Q1 2023 Ichor Holdings Ltd Earnings Call
Okay.
Good day, ladies and gentlemen, and welcome to Eichhorst first quarter 2023 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 should you require operator assistance. Please press star zero on your telephone keypad as a reminder, this call is b.
<unk> recorded it is now my pleasure to introduce your host for today's conference Claire Mcadams Investor Relations for Ichor. Please go ahead.
Thank you Devin good afternoon, and thank you for joining today's first quarter 2023 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 those spelled out in our earnings press release.
As described in our annual report on Form 10-K for fiscal year 2022 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. 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 injuries, and 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 first quarter results and second quarter guidance. After the prepared remarks, we will open the line for questions and I'll now turn over the call to Jeff.
Andreessen Jeff.
Thank you Claire and welcome to our Q1 earnings call.
Our first quarter results, we're pretty closely aligned with our expectations going into the quarter.
Revenues of $226 million were just above the midpoint of guidance, representing a 25% decline from Q4.
Gross margin of 15, 5% came in at the lower end of the range due to a less favorable mix.
We were able to closely manage operating expenses during the quarter.
And achieved about a 10% reduction compared to Q4.
And as a result, our operating margin of six 1% was right at the midpoint.
Earnings of 38 cents per share was well above the range to a net tax benefit which as Larry will discuss later in more than offset the greater FX expense in the quarter.
So while our Q1 results were consistent with our expectations the customer demand environment has further weakened year to date we.
We witness incremental push outs and order cancellations for most of our OEM customers as we progressed through the quarter largely as a result of additional reductions in memory investments as well as some curtailment of spending on leading edge logic.
In particular, the component side of our business, which is largely comprised of weldment and precision machine parts.
And which typically represents about a quarter of our revenue is seen deeper cuts than we had expected entering the year as our customers work to reduce their inventory levels.
This drove the unfavorable mix versus what we anticipated for the first quarter.
In our gas panel business, our expectations for the second quarter sales are lower than what we expected at this time last quarter.
With the adjustments to our forecast closely mirroring the expected declines in new system builds of our largest customers.
With our current visibility we are expecting a 20% sequential decline in revenues for Q2.
Followed by a recovery.
We believe Q2 marks the trough quarter for our revenues this year with both the gas panel in the component business is expected to grow sequentially in Q3 and Q4.
Product mix will again be less favorable with the expected revenue profile in Q2.
And as Larry will discuss in our detailed guidance, we are expecting gross margins to bottom out in the low to mid 14% level in Q2 before beginning to recover in the second half.
We believe it is well understood at this point that the further softening in semiconductor capex expectations. This year reflects a 20% to 25% decline in total wafer fab equipment spend.
Within this range the non litho part of the market is now expected to be down by at least 30%.
In the face of these significant market headwinds during our call last quarter, we discussed a few aspects of our business that could help mitigate these significant declines.
These include our growing business in the EU V lithography market, which while still a small portion of our revenues is a bright spot this year.
We all sort of are less exposed to the memory market today than ever before based on our customers' revenues by end market, we estimate that memory WSB investments drove approximately 40% of our sales in 2022, well that marks a significant decline from the 50% to 70% levels seen over the <unk>.
Prior few years. This segment of our business is now seen spending cuts of about 50% this year.
On the logic and foundry side, we believe our revenue profile is highly leveraged to the most advanced nodes and the capital investments in this important part of the market have also witnessed incremental reductions year to date.
The non semi portion of our revenues, which comes from the I M. G acquisition addresses areas, such as medical industrial and aerospace while still a small portion of our business. These segments previously were expected to perform quite a bit better than Wi Fi in 2023 and how we have seen some additional softness in these non semi market.
That's that reflect the overall weakness in the macro economic conditions.
And the longer term, we believe that each of these markets in particular advanced node logic and memory will provide <unk> with the ability to achieve a strong revenue recovery when the spending environment improves which is pretty much inevitable, especially with these unsustainably low levels of memories investments.
During this time, we will continue to focus on driving share gains for our proprietary products that make investments in new offerings that support our customers' long term technology Road maps.
We remain focused on utilizing the slowdown to complete qualification of new products to both increase our share of market as well as the internally manufactured content of our existing products.
As a reminder, our areas of focus remain achieving customer qualifications for our internally developed machining components, leveraging our global weldment footprint to gain additional share.
Completing the qualifications of our initial next generation gas panels.
All the fine chemical delivery systems, as well as developing new components that address the wet processing market.
And qualifying our gas delivery solutions with key customers, serving the growing silicon carbide market.
We continue to make good progress on all of these fronts, we expect to finalize the qualification of incremental machining components business by mid year and.
We will begin shipping. These shortly thereafter these components will be integrated into our existing gas panels that we manufacture today.
