still not perfectly linear and it's a you know so we didn't have any any softening at the end of the quarter for sure and we continued with a pretty strong.
More linear outlook as we go into Q4.
So the demand environment is still very good.
Okay to your latter part of the question was around inventory and so I would say with but the gas delivery side of the business theres not much in the way of any inventory build those are very customized products and they generally you know cycle too to their customers probably somewhere around two to four weeks once we deliver it so very little inventory.
Tori between the two and I would say that we're we're seeing a very small amount of inventory build on the component side of the business, but it's very very small still.
Okay, Great. Maybe my follow up question is on your share gain opportunities, particularly in Korea, and Japan, and you walk us through what's happening in Korea doing some qualifications in Japan, you're talking to a number of new customers, but they meet when you say meaningful contribution in 2021 for both of these hotels.
Try to see the profile or is it going to be Korean gonna be early in Japan is it going to be first half versus second half is that one customer sort of multiple customers. How do you think about the 20 or 21 kind of revenue ramp for these two countries.
Yeah, I would think based on what I see today I would say if we win a win a position that will be in Korea first since we've been working on that the longest.
We're in the midst of an evaluation there on their process tool and that that can be meaningful in the <unk> and the fact that that particular customer has a fairly good position and the cranes business I'd say in Japan, it's a little bit slower kobin restrictions are very tightened your.
Pan in other words, our partner still can't do face to face meetings, but that's starting to relax a bit so but I'd say the dialogue has continued its just a little more difficult to a you know position first beta tool, but we have several ongoing discussions with probably three or four.
Japanese Oems than we had hoped that we get one of those designs and get a bait out there and then that will give us a little more clarity, but certainly that earliest I would see Japan in the second half.
A 2021, great. Thank you. Thank you bet.
Thank you. Our next question is from Krish, Sankar with Cowen and co.
Please state your question.
Yeah, Hi, Thanks for taking my question I'm, just I had a couple of them first one is you know when I look at you and couple of your peers do.
Well the last five years, you guys outperformed W. W fees up and underperforming WP is down we said the mix it up if you could be upside to 10%.
But does that include any guidance, let's see it's true that WP will be up fight. It then it gets rid of human could outperform in that environment.
Yeah, I mean I would be if you ask me we have put strategies in place some of the share gains we have going on this year will affect next year. We have long term plans are in place. So yes, I would expect that we could outperform WFP again next year, particularly because.
You know, we're going to see a memory recovery and so you know based on what we can see and you know we have a Korean operation. So we get pretty good visibility into Korea, you know, we starting to see the.
The momentum building on the memory side and memory is very etch and dep centric and that's very good for us as well as our customers. So they have very good positions and Threed NAND as those investments increase in DRAM. So again, it'll it'll be driven a little bit by what we actually.
Doing from share gains in other programs as well as just the recovery of memory and the effect that has on the dep and edge.
And our customers positions within that.
Got it that's very helpful. So looks like it to be a billion dollar revenue mix. It hopefully I do have a question for you. One is no when I look at your guidance and you know I'm not saying you're picking on any such thing, but if you compare it to the <unk>.
Probably it you get kind of get into similar revenue level, but arguably there's still a long runway left for memory. So going back to the early part of 2018, when you're running at like North of 250 million in revenues on a quarterly basis to know there will be you can quantify how much you.
Incremental share gain you've gone or how much has been you know you.
You know your market improving you driving is there anything you can like how quantify what is driving above market growth over the last two years and then at a 40 hour I would.
I didn't say I will quantify it specifically, but we did say that we exited.
2019, with about 100 million dollar run rate and share gains. If you think the markets up 15% and that's now been called into about 115 million then what we push through the piano and 29 team was say 70. So that's a big chunk of the growth going forward, we have share gains we.
We haven't quantified this year that will have a full effect going into next year and you. The it's been a very I I would say that customers pretty transparency you guys know the ramp of the V. and our revenues of probably growing alongside that and possibly a little bit higher just as the.
Content has increased from generation to generation as well. So yeah. I think we're positioned I May act or the kind of the chemical side of our business in Asia is the next is another next kind of step function that a with a few qualifications can have meaningful revenue into 2021 as well.
Got it got it and then just a final question Jeff is going to be you can one that he resigned literally you can quantify.
What are your dollar opportunity put UBI systems.
We can but we don't do that for obviously competitive reasons. It's a.
