Q3 2023 Ichor Holdings Ltd Earnings Call
Speaker 1: Good day ladies and gentlemen and welcome to ICOR's third 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. If anyone should require operator assistance during the conference.
Good day, ladies and gentlemen, and welcome to I Corps third 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, 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 I would now like to introduce your host for today's conference Claire Mcadams Investor Relations for Ichor. Please go ahead.
Speaker 1: please press star zero on your telephone keypad. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Claire McAdams, Investor Relations for I-Corps. Please go ahead.
Speaker 1: Thank you, operator. Good afternoon and thank you for joining today's third quarter 2023 conference call.
Thank you operator, good afternoon, and thank you for joining today's third quarter 2023 conference call.
Speaker 1: 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 Security Security Administration
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.
Speaker 1: forward-looking statements are subject to a number of risks and...
Speaker 1: many of which are beyond our control and which could cause actual results to differ materially from such...
Many of which are beyond our control and which could cause actual results to differ materially from such statements.
Speaker 1: These risks and uncertainties include those spelled out in our earningshernal news app or the United States Sul sectors cannot crossowing these risks Chen any fashion is tale
These risks and uncertainties include those spelled out in our earnings press release.
Speaker 1: those described in our annual report on Form 10-K for fiscal 2022, and those described in subsequent...
Those described in our annual report on Form 10-K for fiscal 2022 and those described in subsequent filings with the SEC.
Speaker 1: should consider all forward-looking statements in light of those and other risks.
You should consider all forward looking statements in light of those and other risks and uncertainties.
Speaker 1: Additionally, we will be providing certain non-GAAP financial measures during this conference call.
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.
Speaker 1: and the financial supplement posted to our IR web site.
Speaker 1: provide a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures.
Speaker 1: On the call with me today are Jeff Andreson, our CEO and Greg Swite, our CFO . Jeff will begin with an update on our business and then Greg will provide additional details about our results and guidance. After the prepared remarks, we will open the line for questions.
On the call with me today are Jeff Anderson, our CEO and Greg White, our CFO, Jeff will begin with an update on their business and then Greg will provide additional details about our results and guidance. After their prepared remarks, we will open the line for questions.
Now I'll turn over the call to Geoff Andreessen, Jeff.
Speaker 2: Thank you, Claire. And welcome to our Q3 earnings call.
Thank you Claire and.
And welcome to our Q3 earnings call.
Speaker 2: Our third quarter revenues came in at the upper end of our expectations at $197 million of 6% from Q2, due primarily to a rebound in our core gas delivery business.
Our third quarter revenues came in at the upper end of our expectations at $197 million up 6% from Q2, due primarily to a rebound in our core gas delivery business, reflecting that the trough quarter for semiconductor process equipment is behind us.
Speaker 2: reflecting that the trough quarter for semiconductor process equipment is behind us.
Speaker 2: Earnings of 7 cents per share were aligned with our expectations as we were able to offset some headwinds in gross margin during the quarter with lower OPEX and higher net tax benefit which Greg will discuss in his remarks.
Earnings of <unk> <unk> per share were aligned with our expectations as we were able to offset some headwinds in gross margin during the quarter with lower Opex and higher net tax benefit, which Greg will discuss in his remarks.
Speaker 2: After two quarters in a row of revenues at the upper end of our expectations, at this time our Q4 revenue forecast is fairly similar to Q3 levels. And therefore, a revenue outlook for the full year remains consistent with the expectations we've shared throughout the year.
After two quarters in a row of revenues at the upper end of our expectations. At this time, our Q4 revenue forecast is fairly similar to Q3 levels and therefore, our revenue outlook for the full year remains consistent with the expectations we've shared throughout the year.
Speaker 2: Last quarter, we described the factors that are causing our expected revenue decline in 2023 to be a bit steeper than the overall market. Versus our relative customer and end-market exposure, which is more weighted towards the areas seen in the bulk of the softness this year, especially process tools for the NAN memory sector.
Last quarter. We described the factors that are causing our expected revenue decline in 2023 to be a bit steeper than the overall market.
First as a relative customer and end market exposure, which is more weighted towards the areas seeing the bulk of the softness this year, especially process tools for the NAND memory segment.
Speaker 2: As the year has progressed, it has become increasingly clear that the strong growth witness in action deposition over the last few years has been largely fueled by the capacity expansions underway at the five leading manufacturers of 3D NAMM. And in 2023, this segment has witnessed spending declines of as much as 75%.
As the year has progressed it has become increasingly clear that the strong growth witnessed in etch and deposition over the last few years has been largely flu fueled by the capacity expansions underway at the five leading manufacturers of three D. NAND and in 2023. This segment has witnessed spending declines of as much as <unk>.
95% we.
Speaker 2: We estimate that memory WFE has declined to represent just about one quarter of our total revenues in 2023. Furthermore, the component side of our business has witnessed deeper and more prolonged cuts as our customers work to reduce their inventory levels.
We estimate that memory WMC has declined to represent just about one quarter of our total revenues in 2023. Furthermore, the component side of our business is weighted witness deeper and more prolonged cuts as our customers work to reduce their inventory levels.
Speaker 2: The bright spots for us this year are definitely within the growing market segments of WFE, such as EUP, lithography, and new customer design wins.
White spots for us this year are definitely when theyre in a growing market segments of W. P.
She is a UV lithography and new customer design wins.
Speaker 2: such as the four EPI systems for silicon carbide. We continue to expect to add a third 10% customer for fiscal 23.
Such as the four <unk> systems for Silicon Carbide, we continue to expect to add a third 10% customer for fiscal 'twenty three.