Being margin accretive.
The next generation gas panel evaluation units that we have shipped are progressing well.
We now expect to ship two to three additional evaluation units in the next several months. Once these ship we will be actively engaged with three customers.
With the successful completion of each of these evaluations and expected subsequent qualifications. We expect initial revenues for our next generation gas panel to begin in the first half of 'twenty 'twenty four.
The new games, and our chemical delivery business are progressing but at a slower pace than our gas delivery products.
We remain confident that our new chemical delivery module will gain additional traction later this year.
And finally, we were pleased to report that we have completed delivery and customer qualification of our first gas panels for the silicon carbide market and will begin volume production by mid year 2023.
Before turning the call over to Larry I'll remind everyone here today that our revenues tend to recover more sharply went industry spending rebounds.
As I mentioned with our current visibility we see revenues bottoming out in Q2, followed by the beginning of a recovery.
Lending on the slope of the recovery, we could see a material improvement in customer demand toward.
Towards year end in the meantime, we are managing through the lower demand environment by focusing on delivering solid financial results as the business recovers in the second half improving our operational capabilities qualifying our internally developed products and developing new products that align with our customers' needs for both.
<unk> costs now.
And with that I'll now turn the call over to Larry Larry.
Thanks, Jeff first I'd like to remind you that the P&L metrics discussed today are non-GAAP measures. 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 SG&A in the investors section of our website for reference during this conference call.
First quarter revenues were $226 million slightly above the midpoint of guidance and down 25% from Q4.
Gross margin of 15, 5% was at the lower end of the range due to the less favorable mix of revenues in the quarter as expected gross margin flow through improved to 20% compared to approximately 25% in the prior quarter as a result of the cost reductions implemented over the last two quarters.
Q1, operating expenses were below forecast at $21 $2 million and were down approximately 10% from Q4, the resulting operating margin of six 1% was at the midpoint of guidance.
As a result of higher interest rates net interest expense increased to $4 $6 million other.
Other income and expense was much higher than average zero point $8 million due to unfavorable foreign exchange.
Finally, we ended up recording a net tax benefit rather than the 10% expense included in our forecast and this benefited EPS by approximately <unk> 12 sets driving our earnings above the high end of the guidance range at 38 cents per share.
Now I will turn to the balance sheet.
Total cash and equivalents at quarter end were $68 8 million and total debt was just over $300 million.
We currently have $90 million available on our revolver, our net debt coverage ratio remains below one six times and we have no exposure to any liquidity risks with our bank financing.
Cash flow for the quarter was a negative $17 $7 million.
This reflects a use of cash from operations of $10 9 million and $6 $8 million of Capex.
And working capital, we reduced balances of both receivables and inventory during the quarter, but days were modestly higher due to the faster drop in revenue.
Notable in our cash flows in Q1 was the use of $43 million to reduce accounts payable, which was a result of our highly front end weighted quarter for material receipts.
I will turn to our second quarter guidance.
With revenue guidance in the range of $170 million to $190 million. Our Q2 earnings guidance is approximately breakeven plus or minus <unk> <unk> per share.
The midpoint of revenue guidance at $180 million reflects about a 20% decline from Q1.
At this revenue level, we are expecting gross margins in the low to mid 14% range, which incorporates our cost reduction actions and continued improvements in flow through to just under 20%.
At this time, we expect operating expenses to remain relatively flat to Q1 levels of $21 $2 million as we continue to prioritize our R&D investments in support of new product programs and maintain the critical infrastructure that will enable us to quickly respond to customer demand when the spending environment.
Recovers.
We currently expect our quarterly Opex run rate to be up slightly in the second half of the year to support the expected recovery in revenues.
We expect our net interest expense will be $4 $9 million in the second quarter, reflecting the continued increases in interest rates and with breakeven earnings we anticipate no tax expense recorded for Q2.
However.
Our guidance on taxes as we move through 2023 will reflect the expectation of a net tax benefit to be recorded for the full year.
Although we are expecting pretax income globally for the year at this time, we expect our full year pre tax loss in the U S, resulting in an expected tax benefit in the range of $5 million to $6 million.
A significant amount of this benefit was already recorded in Q1.
A large portion of our fixed cost structure, including interest expense is in the U S, which does not change with customer volumes.
We expect to be able to utilize these U S tax credits as we returned to more normalized revenue volumes in 2024, and therefore your model should reflect the 10% expense returning starting next year.
Operator, we are ready to take questions. Please open the line.
Thank you we will now be conducting a question and answer session I would 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 would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Okay.
Sure.
Our first question comes from the line of Brian Chin with Stifel. Please proceed with your question.
Hi, there good afternoon, thanks for letting us ask a few questions.