That's a good way larger unit, it's very specific to the tool and so it's it's it's multiples of a of a typical gas panel so, but we don't generally quantify that.
Thank you there thank you very much.
Yep.
Thank you and our next question comes from Quinn, Bolton with the need him and cool.
When you can state your question I think is great.
Great.
Thanks, guys just wanted to follow up on the share gain opportunity you've said for a while now that you thought the precision machine parts worse, what's going to take a little bit longer and it sounds like you know that's proving out to be the case, but wondering you know as you sit here today are you starting to see better traction on the.
Precision machine parts side of the business or do you think those share gains and the revenue opportunity is still ahead of the company.
No I you know 2020 includes some share gains that we've gotten out of our what we call our precision machining side of the business there.
They are not insignificant, they're our qualifications that are deep in the cycle a as we speak today that can be multiple million dollar wins as we go forward. So probably those will be late earliest is late Q4, but they'll be kind of a 2021.
Largely impact 2021 versus 2020, and so we continue and then on the Weldments side of the business. It's it's basically just leveraging our operational capabilities and.
And in the market for all the opportunities that come up we drive for incremental market share gains, which we've you know we've done pretty well on again this year.
Jeff I'm sure I'm, not going to get you to size it, but but just order of magnitude do you think that the revenue opportunity for precision machining is is you know is is.
Is that accelerating in.
2021.
Or is there an opportunity just growing in line with Wi Fi that Oh.
Oh, it should it should outpace WFP as we as we win these positions that layer on and <unk> and again as is as you guys know is our precision machining generally is in the flow of gas. So it's pretty sticky demand. So once you win at its if it stays with you for a long long time and.
It's very customized by process tools. So no that could have you know that's part of the strategy that Larry has talked about we want that mix to outgrow just the growth of the overall industry and that's where we get the margin accretion to [noise].
Great second question. It did sound, obviously I think you are seen and your customers have already seeing some strength in the NAND side of the business from your comments it sounds like you've got pretty good visibility for the memory to continue to be healthy into the first half of 2020, but just wondering do you think.
That's sort of now reached a sort of a steady not a steady state, but sort of more of a stable level, where we'll continue it sort of current levels into the first half dozen momentum appear to be growing as you look at the quarterly run rate in the first half of 21 versus 20.
Fourth quarter 20.
Yeah, I I think we've seen a very good growth from first half to 2020 2021.
And I would say based on what we're seeing just out of our Korean operation that we see a similar paused and slightly positive.
Growth in that side of the business as we go into 2021 input.
In particular that application as we've said before is threed NAND centric so.
That's good to see that spending start again as well and you know we do see DRAM investments.
Both in the fourth quarter and going into the first quarter of next year and in that particular region, where we get pretty good visibility. So.
I think you've seen a the pricing environment stabilized and that usually you know triggers the.
The recovery in memory and I think we'll see a good strong year in memory next year, whether I can pick the peak.
Probably probably not close enough to it you have to kind of ask our customers are close enough to it.
Got it got it and then last one for Larry Larry cash flow Yeah. It has been pretty strong over the last couple of quarters I think you're sitting on nearly 80 million in cash it sounds like you project cash to go up again in the fourth quarter, how should we think about that cash to you do you take the opportunity to get a little bit more aggressive.
With paying down debt now that the Kobe. It is hopefully at least stabilizing do you keep that cash on the balance sheet, just given uncertainty or perhaps to fund M&A, how should we be thinking about use of cash as we head into 21.
I think in general, we're keeping 'em, well well keeping our flexibility we put in the shelf we have some flexibility on a revolver I think in general are our thought is that to hold on to hold onto it for the time being and and you know the interest rate.
Don that borrowing is is down in the 4% range overall, so I think.
We want to maintain our flexibility we want to be ready if there's M&A opportunities that we can execute on and then just continue to focus on operational execution and you know at some point, we see an excess cash position, we might do something different but I think now we're sorta.
Keeping at steady state and we're pretty comfortable with where we are on a debt position and we're comfortable with the fact that weve been able now to generate some pretty good cash flow and look to do that again in Q4, great. Okay. Thank you.
Our next question Mitch Steves with RBC capital markets. Please state your question.
Hey, Thanks, I had a few but I wanted to start on the gross margin line first just looking at the guide you're talking about a 50 basis points improvement from September to December but prior to this when you're kind of like the 240 range call. It revenue I mean, your gross margins were up like 16% plus so I'm curious as to if that 15.1 implied guide.
