Q4 2022 Ichor Holdings Ltd Earnings Call
Good day, ladies and gentlemen, and welcome to <unk> fourth quarter 2022 earnings Conference call.
At 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.
And now I would like to introduce to you your host for today's conference Claire Mcadams Investor Relations for Ichor. Thank you Claire. Please go ahead.
Thanks, John Good afternoon, and thank you for joining today's fourth quarter 2022 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 our control and which could cause actual results to differ materially from such statements.
These risks and uncertainties include does spelled out in our earnings press release. Those described in our annual report on Form 10-K for fiscal 2021 and those described in subsequent filings with the SEC you should consider all forward looking statements in light of those and other risks and uncertainties.
Additionally, we will be providing certain non-GAAP financial measures. During this conference call our earnings press release, and the financial supplement posted to our IR website today. Each provide a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures.
On the call with me today are Jeff Anderson, our CEO and Larry Sparks, our CFO , Jeff will begin with an update on our business and a review of our results and outlook and then Larry will provide additional details of our fourth quarter results and first quarter guidance.
After their prepared remarks, we will open the line for questions I'll now turn over the call to Geoff Andres. It yeah. Thank you Claire and welcome to our Q4 earnings call Q.
Q4 revenues of $302 million moderating, 15% from our record third quarter.
As we indicated in our January 10th pre announcement, we witnessed further weakening in customer demand in the last month of the quarter.
So while we had previously expected to report a decline in sales for both Q4 as well as the current quarter, our actual results and current forecast indicate quarter over quarter declines that are modestly higher than what we were expecting a quarter ago.
Not surprisingly this change in the near term business environment has been echoed by leading equipment Oems with significantly reduced shipment levels and build plans expected for the March quarter.
The current expectation is that following the first quarter decline industry shipments should stabilize somewhat and we should see a relatively balanced WMC demand environment between the first and the second half of 2023.
As we reflect on 2022.
Which was a record year for WMC, we reported strong year over year revenue growth expanding gross margins and record earnings all while navigating through a highly dynamic and often challenging business environment.
We grew revenues by 17%, which represented organic growth of more than 10%. In addition to the full year impact of the acquisition of IMG.
This compares to overall Wi Fi growth in the high single digits gross margin improved 30 basis points, and we reported record earnings of $105 million or $3 62 per share.
On the last quarter's call. We discussed we discussed the softening business environment expected for 2023 and the drivers for our revenue that should result in our continued outperformance versus WMC in the coming year and.
In particular, we discussed our reduced exposure to the memory market, our increased exposure to <unk> lithography and our expectations to continue gaining market share and winning new product evaluations.
All three of these drivers continue continued to be very much intact today.
First we continue to estimate that our exposure to the memory market fell to below 40% of our revenues in 2022.
Current expectations are that memory WFAN could be down as much as 50% this year, which is higher than we expected a quarter ago.
As a result, even though foundry and logic capital spending is expected to hold up better than memory of this year. The worsening memory market has certainly led to overall cuts in revenue expectations for 2023.
Next we continue to forecast growth in the part of our business that is tied to EV. The WSJ market is currently experiencing unprecedented bifurcation and outlooks between lithography and the other major segments of WMC, such as etch deposition and process control.
Yeah.
For example, within the overall <unk> outlook, calling for a year over year decline of 20% or more revenues in the lithography segment are expected to increase by 25%.
This means that the rest of the market or non Elisa is expected to be down in the range of 25% to 30%.
And while we steadily increased our share of lithography market over the past several years and continues to represent less than 10% of our revenues and therefore, the majority of our revenues will be impacted closer to the 25% to 30% range declines that are expected for non less OWS.
We continue to expect three primary offsets to this forecast that can help add some resilience to our revenue performance in 2023.
The first is clearly the continued growth expected in our gas delivery business, serving the UV lithography market.
The second is the portion of our revenues from the <unk> acquisition that is independent from the semiconductor industry, while a small piece of our overall revenues today, the AMG sales forecast to areas such as medical industrial and aerospace are holding up better than WMC in 2023.
And lastly, we continue to expect to benefit from success in gaining market share and winning new product evaluations.