Yeah, maybe just to kick things off you know the revenue guide for the June quarter, I'm, a little bit worse than you'd anticipated. Although you kind of look at some of your peers out there kind of towards the lower end of.
Of a range that different companies have provided but kind of bigger picture and actually more importantly.
In terms of.
The amount of inventory burn off that your direct customers are doing incrementally what gives you and your peers kind of confidence here that the June quarter will sort of be the trough and then youll start to see some improvement off that level in sort of yeah.
And tie that into surgery.
I've told you about their inventories and how long it would take for them to sort of bleed down to where they wanted to be and what's driving that sort of second half.
<unk> as well.
Hey, Brian .
Good questions.
What I would tell you on the inventory burn is that I.
I think on prior calls I talked about chasing demand. So I didn't think it would be.
It's as large as it was do I think it'll be done by the end of the second quarter, I think largely but there may be some pockets that leak into the <unk>.
Second half.
It's hard to turn the machine up because there's this kind of felt kind of quickly towards the end of Q4.
It's just resulted in a longer thing now the second half recovery as we look at it we have seen strengthening.
Kind of a cross a little bit across the board, we don't get perfect visibility at the memory logic segment, but we've seen some recovery in some shipments that are destined for China for example.
Think one of our customers talked about that on their call as well and we've seen some strengthening again in <unk>.
Kind of the logic area and I think the view of memory is kind of holding on so I think those two are the larger pieces that give us confidence in the second half and we've seen our our outlook for Q3, and Q4 kind of strengthen over the last several weeks. So that's what gives us confidence to talk about Q2.
Being our trough.
Okay. That's helpful and then sort of like a full year perspective.
And thinking about sort of the the E V gas panel business that you do what can you say about sort of the direction of that business. This year relative to maybe your expectations three months ago.
I think it is held on pretty solidly actually.
Theres been a little jiggering, but I would say that schedule related more than demand related they have a tremendous amount of backlog as you know so anything that shifted in the schedule. It's it's kind of the next one fills that right and so it has stayed very stable for us from the beginning of the year.
Through today and you know it's it's.
It is becoming a bigger piece of our business, but it's good to see.
Alright, thanks for the answers.
You bet. Thank you.
Thank you. Our next question comes from the line of Craig Ellis with B. Riley. Please proceed with your question.
Yeah. Thanks for taking the question.
Jeff I wanted to start with a question that goes back to some of your prepared remarks, and just understand the opportunity that you see with silicon carbide gas panels can you just talk about how big you believe that market is now on what the competitive landscape looks like and as you look out over the next two to three years.
What's the growth potential in that market for you and industry.
Yeah, I wish I could answer the industry quest.
Question I am not that burst in silicon carbide for US. This is largely focused at one customer.
There are several people out there are companies out there that are addressing the silicon carbon market some of it with the existing tool sets.
And so as we kind of look at this first one I would say kind of on an annualized run rate that's somewhere between five and $10 million a year. So if you win each one of these kind of applications you can see that they kind of continue to build up and so.
We've had conversations with a couple of other players, but we're pretty much in the early innings on those.
Got it and that.
Dovetails into my next question. So one of the things that came up on.
On a couple of recent calls from some of the larger cap companies. Despite the mature node areas have been areas of particular strength in a lot of that demand just from China, but it's clear that that's okay.
Our strong global trend. The question is what what exposure does <unk> have to mature nodes is is it material is it mostly something like silicon carbide can just flush out what's what are is existent or what might be a future opportunity in that area.
Well I think the way I would answer this is that we benefit from the mature nodes quite honestly most of those are new tools that their new tools they follow through.
With the gas panel shares that we have today, so we will get our call it fair share of it.
I think if it's a purely refurbished tool.
We have less exposure to that but you know anything there as some of these are 300 millimeter 200 malware is six inch you know they they vary and so if they're kind of older eight inch and six inch we probably get it.
A little less exposure, but the kind of the newer to our 300 millimeters, we get the same exposure we have today.
So got it good to hear and then Larry flipping over to you. So on the cash side you mentioned that.
That there was 17 million used in the first quarter can you talk about the Gibson takes in the second quarter given the.
The earnings guidance for the business.
What do you expect either user generate and then.
What does that mean for some of the supplemental resources.
But you have like the revolver.
I think.
We would expect to generate cash flow in Q2, I think if you look at the payables dropped in Q1, which was pretty significant I think if you look from the first quarter the second quarter with our current receipts outlook and other than that you won't see a lot of change there.
I think on the receivables side, we had a lot of churn.
Churn inside the customer base and even though we hit the revenue number there was a lot of work that went on at the back end of the quarter and we shipped a lot.
Those last.