Speaker 2: As we look ahead to a relatively stable demand environment in our serve markets for the next few quarters, we are also just beginning to see the emergence of new technology drivers and process inflections that require an increasing use of applications that are more highly dependent on the accuracy and repeatability of the gas deliveries.
As we look ahead to a relatively stable demand environment in our served markets for the next few quarters. We are also just beginning to see the emergence of new technology drivers and process inflections that require an increasing use of applications that are more highly dependent on the accuracy and repeatability of the gas deal.
Livery system.
Speaker 2: These include etch and deposition techniques such as atomic layer deposition, selective etch, and low K and nitrite film.
These include etch and deposition techniques, such as atomic layer deposition selective edge and low K and nitride films.
Speaker 2: In lithography, we see opportunities to expand our gas delivery role in next generation platforms, including high NA. As EUV adoption continues to proliferate across multiple device types, our process tool customers are also witnessing the need for more etch and deposition steps to help create smooth patterns and reduce line width roughness.
In lithography, we see opportunities to expand our gas delivery roll in next generation platforms, including high N a S.
<unk> adoption continues to proliferate across multiple device types. Our process tool customers are also witnessing the need for more etch and deposition steps to help create smooth patterns and reduce line width roughness.
Speaker 2: Additionally, expectations for WFE growth I had reflect a significant expansion in the industry's deployment of advanced packaging techniques, which have their own particular
Additionally, expectations for Wf fee growth I had reflect a significant expansion in the industry's deployment of advanced packaging technique.
Which have their own particular process challenges.
Speaker 2: These require better film stress management, improved defectivity.
This will require a better film stress management improved <unk> activity.
Speaker 2: enhance uniformity, and increase material selectivity, all of which are enabled by more precise control of gas and fluid delivery.
Enhanced uniformity and increased material seal selectivity all of which are enabled by more precise control of gas and fluid delivery.
Speaker 2: Outside of family conductors, specifically for our IMG business, we are also driving cross-selling opportunities at our historical gas panel customers, as well as opportunities offer eye-cords of various fluid delivery products and capabilities to IMG's customer base in medical aerospace and defense.
Outside of semiconductors, specifically for our <unk> business. We are also driving cross selling opportunities at our historical gas panel customers as well as opportunities to offer <unk> various fluid delivery products and capabilities to amg's customer base in medical aerospace and defense.
Speaker 2: As these new technologies and drivers evolve and proliferate, we see opportunities for I-Core to expand our revenue potential and continue to add breadth and diversification to our customer base.
As these new technologies and drivers evolve and proliferate, we see opportunities for ichor to expand our revenue potential and continue to add breadth and diversification to our customer base.
Speaker 2: All of these factors build a strong story for Icors revenue growth as the industry recovery accelerates.
All of these factors build a strong story for <unk> revenue growth as the industry recovery accelerates.
Speaker 2: Furthermore, our business model and financial profile tend to generate significant operating leverage as revenues grow.
Furthermore, our business model and financial profile tend to generate significant operating leverage as revenues grow.
Speaker 2: Current expectations are for the Q4 industry spending levels to stay fairly consistent through the first half of 2024, followed by the beginning of a revenue ramp in the second half in advance of an expected strong recovery year in 2025.
Current expectations are for the Q4 industry spending levels to stay fairly consistent through the first half of 2024, followed by the beginning of a revenue ramp in the second half in advance of an expected strong recovery year in 2025, we expect to be able to deliver significant earnings growth.
Speaker 2: We expect to be able to deliver significant earnings growth as revenue volumes increase, which is why we continue to make critical investments in our business in support of our future growth.
Revenue volumes increase which is why we continue to make critical investments in our business in support of our future growth.
Speaker 2: We are maintaining our focus on driving share gains for our proprietary products and making investments in new offerings that support our customers long term technology road.
We are maintaining our focus on driving share gains for our proprietary products and making investments in new offerings that support our customers' long term technology Road maps. These.
Speaker 2: These periods of lower demand provide both I-Corps and our customers the ability to work on new qualifications. We continue to make very good progress in our key focus areas. These include our next generation gas panel, qualifications of our proprietary machine components, and our silicon carbide gas panel.
These periods of lower demand provide both <unk> and our customers the ability to work on new qualifications. We continue to make very good progress in our key focus areas. These include our next generation gas panel qualifications of our proprietary machine components in our silicon carbide gas panel.
Speaker 2: I'm very pleased with our progress in customer evaluations of our new gas panel. As a reminder, the new gas panel contains about 75% proprietary high-core content compared to just 10% today, which could drive significant expansion of our gross margin profile. We have completed the qualification of our gas panel for three process applications, and in the next two quarters, expect to ship gas panels that will support five additional climate flip.
I'm very pleased with our progress and customer evaluations of our new gas panel as a reminder, the new gas panel contains about 75% proprietary high court content compared to just 10% today, which could drive significant expansion of our gross margin profile, we have completed the qualification.
Our gas panel for three process applications and in the next two quarters expect to ship gas panels that will support five additional systems.
Our end user customer tool evaluations.
Speaker 2: This is a major milestone for the program.
This is a major milestone for the program.
Speaker 2: Our best estimate of when production shipments will begin is late 2024, which is when we would expect the end customer evaluations to be successfully completed.
Our best estimate of when production shipments will begin as late 'twenty 'twenty, four which is when we would expect the end customer evaluations to be successfully completed.
We continue to work with three additional customers that are evaluating our technology.
Speaker 2: We continue to work with three additional customers that are evaluating our technology.
Speaker 2: In our I-Corps proprietary machine components, we continue to win new qualifications across our customer base.