It includes the 100 basis point impact from Kobe, It if you're going to start to see some improvement there any sort of information would be helpful.
No we've talked about <unk> the <unk>. The 15, one we still have around a 50 basis point headwind due to cove it between.
P.P., Andy Oh, we have to hire more people were obviously change or shift stat strategies and other things. So that that will continue I think until there's a vaccine or a significant change in protocol around social distancing and the things we have to do there. So that's that's still a headwind and then.
Well the current situation changes, we sort of expect that to continue at least a at least to the beginning of 2021. The other things that we've had that have impacted us we've talked about these before what one is we gained a a fair amount of share in gas panels that are number two cost.
Summer.
And that's changed our mix as you know gas panels in general are below the corporate average and barge and and as Weve gain that share that that's a little bit of a headwind not an absolute dollar perspective, but clearly on a percentage perspective. We also added a lot of capacity between two that.
As an 18 and now.
We've talked historically about having you know brick and mortar capabilities to go north of 300 million and revenue per quarter and until we get there were sort of a you know rent ready for the growth, but it does create a little bit of a headwind for us on margins and then finally I think the other thing weve.
Talk to us a little bit about a is the plastics business and we're working on.
Right sizing the cost structure and working on some products that will improve that as well.
Understood and then turning over to asked about kind of the comments you guys made everybody would be ramping up I've already stated at 2020. Some units got pushed at 21, I'm curious as to how like what what the scale of the ramp is there I know you had some I was always been kind of a <unk> call it mid to high single customer.
Is that going to continue to improve as a percentage of revenue oriented DRAM get improve at such a rate that you don't think that asked the Mel will become a bigger customer for you next year.
Yeah, Yeah, I its Jeff so so Mitch with where they have some Mel I'd say, they're they're pretty transparent, but the one thing to keep in mind, we build probably about five months before they can deliver we go and pretty early in the build cycle and a the qualification cycle. So what we're building in the second half.
Pretty much is addressing the front half I can't be specific obviously for the customer, but we see steady growth going into next year and and.
And so as a Mel is is it's just think of it as a steady grower, but for it to become a 10% customer it would have to get significantly bigger than it is today, mainly because as you look at our you know our outlook is if you take the midpoint of <unk> guidance around 900 million.
And so that's a pretty big number.
Going forward for them to cross that they'd have to grow quite a lot.
Okay, and then just last one.
Yes in terms of the DRAM versus NAND side, I mean, there's been a clear debate on the NAND side that we're kind of at peak levels and it can't get much higher than that and then DRAM side, we're starting to see some green shoots or whatever you'd like to call out in terms of improving demand. There. So maybe you could just help us understand what you guys think 21 looks like for you guys in terms of what what.
Market DRAM or NAND in terms of scale of revenue growth is going to look like.
Yeah. So just just to be clear, we don't we don't get to see all of the applications for the gas panels that we ship so were not the perfect. One to ask about magnitude of DRAM versus NAND 'em, we get more visibility in Korea, because we have an operations there.
So we do see both investments and a.
Threed NAND picking up and DRAM picking up in that.
In that region, but ER I'm, probably not the best one to call. It for the full year next year.
Okay understood. Thank you. Thanks.
Thanks, Matt.
Our next question is from Tom Diffely with D.A. Davidson. Please state your question.
Hi, Good afternoon, guys Franco on behalf of Tom today.
Thanks for your.
Your question.
So I walked thoughts on that the last topic can you talk about the DRAM side I know that in the positive kind of expressed here.
Oh did decide to pay more as far as trying to DRAM, particularly after they could deliver a module gain traction in Asia can you, perhaps give us sort of an update on the.
The progress on this effort.
So yeah sure, but I just to maybe to be a little more specific it's a liquid delivery is not I'm not sure. If you inferred that or not if I misunderstood, but it's not a DRAM application per se can address any wet chemistry application. So it can go across all the different applications.
Today were qualified on one large customer through one of our Oh OEM customers today in the U.S.
We have a beta in process or in Korea, with probably the third or fourth largest clean manufacturer and again in Japan as I said on the call. We're kind of in the early innings, but I'm pretty happy with the level of engagement, we're having with some of the largest Oems in Japan through our partner there.
Okay. No. That's helpful and then I have one for Larry Yeah.
You're talking about the R&D push out or I.
I guess do you have any detail on that on you know what the push out of whats regarding two and then when.
When you look and it's been if anyone how should we think about your R&D investment.