$5 five weeks six weeks of the quarter. So we ended up with a little bit higher receivables balance than you would expect to have on a on a normal basis and as we see happening in Q2, So I think where we expect to generate positive cash flow into Q2, where we sit today.
Good to hear and then if I could I'll just do one last one for Jeff Jeff.
Going back to one of Brian's questions about the view for <unk> being a bottom.
Just given the state of the macro environment, if things proved to be a little bit more U shaped than we bounced along the bottom three.
Through the third quarter, what would be the one or two factors in Europe , you would that would catalyze such a trend versus a nice V shape, but you were discussing.
I don't I.
I don't know how steep the V would be I think the way, where we're seeing it in the outlooks that we're having we're seeing kind of a 5% to 10%.
The increase from quarter to quarter three today, and then something similar in quarter four so I mean to pull those down you'd probably have to have the macro environment kind of go further south and we're already seeing today, but again you know we were at levels of the lowest levels of memories wip spend in a long long.
Long time, so how long can they keep those down before they have to continue to invest in these more advanced nodes. So.
I'm feeling better about the second half clearly as you can hear from our outlook. So.
Yep Yep and agree that it's a multi decade historic quench and memory. Okay. Thanks for all the help guys really appreciate it.
Thanks, Greg.
Thank you. Our next question comes from the line of Quinn Bolton with Needham <unk> Company. Please proceed with your question.
Hey, guys.
Just a follow up to Craig's question, there if I do the quick math of up five to 10 in Q3 Q4, if I just take the midpoint of those you know percentage growth rates it looks like youre going to be almost flat half over half maybe down a smidge in the second half of 'twenty three versus the first half, but just want to make sure.
That's kind of consistent with how you're seeing things.
You did the math quickly and accurately.
I think I think.
As we entered this we thought that we would see a more backend loaded but it's it's soft enough in the first half that.
They're going to be pretty close to equal.
Got it.
And then for Larry you talked about the.
No.
Reduced incremental fall through as revenues have declined you were 20% in Q1, you think it might be a little bit less than 20% in Q2, but as you start to see revenue recover it in Q3 and Q4 do we go back to a 25% fall through of the higher revenue.
As you begin to recover given some of the cost reduction actions you've taken.
Yeah, I think given where we are today and then the.
Variable spending that we've taken out and people that we've taken out I think 25% is reasonable for the back half of this year assuming the.
The revenue there.
Just mentioned and what we see in the way of mix between machining and our.
Our gas panel integration business, that's a reasonable model.
Got it.
And as a follow up question on the China business I think a number of the larger Oems in their earnings calls.
Talked about the clarification of export controls around DRAM shipments appears to have you know benefited.
Some of your larger Oems I assume that you would see that growth.
You know as they were able to ship those tools they got clarification on.
Yeah, Yeah, definitely I mean, I would say that we've seen it and so some of the strengthen in the second half has come from that we don't get all the sell through information, but we get enough to know it seemed to have a aligned with some of the comments made by the larger Oems in the industry.
Great and then lastly, maybe I missed it but Geoff did you.
Talk about the type of tool that you have the gas panel for Silicon carbide is this a natural dep tools, just perhaps more epitaxy side of things.
I haven't been able to comment on that Quinn and if I, if I did probably figure out who who it was we were working with so it's one of those three.
Okay.
Fair enough.
I tried alright, thank you very much Jeff.
Yeah.
Yeah.
Thank you. Our next question comes from the line of Krish <unk> with Cowen. Please proceed with your question.
Hi, This is Robert Mertens on for Chris Thanks for taking my questions first.
First could you provide just.
How many of your high level expectations for the IMG business. This year, how the demand environment has changed over the past quarter and what sort of visibility you have and then I had one follow up.
Yeah, I think we we don't actually break it out, but what I'll I'll give it to you kind of a more qualitative I would say the semi side of the business is seeing something pretty similar to what we've experienced in our outlook.
The we talked about a little more softening in their non semi market that has we had entered the year with that expected to grow I would say, that's probably going to be more flat.
So it's not it's not gone down anywhere like the semi business, but the semi business they have.
Is.
It's softening.
Having said that you know we.
We're similar in their side of the business, we do see the second half strengthening for them. So.
That's yeah. That's helpful. And then maybe just a follow up on.
Suppliers and customers for their ongoing dedication and support as we continue to navigate this highly dynamic business environment, our upcoming investor activities include the B Riley conference in La on May 24th the Cowen Tech Conference in New York on June one.
The Stifel Cross sector conference in Boston on June six and the CEO summit in San Francisco on July 12.
Also look forward to our next quarterly earnings call scheduled for early August operator that concludes our call.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Yeah.
Okay.
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Yes.
Thank you.
Okay.
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