And our eye core proprietary machine components, we continue to win new qualifications across our customer base.
Speaker 2: In Q3, we completed several new component qualifications and expect to begin initial shipments later this quarter. We also expect to integrate incremental proprietary components into our existing gas panels. But this will take some time as our customers continue to work through the existing inventory on hand.
In Q3, we completed several new component qualifications and expect to begin initial shipments later this quarter.
We also expect to integrate incremental proprietary components into our existing gas panels, but this will take some time as our customers continue to work through the existing inventory on hand.
Speaker 2: Similar to our next generation gas panel, all of these qualifications and new customer winds will be margin accreted.
Similar to our next generation gas panel all of these qualifications and new customer wins will be margin accretive.
Speaker 2: And lastly, we continue to ship production volume gas panels for the silicon carbide market and have now been qualified on the next generation systems as well.
And lastly, we continue to ship production volume gas panels for the silicon carbide market.
And have now been qualified on the next generation systems as well.
Speaker 2: We estimate the silicon carbide SAM for gas delivery to be around $60 million in 2023, but a decent tailwind for our revenue growth as the overall industry rebounds in the latter half of 2024 and 2025.
We estimate the silicon carbide, Sam for gas delivery to be around $60 million in 2023, but a decent tailwind for our revenue growth as the overall industry rebounds in the latter half of 'twenty four and 2025.
Speaker 2: In summary, I'll remind everyone here today that our revenues tend to recover more sharply when industry spending rebates.
In summary, I'll remind everyone here today that our revenues tend to recover more sharply when industry spending rebounds, and our business model enables earnings growth well in excess of revenue growth.
Speaker 2: And our business model enables earnings growth while in excess of revenue.
Speaker 2: In the meantime, we are managing through the lower demand environment by focusing on delivering solid financial results as the business recovers, improving our operational capabilities, qualifying our internally developed products and developing new products that align where their customers need for both technology and cost.
In the meantime, we are managing through the lower demand environment by focusing on delivering solid financial results as the business recovers improving our operational capabilities qualifying our internally developed products and developing new products that align with our customers' need for both technology and cost.
Speaker 2: With that, I'll turn it over to Greg to recap our Q3 results and provide further details around their Q4 outlook. Greg?
With that I'll turn it over to Greg to recap, our Q3 results and provide further details around our Q4 outlook Greg.
Thanks, Jeff.
Speaker 3: To begin, I would like to emphasize 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.
To begin I would like to emphasize 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.
Speaker 3: non-recurring charges, and discrete tax items and adjustments.
<unk> charges and discrete tax items and adjustments.
Speaker 3: There is a useful financial supplement available on our investor section of our website that summarizes our gap and non- GAAP financial results, as well as summary balance sheet and cash flow information for the last several quarters.
There is a useful financial supplement available on our investors section of our website that summarizes our GAAP and non-GAAP financial results as well as summary balance sheet and cash flow information for the last several quarters.
Speaker 3: In the third quarter, our revenues were $197 million at the upper end of guidance, and increased 6% from the second quarter.
In the third quarter, our revenues were $197 million at the upper end of guidance and increased 6% from the second quarter.
Speaker 3: Our Q3 gross margin was 13.1%, which was lower than our expectations, primarily due to the additional inventory provisions recorded during the quarter, as well as a less favorable product mix compared to our forecast.
Our Q3 gross margin was 13, 1%, which was lower than our expectations, primarily due to the additional inventory provisions recorded during the quarter as well as a less favorable product mix compared to our forecast.
With close control of spend in Q3 operating expenses of $21 $3 million declined from Q2 levels, the resulting operating margin for Q3 was 2.2%.
Speaker 3: With close control of spending, Q3 operating expenses of $21.3 million declined from Q2 levels. The resulting operating margin for Q3 was 2.2%.
Speaker 3: Our net interest expense was $5 million, and our non-GAAP net income tax benefit for the quarter exceeded our forecast at $2.9 million. Consequently, our net earnings for the quarter came in at the midpoint of Q3 guidance at $0.07 per share.
Our net interest expense was $5 million and our non-GAAP net income tax benefit for the quarter exceeded our forecast at $2 $9 million. Consequently, our net earnings for the quarter came in at the midpoint of Q3 guidance at seven cents per share.
Speaker 3: Now turning to the balance sheet. At the end of the quarter, our cash and equivalent totaled $76 million, a $9 million decrease from Q2 primarily due to our net debt reduction of $12 million.
Now turning to the balance sheet at the end of the quarter, our cash and equivalents totaled $76 million a $9 million decrease from Q2, primarily due to our net debt reduction of $12 million.
Speaker 3: We generated $4 million in cash flow from operations, and after deducting $2.4 million of capital expenditures, our free cash flow for the quarter was $1.6 million.
We generated $4 million in cash flow from operations and after deducting $2 $4 million of capital expenditures, our free cash flow for the quarter was $1.6 million.
Speaker 3: This was below our expectations for free cash flow, given the back end loaded revenue profile of the quarter, which drove an $8 million increase in accounts receivable.
This was below our expectations for free cash flow given the backend loaded revenue profile of the quarter, which drove an 8 million dollar increase in accounts receivable.
Inventory remained flat at $267 million days sales outstanding increased by one day to 48 and inventory turnover stood at 2.6.
Speaker 3: Inventory remained flat at $267 million. Day sales outstanding increased by one day to 48 and inventory turnover stood at 2.6.