Before providing an update on our share gain initiatives I'll also add a fourth potential offset which is that our revenues tend to recover more sharply when industry spending rebounds current expectations call for a bottoming in non litho wsh shipments around mid year, followed by the beginning of a recovery depending on.
The slope of the recovery, we could see a material improvement in customer demand toward year end and that would therefore be a fourth upset to the 25% range declines expected this year.
Which brings me to an update on our share gain initiatives.
Historically, we have taken advantage of these slowdowns in industry demand to drive market share gains as our customers are able to focus more resources into new product evaluations and qualifications are areas of focus remain qualifying more of our internally developed machining components, we have several opportunities that we're quoting.
This quarter and hope to see first revenues in the second half ones qualify leveraging our global weldment footprint to gain additional share qualifying our next generation gas panel, we expect to ship a third qualification patient unit by mid year.
And qualifying our chemical delivery systems as well as developing new components that address this market.
Beyond these we are continuing to work with the customer on a gas delivery solution that serves the growing silicon carbide market and expect to deliver our first unit for qualification in late Q1.
So our focus turns to the expected spending environment over the next several quarters and our ability to manage our variable operating model to adjust to lower levels of wf.
<unk> demand.
We have executed reductions in our workforce to align to the business volumes, we expect in 2023 across our global footprint.
We have always maintained good discipline on operating expenses and will continue to invest in our R&D programs and optimization of our capacity to ensure we can support the future growth in the business.
In 2023. These continued investments will by definition result in a more limited reduction in operating expenses as compared to the levels of revenue decline as Larry will discuss later.
We are an essential part of our customers growth plans as we look beyond this current downturn and just as they will continue to invest for the future, we will as well, which in turn will drive strong operating leverage as we come out of this temporarily weak business environment.
In the meantime, we are confident that we will show solid financial results and strong cash flow performance during 2023, which by the way is expected to be the third largest Wi Fi year in our industry's history.
With that I'll now turn the call over to Larry Larry.
Thanks, Jeff first I would like to remind you that the P&L metrics discussed today are non-GAAP measures.
Measures exclude the impact of share based compensation expense amortization of acquired intangible assets nonrecurring charges and discrete tax items and adjustments.
There is a very helpful schedule summarizing our GAAP and non-GAAP financial results, including the individual line items for non-GAAP operating expenses, such as R&D and SG&A in the investors section of our website for reference during this conference call.
Fourth quarter revenues were $302 million up 5% from Q4 of last year and down 15% from our record third quarter.
Even though revenues declined more than expected gross margin of 16, 7% represents flow through of approximately 25% on the revenue volumes compared to Q3, which is consistent with our expectations going into the quarter.
Q4, operating expenses were $23 $4 million slightly higher than forecast, primarily due to an increase in R&D investments in support of our new products, the resulting operating margin was eight 9%.
As a result of higher interest rates interest expense increased to $4 2 million in line with our expectations, while our effective tax rate was lower than expectations at 7%, reflecting the revised full year effective rate of 9%.
The resulting EPS for Q4 was 72 cents.
Now I will turn to the balance sheet as expected cash conversion of working capital approved again in the fourth quarter, and we generated $32 million of free cash flow cash.
Cash from operating activities was $39 million in Capex for the quarter was $7 million.
Cash flow from operations benefited from a $47 million decline in accounts receivable and receivables DSO were 41 days compared to 47% in Q3.
Inventories were $284 million, a year and $7 million lower than Q3 with turns of three five.
Total cash was $86 million at quarter end up $30 million from Q3, and total debt was $303 million down about $2 million from Q3.
Now I will turn to our first quarter guidance.
With revenue guidance in the range of $210 million to $240 million. Our Q1 earnings guidance is 19% to 37 cents per share.
Midpoint of revenue guidance at $225 million reflects about a 25% decline from Q4.
At this revenue level, we are expecting gross margins in the range of 15, 5% to 16%, which incorporates our recent new and previous cost reduction actions. The result is an improvement and flow through on the lower revenue volumes to about 20% compared to 25%.
In Q4.