Well I think in general you know some of the new programs. There's nothing seems a there was a specific program push out in R&D, It's just the timing of.
When were bringing some consultants and some engineering materials. So it's nothing specific around the specific product I think going into 2021, you know overall, we expect our opex to run sort of what it's been doing which is about half the growth about half the rate of.
The revenue growth and I think if you look at R&D, we would expect.
That piece of R&D and that Opex to at least be that I think as we penetrate new products.
We're gonna be ready to make the investments we need to drive these new products successfully into the market. It helped drive up our margins. So you can think of R&D getting not necessary the lion's share, but it probably is going to be the biggest percentage grow or within that a 50% of revenue growth model.
Alright, Thanks, Larry.
Our next question is from Patrick Ho with Stifel. Please state your question.
Oh, Thank you very much Jeff maybe just going back.
To.
The mix of your business that you look at the December quarter, obviously demand continues to be strong that's probably going to increase the number of gas delivery system, but can you talk about a little bit of the mix of weldments, having precision machining are they increasing at the same rate you you're going to see the same I guess percentages.
As of the business you saw in the September quarter.
Or is the mix shifting a little more just some of the other products aside from gas deliveries.
Yeah, I think Patrick it's a good question that might take three parts to answer but I'll give it a shot. So if you look at this year, we're going to do say around 900 million given our Q4 guidance or last peak was in the low eight hundreds.
We know we've layered on about $115 million or so of.
Market share gains plus the market is growing so the gas pedal side of the business is kind of was one of the bigger chunks of that market share gains so, but I would say over the last quarter or so we were we were pleased with the performance that we got out of it and the growth out of both our precision machining weldments side of the business. So now.
Now that we've kind of one that last big piece and and on the gas side, we're going to see the mix now.
Improved for the component side of the business I can't give you the specific numbers, but.
You know that is part of our gross margin accretion plans, it's been part of our strategy to outgrow the market and Weve done done very very very well so far.
Much longer qualifications, obviously for precision machining measured in.
Month to months and months, whereas you can do a much faster on the Weldment side. So we do see those well net wins happening.
I'd call it pretty ongoing now and precision machining, you're trying to qualify maybe a family of parts or something like that and so those would come with you don't bigger chunks. So.
I like where we're at and the progress of both those businesses.
Great and maybe just as a follow up to that.
Yep.
The two of US I've been in this industry, a long time with the precision machining business. The qualifications that you just said take a longer time are there ways for you to quote qualify multiple I guess component parts on that side of the business or is it usually kind of step by step you have to get disqualified.
And then it goes to you know step B. I, and then I guess step seat to get other parts qualified.
Now you can get family of parts qualified provided they're very similar manufacturing. If there is any significant do you you know changes in the manufacturing process you might have to doing differently, but some of the qualifications were doing now are for you know I'd call up call part families. So be many many part numbers.
Great and final question for me to elaborate.
Inventory turns are still.
Still pretty stable, but.
But some of your leading customers I've talked about I guess, you know kind of building a little bit of inventories for themselves given the demand environment as well as the uncertainty in the market.
Impacted your procurement of inventory on Youre right.
No I don't think so I think you know we were at 5.4 turns we're not seeing as thick as Jeff mentioned a ton of inventory growth. So that people may talk about it but we're not we're not seeing a lot of it I think in general no.
We want to stay within our kind of turns range grow it a little bit more and but we haven't seen any material change in behavior. Yeah, I mean, the customer the inventories at the customers are holding you know we're still in a pretty pretty.
Pretty good demand and demand environment and while we're all feeling good about where we're at we're still.
Theres not the ability to just a build inventory on their side, we are building, our consignment level inventory and so some of even though our inventory went down there was actual growth. There. So we've done a really pretty good job of.
Becoming more efficient within our manufacturing process and as well as supporting our customers' needs for the inventory we put on site for them.
Great. Thank you very much.
All right.
Well, ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the call back to Jeff injuries for closing remarks.
Hi, Thank you for joining us on our call this quarter I'd like to thank our employees suppliers and customers for their support and strong execution in this operationally challenging.
Environment, but with very but very strong growth year in 2020, we look forward to updating you again on our next earnings call in early February in the meantime, we're scheduled to participate and virtual conferences hosted by Stifel. RBC Your B S and D.A. Davidson as well as a virtual CEO summit during Q4 up.
Operator that concludes our call.
Right. Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you everyone for your participation.
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