Speaker 3: We are continuing to reduce our net debt levels given the higher interest rate environment, and our net debt coverage ratio currently stands at 2.6 times. Now let's discuss
We are continuing to reduce our net debt levels, given the higher interest rate environment and our net debt coverage ratio currently stands at 2.6 times.
Now, let's discuss our guidance for the fourth quarter.
Speaker 3: We anticipate revenues in the range of $190 to $205 million.
We anticipate revenues in the range of $190 million to $205 million.
Speaker 3: We expect that our gross margins will improve to approximately 14% plus or minus 50 basis points.
We expect that our gross margins will improve to approximately 14% plus or minus 50 basis points.
Speaker 3: Our fourth quarter gross margin expectations reflect somewhat more favorable product mix as well as some improvement in the level of inventory reserves forecasted.
Our fourth quarter gross margin expectations reflect somewhat more favorable product mix as well as some improvement in the level of inventory reserves forecasted.
As we enter 'twenty 'twenty four we expect to be solidly back on track with our 25% flow through at similar revenue levels when compared to our second quarter gross margin performance.
Speaker 3: As we enter 2024, we expect to be solidly back on track with our 25% flow through at similar revenue levels when compared to our second quarter gross margin performance.
Speaker 3: We plan to carefully manage operating expenses to $21.4 million level, give or take $200,000, as we continue to prioritize our R&D investments for new product programs and maintain the essential infrastructure that will enable us to ramp revenues in response to more significant upticks in customer demand in the quarters ahead.
We plan to carefully manage operating expenses to $21.4 million level give or take $200000.
As we continue to prioritize our R&D investments for new product programs.
And maintain the essential infrastructure that will enable us to ramp revenues in response to a more significant upticks in customer demand in the quarters ahead.
Yeah.
Speaker 3: Net interest expense is expected to be approximately $5 million.
Net interest expense is expected to be approximately $5 million.
Speaker 3: The non-GAAP income tax benefit we expect at the midpoint of Q4 guidance is approximately $1 million. For fiscal 2023, we expect to recognize a net tax benefit of approximately $7 million, which is higher than our previous forecast.
The non-GAAP income tax benefit we expect at the midpoint of Q4 guidance is approximately $1 million for fiscal 2023, we expect to recognize a net tax benefit of approximately $7 million, which is higher than our previous forecast.
Looking ahead to 2024, we anticipate incurring a nominal non-GAAP tax expense each quarter and for modeling purposes, you should assume a 5% to 10% non-GAAP effective tax rate.
Speaker 3: Looking ahead to 2024, we anticipate incurring a nominal non-GAAP tax expense each quarter, and for modeling purposes, you should assume a 5% to 10% non-GAAP effective tax rate.
Speaker 3: Operator, we are ready to take questions. Please open the line.
Operator, we are ready to take questions. Please open the line.
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 your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
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Yeah.
Speaker 1: Your first question comes from Charles Shee with Needham. Please go ahead.
Your first question comes from Charles <unk> with Needham. Please go ahead.
Speaker 4: Thanks for taking my question. Good afternoon, Jeff and Greg. I want to start the first question in terms of the first half 24. I heard you talk about the first half 24. Maybe that's an industry comment.
Hi, Thanks for taking my question Hi, Good afternoon, Greg.
I wanted to start first question.
In terms of the first half 'twenty four I heard you talk about the first half or maybe that's an industry comment you're expecting consistent.
Speaker 4: you're expecting a consistent level, I mean, consistent with Q4 level for the first half of 24. I wonder, what do you see at iQOO Business going to 24? And I think it's tied to this question that how much inventory do you think your customers are still holding at this point of your products and whether they have depleted or soon to be depleted, which actually could...
Medical I mean, consistent with the Q4 level.
First half 'twenty cool I wonder.
What do you see other I call business going into planning for.
I think it's tied to this question that how much inventory do you think your customers are still holding at this point all of your products and whether they have any political horse into the depleted which actually could.
Speaker 4: lead to a slightly higher, steadier growth for ICO business going into 2024, first half of 2024. Thank you.
Led to slightly higher.
Your growth or I call business going into Colombia.
Thanks.
Speaker 2: All right, Charles, thanks for the questions. And if I miss any piece of it, just remind me. I think what we see looking into 2024 are very similar levels of revenue, kind of bounce along the bottom here, I think.
Alright Charles.
Thanks for the questions and if I Miss any piece of it just remind me.
I think what we see looking into 2024 are very similar levels of revenue.
Bouncing along the bottom here I think and.
Speaker 2: In outlook for WFE, I would say, in general, I think that kind of mirrors what most people are expecting.
And outlook for WMC I would say in general I think that kind of mirrors. What most people are expecting I think in the market with an inflection beginning in the second half.
Speaker 2: market with an inflection beginning in the second half, in general it's going to have to inflect sometimes near the fourth quarter unless the 2025 outlook changes materially, but I think most people are looking at a very strong 2025 similar.
In general it's gonna have to inflect.
Sometimes near to the fourth quarter, unless the 2025 outlook changes materially, but I think most people are looking at a very strong 2025 <unk>.
Similar.
Speaker 2: Now your question around inventory, how much we don't know, we don't have that visibility, but we can tell from the order patterns that we're still at, I'll call it muted levels, versus where we would have expected to be through this quarter and probably will last and be a bit of a headwind as we go even into next year. And the reason we can stay relatively flat, I think over the next couple of quarters is we are bringing in some incremental share gains to offset some of them.
Now your question around inventory how much we don't know we don't have that visibility.
But we can tell from the order patterns that were still at a I'll call. It muted levels versus where we would've expected to be through this quarter, and probably will last and be a bit of a headwind as we go even into next year.