At this time, we expect operating expenses to decline to approximately $21 $7 million in Q1 through a combination of head count and other controllable spending reductions.
We will continue to maintain our R&D investments in support of new product programs with the majority of the quarter over quarter spending reduction coming from G&A.
We will continue to invest in new product programs and critical it infrastructure and currently expect our quarterly Opex run rate to remain around $21 $5 million to $22 million for the balance of the year.
We expect our interest expense will be $4 $9 million in the first quarter, reflecting the continued increases in interest rates our tax rate in Q1 is expected to be 10% and we estimate our fully diluted share count to be approximately $29 4 million.
Operator, we are ready to take questions. Please open the lines.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May press star two if he would like to remove that question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star.
Keith.
One moment, please while we poll for questions.
And the first question comes from the line of Brian Chin with Stifel. Please proceed with your question.
Hi, there.
Okay.
Yeah, Yeah, great. Good afternoon, and thanks for letting us ask a few questions.
Maybe Jeff just to kick things off.
It sounds like and just correct me, if I'm wrong here, but it sounds like you're saying maybe revenue could drift a little bit lower in Q2 in terms of that sort of mid year commentary about shipments maybe bottoming can you give a sense of that's roughly accurate.
Percentage wise, how closer are we to maybe a.
The trough here in Q1 relative to maybe what you think of Q2.
And can you also just wrapped better yes. It could be also wrap that around how you would characterize your customers' inventory levels.
But the other slowdowns and kind of whether you think your shipments trend at this point pretty much in line with theirs.
Yeah. Good question so.
At this stage and I think given our visibility we kind of see the two quarters relatively the same I would say if we it depends on what happens in Q1 with where if things pull forward than maybe it moderates down of things flatten a little maybe it moderates a percent, but we see them pretty similar right now so we see the first half.
Is the low point, whether I can call. It Q1 or Q2 exactly now I can't but I think they are very close and very similar and then.
And the second part of your question I've forgotten forgotten, it with customer and customer inventories so the.
I would say when you look at gas panels, I'd say, it's pretty muted most of that we were kind of chasing demand to some degree and staying up and close them.
Most of the impact will be in the components side and as I've said and.
The last conference we attended in general in the last call is that we think that will be less of an impact that we saw.
Some the 2018 downturn I think it took a while for the component business I would say part of our our missed this quarter, where we pre announced some of that was in the components being more socs and so we've already seen some of that but I don't think it'll be the depths we have seen before so our customers.
Probably we'll do some inventory adjustments as you guys can see their inventory levels, but I think it'll be a less impact than we saw in the last one.
Okay.
Helpful.
And then Jeff I think in your remarks, you referenced I guess, some optionality whereby revenue could pick up.
Prior to year end or what are you looking at to provide some optimism here is it more memory.
Advanced logic foundry trailing edge focused or were you commenting more reference to the visibility you have in the company specific spanned expansion initiatives.
Well, what I would say is the comment was largely around if we're going to see 2024, and I would say most people think that will be up today. We're ahead of that when it comes to providing our components and have the longest lead time and what we deliver and then you know as you know our gas delivery and chemical delivery usually is.
Kind of leading by about a month, so we'll see it a little sooner and that's what it's meant to say so depending on when we see the uptick we should see.
A quicker reaction than maybe our customers revenue shipment.
Got it like the natural order of things in terms of housekeeping I've seen operate work, maybe one last thing for Larry real quick.
Clearly strong cash flow generation in Q4, and receivables came way down.
Do you think inventories, we look for inventories to come down and continue to generate pretty good working capital.
Castle here, even with the step down in revenue in Q1.
Yes, that's our expectation over the next couple of quarters is to is to drive that inventory down it came down a little bit in Q4, but we expect that.
To come down more significantly in the next couple of quarters.
Okay, great. Thank you.
Thanks, Brian .
And the next question comes from the line of Quinn Bolton with Needham and company. Please proceed with your question.
Hey, guys just wanted to ask relative to last quarter, you sort of talked about the ability to outperform wf fee by about five points. It sounds like on this call you were saying Hey, maybe you don't outperform all of Wi Fi because of the strength in lithography, but itself it sounds like you're confident in outperforming the non <unk>.