And the reason we can stay relatively flat I think over the next couple of quarters as we are bringing in some incremental share gains.
To offset some of that.
Yeah.
Did I did I Miss any other pieces.
Speaker 4: Now, yeah, thanks very much, Jeff. That was a very good answer. So maybe the next question, I wanna ask a little bit more about the gross margin performance over the last quarter.
No yeah. Thanks, Thanks, very much Jeff that was a very good answer.
So maybe the next question I wanted to.
Ask a little bit more about the gross margin.
Over the last quarter because.
Speaker 4: You did highlight, right, that if I heard you correctly, there are two items there. One is the, well, maybe the product mix was not as favorable, but you actually pointed out, pointed to the rebound of gas panel business, somewhat of rebound. But the other thing is about inventory reserve. I just wanna ask, what was that inventory reserve that you took in Q3? Why was it a little bit higher?
You did highlight right.
If I heard you correctly there are two items there.
One is the well maybe the product mix or what's not as big rope up after you actually pointed out I pointed to the rebound of the gas panel business somewhat rebound, but the other thing is.
There's about inventory reserve I just wanted to ask what was that inventory reserves that you took in Q3 why was it a little bit higher it sounds like it's a little bit higher than you previously expected.
Speaker 4: Sounds like it's a little bit higher than that you previously expected. Why did you take that action and what's behind that thing?
Why did you take that action, but well what's behind that thanks.
Speaker 2: I'm gonna, can I start with a product mix and I'll like to create a great answer to the reserve level. With the product mix, I would say as we entered the quarter.
Can I start with the product mix and I'll, let Greg.
Greg answer the reserve level with.
With the product mix I would say as we entered the quarter.
And our machining side of the business wins, we expected some relatively decent growth not super but it just stayed relatively the same and actually declined slightly. So this is what leads us to believe that we still have inventory in the channel that has to get burned off before we start to see an inflection in that that's primarily where.
Speaker 2: In our machining side of the business, we expected some relatively decent growth, not super, but it just stayed relatively the same and actually declined slightly. So this is what leads us to believe that we still have inventory in the channel that has to get burned off before we start.
Speaker 2: inflection and that's that's primarily where you saw the mix. We offset that obviously with the gas panel integration business which comes in at lower margins.
You saw the mix, we offset that obviously with the gas panel integration business, which comes in at lower margins versus our machining margins.
Speaker 2: And I'll let Greg talk a little bit about inventory reserves. And it's a complex subject. I'll leave it at that.
And then I'll, let Greg talk a little bit about inventory reserves and it's a complex subject I'll leave it at that.
Speaker 3: Okay, thanks Jeff. Hey Charles, regarding the inventory reserves in Q3, you know we saw some headwinds in our various business units of inventory using our normal E&O inventory reserve process.
Okay. Thanks, Jeff.
Yes.
Regarding the inventory reserves in Q3.
We saw some headwinds in our.
Various business units of inventory using our our normal E N O inventory reserve process.
Speaker 3: And as we do our look backs, we had some inventory roll off.
And as we do our look backs, we had some inventory roll off.
Speaker 3: from prior quarters that we had to take some additional reserves for. That was predominantly the driver for Q3, and we do expect to see some benefit in Q4 as we work down some of that inventory that we had reserved.
From prior quarters that we had to take some additional reserves for.
That was predominantly the driver for Q3.
And we do expect to see some benefit in Q4 as we work down some of that inventory that we had reserved.
Speaker 3: But we do expect it to return back to some level of normality as we exit the year for 23. We do expect it to return back to some level of normality as we exit the year for 23.
But we do expect it to return back to some level of normality.
As we exit the year for 'twenty three.
Speaker 4: Maybe a quick follow up, Greg, I know that's a complex subject. But how should we think about what's normality? Is there anything quantitatively you can point out, Steve?
Okay.
Maybe a quick follow up Greg I know Thats, a complex complex subject, but how.
How should we think about what's what's known biology is there anything quantitatively you pointed out Steve. Thanks.
Speaker 3: No, I think, Charles, that's a bit more complex, you know, we have a very complex model that we look at and use, you know.
No I think Charles that's a bit more complex yeah, we have a very complex model that we look at end use.
Various things to look at demand in historical.
Speaker 3: various things to look at demand and historical activity. So...
Activity so.
Speaker 3: There isn't a normal number that we could point to, but as we manage that inventory and we start turning it, then we should see the reserves come back to.
There isn't a normal number that we could point to.
But as as we manage that inventory and we start turning it then we should see the reserves come back too.
Speaker 3: What we would expect to be normal, not some predetermined amount, but what we expected to be from an ongoing run rate standpoint.
We would expect to be normal not some pre determined amount, but what we expect it to be from a ongoing run rate standpoint.
Yeah.
Speaker 3: Thanks, James. I'm not sure I answered that, but it is a complex model and there isn't really a normal number that we could point you to. Thank you.
Thanks, Dan not sure I answered that but yeah. It is a complex model.
And there isn't really a normal number that we could point you to.
Thanks, Greg that's all my questions. Thanks.
Thanks, Josh.
Speaker 5: Next question, Craig Ellis with B Riley Securities, please go ahead.
Question, Craig Ellis with B Riley Securities. Please go ahead.
Yes, thanks for taking the questions guys I'll just follow up on.
Speaker 3: Yeah, thanks for taking the questions, guys. I'll just follow up on a little bit of Charles' line of inquiry. Can you help us understand the relative magnitude of the mix and the inventory reserve items that impacted the calendar third quarter's gross margin and somewhat relatedly
A little bit of Charles sliding of inquiry can you help us understand the relative magnitude of the mix and the inventory reserve items that <unk>.
Impacted the calendar third quarter gross margin and somewhat relatedly.
Speaker 3: Am I interpreting your comments correctly Greg and inferring that the reserving issue should exhaust itself by the end of the fourth quarter could some of that carry into calendar 20.
Am I interpreting your comments correctly, Greg in inferring that the reserving issue should exhaust itself by the end of the fourth quarter or could some of that carry into calendar.
Calendar 'twenty four.
Speaker 3: So, hi Craig, so the excursion we saw from what we had guided to, about half of the mist
So hi, Craig.
Yes.
The excursion we saw yes.
From what we had guided to about half of the Miss was tied to the to the inventory reserve that we took.
Speaker 3: was tied to the inventory reserve that we took. And then the rest of it is really product mix and some minor changes in the factory. But half of the mist that we guided to was driven by the reserves.
And then the rest of it is really product mix and some other.
Some minor changes in the factory, but half of the Miss that we guided to was driven by the the reserves.
Speaker 2: And as I said earlier, we don't expect it to be at that same level of reserve in Q4, so we do expect it to pop back as we manage through that bubble of the inventory. Yeah, and I think a Craigage ship just to follow on, I think that's why we offered some color on, even in a similar quarter in Q1, we think we would be back to that flow through a 25% so in Q1 it should...
And as I said earlier we.
We don't expect it to be at that same level of of reserve in Q4. So we do expect it to pop back.
As we manage through that.
Bubble of the inventory, yes, and I think hey, Craig its Jeff just to follow on I think that's why we we offered some color on even in a similar quarter in Q1 that we think we would be back to that flow through of 25%. So in Q1 it should.
Speaker 2: more normalized, I should say it's never, it always has some flexibility or variability in it. But I think we can get back, and if you do that flow through based on Q2, you'll see it be kind of in the low.
Normalized I should say, it's never it always has some flexibility or variability in it but.
I think we can get back and if you do that flow through based on Q2, you'll see it'd be kind of in the low fifteens again.
Got it that's really helped one I'd Miss that comment Tom on queue. So thanks for clarifying that.
Speaker 3: Got it. That's really helpful and I'd miss that comment on one. Thank you so much for clarifying that draft. And then Jeff, I wanted to follow up on a comment that you made in the early part of the Q&A when you talked about
And then Jeff I wanted to follow up on a comment that you made.
In the early part of the Q&A when you talked about.
Speaker 3: some shared-day potential that you had coming into the model that would be beneficial in calendar 24. Can you talk a little bit more about that? And when do we expect it to start? How material could it be through the year, etc? Thank you.
Some share gain potential that you had coming into the model that would that would be beneficial in calendar 'twenty. Four can you talk a little bit more about that and when do we expect it to start how material could it be through the year et cetera. Thank you.
Yeah. If you look into 2024, it's I'd say, it's difficult to size, but it's.
Speaker 3: Yeah, if you look into 2024, it's, I'd say it's difficult to size, but.
Speaker 2: I'll size it in the tens of millions. It had kind of been a full run rate. There's a couple of things that I can point to. Obviously we've been working to add machine content. We're getting to qualify, but between our inventories and other in the channel, we have to work through that before they go in. I think you'll start to see some of that margin accretion, which is why we talked about the 25% flow through going into Q1. We get a full year of the Silicon Carbide Gas.
Hi Tech.
Is it in the tens of millions.
Kind of in a full run rate. There is a couple of things that I can point to obviously, we've been working to add machine content, we're getting it qualified but between our inventories and other in the channel we have to work through that before they go in and I think youll start to see some of that margin accretion, which is why we talked about the 25% flow through going into Q1.
We get a full year of the silicon carbide gas delivery systems that we're delivering to our initial customer in that space that are going to actually get the full year were in fact, we had about half of the year. So it's kind of more than double and youll start to see that runway kind of increase a little bit and those are some areas where.
Speaker 2: delivery systems that were delivered into our initial customer in that space that are going to actually get the full year we're in fact we had about half a year so it's going to more than double and you'll start to see that run
Speaker 6: of increase a little bit. Those are some areas where we're seeing some new ones in weldments, but we're still working off some of the inventory in the channel. Nice to see that.
We're seeing some new wins and Weldment, but we're still working off some of the.
Inventory in the channel.
Nice to see that thanks, so much thanks Craig.
Thanks, Greg.
Speaker 5: Next question, Chris Sankar with TD Cowan, please go ahead.
Next question Krish Shankar with TD Cowen. Please go ahead.
Yeah, Hi, Thanks for taking the question first one just I just wanted to ask you a question I understand the demand weakness, it's kind of well understood. So you know that's kind of a negative thing. If you look at your customers all the semi cap OEM customers are shipping a lot to China and obviously they can tell you hired ESP, even though it's the mature nodes.
Speaker 7: Yeah, hi, thanks for the question. First one, Jeff, I just wanted to ask you a question. I understand the man weakness. It's kind of well understood. So, you know, that's kind of a negative thing. You know, if you look at your customers, all the Semicap OEM customers are shipping a lot to China and obviously they can charge a higher ASP even though it's mature nodes.
Speaker 7: Do you get any benefits from that or is it neutral or is it even negative for I call because
Do you get any benefit from that or is it neutral or does it have a negative floating I call because it's a mature notes of the gas boxes are smaller it's the lowest ESP product yourself I'm just trying to get your thoughts on how China impact because it's clearly a huge benefit for our customers are but it doesn't seem like it's impacting you asked much.