Litho W. E are down 25% to 30%. So if we're thinking about the year, what would I be correct in thinking that something in the down 20% to 25% what would be the right ballpark based on where you sit today.
Well I'd say, we see the market down 20% to 25% so maybe.
You know when I talked about the outperformance.
5%, it's really around our that includes the EEV lithography performance market share gains.
In that so it depends on where the market ends up but we think will be about five percentage points better based on some of that the IMG side of the business that isn't floating down and things like that.
Sorry, Jeff just I just want to make sure I'm very clear have you you still think you can outperform total there'll be a fee by five points or do you think it's the non litho portion of W. P.
Non litho Nonetheless, okay perfect.
And then yeah no no. Thank you for the clarification and then a second question. Larry You had mentioned seeing a 20% fall through in the March quarter versus previous expectations of a 25% fall through on incremental revenue bump do.
Do you expect that 20% fall through to continue into future quarters or does that 20% fall through really reflects some of the cost reduction activities and then as we get into the second quarter and beyond we should sort of think about going back to that 25% fall through whether revs are up or down in subsequent quarter.
<unk>.
Well I think I think the as we've said before we started at 25% we have a little bit.
Oh between 2020 five depends on product mix and some of our share gains. So I'd say, we're probably somewhere in between 20 to 25.
2020, really does reflect kind of a bottoming out of some of our product mix and then we did some pretty significant cost reductions starting in the quarter that we're going to see.
You know come to kind of full full.
Full benefit this quarter.
That helps.
That does and then last for me Leary or Jeff can you talk about the company's plans to.
Perhaps get more aggressive on debt pay downs interest expenses is almost $5 billion a quarter and it feels like we may have another one or two rate hikes still to go do you think with the with the strong cash flow generation that you'll be more aggressive with with debt pay down over the next couple of quarters.
Yeah, I think that right now is kind of our primary plan as we generate cash we will we know where we can run our business that you guys have seen it and so as we start to generate cash and pull that inventory down we're not we're going to pay off some of the debt along the way.
Perfect. Okay. Thank you I'll get back in the queue.
Yep. Thanks.
And the next question comes from the line of Craig Ellis with B Riley Securities. Please proceed with your question.
Yeah. Thanks for taking the question and I appreciate all the color. So far I wanted to just follow up on some of the dynamics that are going on in the business in the very near term, Jeff I think you mentioned that one of the things you were saying is relative strength in gas delivery and ERP. So as we think about the way the segments are.
Our are performing is it is it fair to think that gas delivery would be performing relatively well.
As some of the other segments or how do we think about the gives and takes across gas deliberate chemical library.
12 months in precision machining.
Okay I'll take them one piece at a time I think with <unk>, we clearly expect a pretty significant growth year for us largely align with comments that our customers made.
Gas delivery I think we'll we'll have less of any kind of inventory adjustments. So I would say our components will probably drop down early and then recover a little quicker in the back so it's a bit of a mixture of different types of business and stuff, but I think getting in general.
We'd see the second half, we'd hope to see our you know our components business growth, because that's where a lot of focus of our share gains are at.
And maybe in the front half castle performed better than the other segments of the business.
Got it.
And then on the.
On the just.
Staff management staff planning, Larry did you say that you put through the <unk>.
The more SG&A focused reductions already and is that in the first quarter's Opex guide is there.
Anything left to do in and are you, saying that you're happy with where staffing is on the manufacturing side and that will just be steady here at current levels as we go through the trial.
Yes, I think we're.
We're pretty much done we did some of this late.
In the December timeframe, and then very early January so we're pretty complete.
Complete regarding the personnel actions.
Not only just people impacts, but mandatory shutdowns and overtime reductions and so I'd say the majority of that showing up in the in the Q1 results.
On the cost of sales side.
And on the Opex side as well.
Yeah, I think I'll, just add a little color Craig Yeah go ahead.
Yeah late late late in the year, we began kind of the right sizing with temporaries and things like that we did have two impacts some rfps in early January Unfortunately, but we've largely right sized them to a large degree to reflect kind of the revenue with some potential burst capacity in our man.