Speaker 7: It's a mature note, so the gas boxes are smaller, so it's a lower ASP product you're selling. I'm just trying to get your thoughts on how China impacts you, because it's clearly a huge benefit for your customers, but doesn't seem like it's impacting you as much.
Speaker 2: Well, I think if it's a new tool that ships...
Well I think if it's a new tool that ships into China.
Speaker 2: into China at 300 millimeter, we benefit just like any other tool that goes into China. Where we don't benefit is we don't sell anything directly to any China OEMs, process dual manufacturers like a NARA or anything like that. We don't participate in that level. I would say our participation at the 200 millimeter level is a little bit lower than it is at 300 millimeter. Some of that is still done in...
At 300 millimeter, we benefit just like any other tool that goes into China, where we don't benefit as we don't sell anything directly to any China Oems.
The process to our manufacturers like an IRA or anything like that we don't participate in that level I would say our participation as the 200 millimeter level is a little bit lower.
Then it is a 300 millimeter some of that is still done in house and so I don't know that it's a huge headwind for us, but its obviously not a.
Speaker 2: So I don't know that it's a huge headwind for us, but it's obviously not a, we benefit as though our customers do, anything that they ship into China.
We benefit as though our customers do anything that they ship into China at 300 millimeter, we will get it.
Speaker 2: a piece of, if that's market share that we're apart.
So if that's market share that were a part of.
Speaker 7: Got it, got it. And then there are two other quick questions. Number one, you kind of mentioned, you know, your revenues hanging around these levels in the first half of next year. Do you really need to see a NAND inflection for these revenues to grow or are you banking on it?
Got it got it.
Two other quick questions number one you.
You kind of mentioned you know your revenue hanging around these levels in the first half of next year.
You really need to see a nice inflection for these revenues to grow are you banking on anything.
Well that's that is a great question Chris.
Speaker 2: Well, that's that is a great question, Chris, and inflection would be fantastic. I mean, obviously, I think, as you know, our customer base, well, man, for us.
An inflection would be fantastic I mean, obviously I think as you know our customer base well NAND for a us is.
Speaker 2: that is a reflection of what our customers are seeing and Dan is down as much as 75%. So any inflection there?
Is.
As a reflection of what our customers are seeing in NAND as down as much as 75% so any inflection there.
Speaker 6: tremendously helpful and would drive kind of the memory span. I would say you know this year we're going to be 75% Foundry logic.
As a tremendously helpful and would drive kind of the memory spend I would say.
This year, we're going to be 75% foundry logic. So obviously it would definitely help I would say, we don't see that inflection in the next two quarters and the first half of 2024.
Speaker 6: Obviously it would definitely help. I would say we don't see that in flexion in the next two quarters in the first half of 2024. We don't see any indication
We don't see any indication of that yet.
Speaker 7: Got another final just a clarification on the silicon carbide side.
Got it and then just finally, just a clarification on the silicon carbide side.
Yes, lovely one customer or do you have more than one.
Speaker 6: We have one customer in that space. I can't we haven't said who it is but
We have one customer in that space I can't we haven't said who it is.
But.
Speaker 6: They were on multiple platforms there now and as they continue to iterate.
They were on multiple platforms, there now and as they continue to iterate.
Speaker 6: we were the, call it the tool of record there. We talked about the market being 60 million and I would say that this one customer has got a reasonably good share of that market, but there's still three or four other players that can address this market over time. We see this market as kind of doubling in the next four or five years, so it's an area of focus for us. And this is what I would say, these are just some of the things
Where are the <unk>.
Call it the tool of record there.
There as.
We talked about the market being 60 million and I would say that this this one customer has got a reasonably good share of that market, but there's still three or four other players that can address this market over time, we see this market as kind of doubling in the next four or five years. So it's an area of focus for us and this.
What I would say is these are deposition tools so.
Thanks, a lot Jeff.
Okay.
Thank you. Our next question comes from Brian Chin with Stifel. Please go ahead.
Speaker 5: Thank you. Our next question comes from Brian Chin, with Steve Bull. Please go ahead.
Speaker 8: Hi there, good afternoon. It's going to ask a few questions. Maybe Jeff, first question.
Hi, there good afternoon.
Thanks for letting us ask a few questions.
Maybe just a first question.
Speaker 8: With EV, Litho will deliver sort of flatening out plus reminders next year. Have you already seen an adjustment from your customer?
With with EV litho delivery sort of flattening out plus or minus next year have you already seen an adjustment from your customer.
Speaker 8: And are there any indent or headwinds to consider moving forward?
And are there any inventory headwinds to consider moving forward.
Speaker 6: I don't think there's any inventory headwinds with our EUV customer. I think that
I don't think there's any inventory headwinds with our customer I think that.
Speaker 6: What I've said in the past, they're very transparent. We don't really see a deviation from what they're telling the external world. The only thing I would remind you of is
What I've said in the past Theyre very transparent, we don't really see a deviation from what they're telling us.
External world the only thing I would remind you love us.
We.
Speaker 6: We deliver about five months before they can deliver a tool. So anything in the first half of the year, we've already addressed in our back half of the year's shipment for them. So, and they're remaining relatively flat, I think, as you know, that customer's expected to address 10% of our revenue this year.
We deliver about five months before they can deliver a tool so anything in the first half of the year, we've already addressed in our back half of the year shipments for them. So.
And there are remaining relatively flat I think as you know that.
That customer is expected to cross 10% of our revenue this year.
Okay. Okay. Thank you.
Speaker 8: And you gave a bit of an update in terms of the the
And you gave a bit of an update in terms of debt.
The evaluations.