Are you factoring.
Operations and then in Opex as Larry always reminds US is were pretty Opex light.
We were not very extravagant that way, but given the run rate that Larry put in his comments you'd see that's around a 5% year over year kind of target reduction and we've got those plans in place.
Got it and Larry I, typically think of gross margin having the highest.
Laurel Asian day volume in and you've been clear with the revenue guidance for the quarter and Jeff noted that you know one Q2, Q you know, we might bounce up or down a little bit but that looks like a bond and the question is as we think about the contour of gross margin through the year is there anything happening from a one off basis.
That would impact how we think about the Gibson takes either.
Either from the first quarter to the second quarter or beyond just the potential volume benefit things that could happen in the back half of the year.
I think if you look at Q1 to Q2.
And assuming revenues fairly consistent and assuming the product mix between gas and our components business, we wouldn't see much of a change between what we've guided in Q1 and what we would expect in Q2 I think.
What happens in the second half one of the benefits and Jeff mentioned. This is that we do expect to drive a lot of share gains primarily in the components business with some of the new new product wins and some other things that were in the qualifications now so we would expect that the.
The components mix of our business would improve.
And the fact that some of the inventory impacts that we saw in the fourth quarter and kind of early in this year.
Would moderate some so we do expect a little bit of a tailwind when it comes to margin go into the back half of this year.
That's helpful and then just clarifying that.
That new product win point.
Either for you or Jeff can you just put some context around how material. The wins are that you're seeing now that could start to impact the business in the second half of the year relative to prior years any context on whether where this shakes out top of the list you bottomed washed would be helpful. Thanks.
<unk>.
Yeah I'll.
I'll give you.
Without being too specific I mean, obviously you know we're trying to focus on machine components and things like that and that's usually in kind of a high 30 low 40 gross margin so.
If you look at the outperformance we were talking about I'll call. It largely in the law non litho area.
A lot of that is focused around that particular area. There is some incremental <unk>.
I'd call it sub assembly and gas that we can probably pick up but largely focused on getting new components qualified in the second half and that'll that like Larry said, that's a that's a strong tailwind for us when we see that side of the business grow the incremental flow through is much higher than the than than what we've seen.
On the average going down so.
Got it thanks guys.
You bet.
And the next question comes from the line of David Duley with Steelhead Securities. Please proceed with your question.
Yeah. Thanks for taking my question.
Was wondering you gave us an assortment of reasons.
Why your noncore businesses could you know could uptick I guess in the back half of the year could you perhaps rank order what you think that.
I think you gave us for reasons, what do you think or what is the biggest the largest opportunities of those offsets that you've talked about it.
Yeah, I would say.
Uh huh.
Probably in rank order with outsized and I'm, specifically, obviously, we have <unk> growth that's different than the overall wf fee growth. We also have incremental.
Incremental market share wins largely around them.
The next biggest one will probably be around qualifying components.
And and then kind of bringing up the end is probably more around the chemical delivery.
Yeah.
Okay.
I've asked this question in the past and I'll just ask it again just for fresh.
Fresh commentary as far as the new gas panel.
<unk> you talked about I think shifting another evaluation system in the middle of this calendar year. When would you expect the product to start to generate some significant revenue and.
It's just something that.
Your customers will easily adopt or it's just that you know once you have a.
A new product, it's improve with your own components.
Does it take a lot longer to get into production or ups looking for timing.
Yeah, I would say I'm going to answer it in two pieces of fully kind of integrated gas panel, which has the bulk of our components on there. These are the two evolves we have out there. The earliest I would probably expect one to be qualified and start to get on a platform of any significance would be late in the year.
But the other one kind of following.
And that the mid year, one, we'll probably take up to a year and then having said that as we've talked in the past components that we're putting on there can be also integrated into existing gas delivery. Those I would say some of those qualifications are done and we will start to implement some of those in the first half of the year and Theres more that will work.
On to try and implement and qualify as I said in my prepared comments for the second half of the year. So.
That's kind of how we see revenues associated with those big moving pieces.
Okay. I don't think for me is you talked about a second half recovery for the industry I'm, assuming you're getting that feedback from your customers are there any other I guess the simple question is what gives you confidence that we will see a second half ramp that's it for me. Thanks.
Yeah, well I mean, I think its the slope of the recovery I think what we're trying to indicate is that we can see the bottom b in the first half and how big the second half of the year, we'll probably for us at least be.
Contingent on how the market recovers and overall, but we do see a modestly up back half from the front half today.
Thank you.
Thanks.
And the next question comes from the line of Krish Shankar with Cowen. Please proceed with your question.
Hi, This is Robert Mertens on behalf of Krish. Thanks for taking my questions just first in terms of.
This scenario this year of W. E contracting say that 20, 30%.
And I know you have the E V O O.
A portion of the business just how would you.
Sort of frame inventory draw down by customers.
Trying to make sure that I have the right numbers in terms of how you view your business versus the overall market.
I think we've talked about D. A V a U K.
I have to talk about them in E lithography and non lithography segments.
And we're going to see a fairly healthy percentage growth in.
And in relation to inventory I don't know if you're talking about the deferred that have been talked about in one of our customers are not my comments will be really around system shipments the other side of that business.
The non litho wf fee. This again, we've talked about outperforming on the downside by you know going down about five percentage points less than the overall market for the reasons, we've talked about on.
On the call from a customer specific inventory there they will right size their components inventory, we've already seen some of those effects. My belief is that that'll be largely done.
The first quarter and you know really occurred late in the fourth quarter as well, but it may roll a little bit into the second quarter is hard to tell at this point gas panel inventory.
Inventory is not generally hung up you know between two quarters in two years, but theres always a little bit when you have these sharp downturns. So I don't know if that answered all your questions Robert.
No that's definitely helpful and then maybe just.
The other one around them.
Earlier pre announcement.
When you start experiencing the incremental weakness in the quarter and was that.
Oh is that right to say that that was primarily in the.
The components portion of the business.
No.
We saw I would say, it's largely tied to just the memory softness most of what we saw was memory, but not 100% of it.
Components was a fair chunk of it but the gas panels also salt reduction for sure.
Yeah.
Okay alright, thank you.
Thanks Robert.
And the next question comes from the line of Hans Chung with D. A Davidson. Please proceed with your question.
Hi, Thank you for taking my question.
Two quick questions first so any update on the supply chain constraints.
I remember last quarter, we saw a market improvement that still had some overhang.
Just wondering how although challenges.
Now completely behind and any implications to the gross margin or E.
The ability to eat or things like that thank you.
No I'd say the supply chain is in pretty good.
Position right now or health, it's not it's never perfect. So there still are pockets that were working but I would say those are things that we're working out months in advance Ah looking ahead, but I'd say largely the components suppliers to us are performing pretty.
Pretty well given.
Given the downtick in demand there is plenty of capacity out there. So we're not seeing much in the way of supply chain.
And so it's not going to be something that necessarily we can see impacting us today.
Yeah.
Got it and then.
A follow up on the.
Next generation gas panel products so.
I think you're making the third tool.
T D D for.
Mickey.
Any color around where there is existing customer or new customer and and what type of application used for and then.
Yeah, I think for the first two previous Q it seems like a good start to.
To see the fallout of older in 'twenty four right. So just wonder how much the revenue opportunity could be in 2004 four days.
Next generation gas panel.
Hum.
Stage until we actually know what we're going to be qualified on we do know the application. Unfortunately, I can't share that on a conference call, but the the opportunities would be measured in tens of millions of dollars by platform. If we went a whole platform.
On an annual basis.
Thank you okay.
Thank you.
Thank you at this time, we have reached the end of the question and answer session and I would like to turn the call back over to Jeff Andreasen for closing comments.
Thank you for joining us on our call this quarter I'd like to thank our employees suppliers and customers for their ongoing dedication and support as we continue to navigate this highly dynamic dynamic business environment, our upcoming investor activities include the Susquehanna Technology conference being held virtually I'm.
March 3rd we also look forward to our next quarterly earnings call scheduled for early May.
Operator that concludes our call.
Thank you everyone that does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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