Speaker 8: and qualifications of some of the new gas panels with significant content, I-core content. And it sounds like, can you, I mean, catch all of the discussion, but it seems like there's...
Qualifications of some of the new gas panels with Cigna.
Significant content.
Core content.
It sounds like can you I didn't catch all of the discussion, but it seems like there is.
Speaker 8: additional e-vals going out in the field. And so maybe more activity than you might imagine in sort of first revenue kind of steered towards the latter stages of next year. That's the right way to characterize it. Can you also maybe, if you then already go over sort of like the number of customers, maybe the number of platforms again that you're involved with.
Additional eval go out in the field and so maybe more activity than you might imagine in sort of first revenue kind of steered towards the latter stages of next year.
Great way to characterize that can you also maybe if you didn't already go over sort of like the number of customer who is maybe the number of platforms again.
That you're involved with.
Speaker 6: Yeah, so the first three qualifications are, again, they're all depositioned.
Yes, so the first three qualifications are.
Again, they're all depth deposition.
Speaker 6: applications, three different applications. We haven't said how many customers.
Applications three different.
Applications, we haven't said, how many customers and specifics we're working on but it's three or four that are pretty active right now so.
Speaker 6: specifics we're working on, but it's three or four that are pretty active right now. So this initial wave of evaluation units, most of those
This initial wave.
Wave of evaluation units.
Most of those customer evaluation. So we've delivered gas panels that might go in their application lab get tested get qualified and then they go out with their new products and platforms with our gas panels on them in the next five months or so we're gonna have about fivefold tools go out that we would expect to be at.
Speaker 6: customer evaluation. So we've delivered gas panels that might go in their application lab, get tested, get qualified, and then they go out with their new products and platforms with our gas panel gone and then next five months or so we're going to have about five full tools go out that we would expect to be it. Customer evaluation.
Customer evaluation, so that the AR device manufacturers those take six to nine months and so that's how that first wave to be kind of the back half of 2024, and then we're working with several other customers along the way and but they have not yet finished their internal qualification.
Speaker 6: the device manufacturers, those take six to nine months. And so that's how, at first, we'd be kind of the back half of 2024. And then we're working with several other customers along the way. But they have not yet finished their internal qualifications. So it's hard to set a timeline, but obviously probably qualifications complete at some point for some of those 24 and then 25 is the megaphone 8 bass just as compared to real difference with a system,
So it's hard to set a timeline, but obviously probably.
Qualifications complete at some point for some of those 24 and 25 is the would be the production tool rollouts.
Speaker 8: Got it. Maybe one last one, maybe for Greg and kind of tying some of this together, but thinking about some of.
Got it and then maybe one last one maybe for Greg.
Some of this together, but you know.
Thinking about some of the.
Speaker 8: the hopefully successful qualifications, thinking about some of the content that you're designing into existing gas panels. I understand it'll stage into net revenue at parts of last year, but maybe 24 into 2025.
That does hopefully successful qualifications thinking about some of the content that you're designing into existing gas panels.
And I understand the kind of stage in some of that revenue.
Parts of last year, but maybe 24 and into 2025.
Speaker 8: Does it start to make sense that you could have gross margin flow through somewhere north of 25% when you think about sort of the accretion some of those revenue opportunities provide?
Does it start to make sense that you can have gross margin flow through somewhat somewhere north of 25%. When you think about sort of the accretion some of those revenue opportunities provide.
Hi, Brian.
Speaker 3: Hi, Brian . Yes, in regards to that, you know, as those
Yes in regards to that as those.
Speaker 3: gas boxes and those new new content start to move their way through the revenue stream. We do expect that we should benefit in our margin and that those specific margin profile should see a better than 25 percent flow through. And as that takes more percentage of the revenue, we should see a better benefit on the overall margin going into 25.
Gas boxes, and those new content start to move.
Move their way through the revenue stream, we do expect that we should benefit in our margin.
And that those specific margin profile should see a better than 25% flow through.
And as that takes more percentage of the revenue, we should see a better benefit on the overall margin.
Going into 'twenty five.
Yeah.
Speaker 6: Yeah, I mean, Brian , I think we've talked about this in the past, we need this level of content to get us into the 20% kind of corporate wide gross margins. And you don't need like $100 million of this, given the fact that the margins are much more like our machining margins.
Yes, I think Brian I think we've talked about this in the past we need this level of content.
To get us into the 20% kind of corporate wide gross margins and you don't need like $100 million of this given the fact that our margins are much more like our machining margins with the shift from kind of 90% procured to 75% internally manufactured so.
Speaker 6: the ship from kind of 90% procured to 75% internally manufactured. So it's part of our roadmap to getting the 20% gross margin.
Our roadmap to getting the 20% gross margin in.
And our business model.
Okay, great. Thank you.
Okay.
Speaker 5: There are no further questions. I would like to turn the floor over to Jeff Andrewsson for closing comments.
There are no further questions I would like to turn the floor over to Jeff Andreessen for closing comments.
Speaker 6: Thank you for joining us on our call this quarter. I'd like to thank our employees, suppliers, and customers for their ongoing dedication.
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 business environment.
Speaker 6: as we continue to navigate this highly dynamic business environment.
Speaker 6: Our upcoming investor activities include the New York City Summit on January 30, December 12, and the Needham Growth Conference.
Our upcoming Investor activities include the New York City Summit on January or sorry December 12, and the Needham growth Conference. In January. We also look forward to our Q4 conference call scheduled for early February operator that concludes our call.
Speaker 6: We also look forward to our Q4 conference call scheduled for early February . Operator.
Speaker 5: This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Speaker 9: I Music
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