Q1 2024 Ichor Holdings Ltd Earnings Call
Operator: Good day, ladies and gentlemen, and welcome to Ichor's first quarter 2024 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. To ask a question, you may press star 1 on your telephone keypad. As a reminder, this call is being recorded. I'd now like to introduce your host for today's conference, Claire McAdams, Investor Relations for Ichor. Please go ahead.
Good day, ladies and gentlemen, and welcome to <unk> first quarter 2024 earnings Conference call.
Operator: At this time all participants are in a listen only mode.
Operator: Later, we will conduct a question and answer session and instructions will be given at that time.
Operator: To ask a question you May press star one on your telephone keypad.
Operator: As a reminder, this call is being recorded.
Claire E. McAdams: I would now like to introduce your host for today's conference Claire Mcadams Investor Relations for Ichor. Please go ahead.
Claire E. McAdams: Thank you, Operator. Good afternoon, and thank you for joining today's first quarter 2024 conference call. As you read this 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 those expressed.
Claire E. McAdams: Thank you operator, good afternoon, and thank you for joining today's first quarter 2024 conference call.
Claire E. McAdams: 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.
Claire E. McAdams: These risks and uncertainties include those spelled out in our earnings press release, those described in our annual report on Form 10-K for fiscal 2023, 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.
Claire E. McAdams: These risks and uncertainties include those spelled out in our earnings press release. Those described in our annual report on Form 10-K for fiscal 2023 and those described in subsequent filings with the SEC.
Claire E. McAdams: You should consider all forward looking statements and lighting 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 measure.
Claire E. McAdams: As to their most comparable GAAP financial measures.
Claire E. McAdams: On the call with me today are Jeff Andreson, our CEO, and Greg Swyt, 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. I'll now turn over the call to Jeff.
Claire E. McAdams: On the call with me today are Jeff Anderson, our CEO and Greg <unk>, our CFO, Jeff will begin with an update on our business and then Greg will provide additional details about our results and guidance. After their prepared remarks, we will open the line for questions.
Claire E. McAdams: Now I'll turn it over the call to Geoff Andreessen, Jeff.
Jeffrey S. Andreson: Thank you, Claire, and welcome to our Q1 earnings call. As expected, our Q1 revenues were similar to Q4 levels at $201 million, reflecting the relatively stable demand environment within the WaferFab equipment market. Q1 gross margin of 12.2% increased sequentially from Q4, but not quite as much as we had forecast due to a combination of mix and cost. Revenue mix was slightly less favorable than our earlier expectations for Q1 revenues. Q1 was a particularly back-end loaded quarter, with about one-third of our revenue shipping in the final three weeks of the quarter.
Jeff: Thank you Claire and welcome to our Q1 earnings call as expected. Our Q1 revenues were similar to Q4 levels at $201 million.
Jeffrey S. Andreson: <unk>, the relatively stable demand environment within the wafer fab equipment market.
Jeffrey S. Andreson: Q1 gross margin of 12, 2% increase sequentially from Q4, but not quite as much as we had forecast due to a combination of mix and cost.
Jeffrey S. Andreson: Revenue mix was slightly less favorable than our earlier expectations for Q1 revenues Q1 was a particularly back end loaded quarter with about one third of our revenue shipping in the final three weeks of the quarter.
Jeffrey S. Andreson: The high volume shipments at quarter end were highly weighted to gas panels compared to components, and our overall mix of higher-margin components decreased compared to Q4, versus our prior expectation for sequential growth in our components business. At the same time, we witnessed a late-quarter slowing in build rates for EUV gas delivery associated with order delays and leading-edge lodging.
Jeffrey S. Andreson: The high volume shipments at quarter end were highly weighted to gas panels compared to components and our overall mix of higher margin components decreased compared to Q4 versus our prior expectation for sequential growth in our components businesses at.
Jeffrey S. Andreson: At the same time, we witnessed a late quarter slowing in build rates for <unk> gas delivery associated with order delays and leading edge logic.
Jeffrey S. Andreson: We remain on track with our strategy to drive gross margin improvement through greater integration of proprietary components and continued cost reduction initiatives. In Q1, we achieved a sequential uptick in proprietary content that was aligned with our expectations, but with higher than expected costs as we begin to ramp these products. With continued execution of our gross margin improvement strategies, we are driving further expansion of our margin profile at the similar revenue levels expected in Q2.
Jeffrey S. Andreson: We remain on track with our strategy to drive gross margin improvement through greater integration of proprietary components and continued cost reduction initiatives in Q1, we achieved a sequential uptick in proprietary content that was in line with our expectations.
Jeffrey S. Andreson: But with higher than expected costs as we begin to ramp these products.
Jeffrey S. Andreson: With continued execution of our gross margin improvement strategies, we are driving further expansion of our margin profile at the similar revenue levels expected in Q2.
Jeffrey S. Andreson: Our earnings for the quarter came in below guidance because of a combination of gross profit impacts as well as a change in the tax provision, as Greg will cover shortly. We completed an equity offering in early March that yielded net proceeds of $137 million. We paid down the entire balance of our revolver, vastly improving our leverage ratio and cutting expected interest expenses by over half.
Jeffrey S. Andreson: Our earnings for the quarter came in below guidance because of a combination of gross profit impacts as well as a change in the tax provision as Greg will cover shortly.
Jeffrey S. Andreson: We completed an equity offering in early March that yielded net proceeds of $137 million, we paid down the entire balance of our revolver vastly improving our leverage ratio and cutting expected interest expenses by over half.
Jeffrey S. Andreson: With this transaction, we believe we have significantly improved the company's capital structure, as well as our earnings leverage and overall flexibility to execute against future strategic objectives. Now, I'll turn to our outlook for the year. Expectations for industry demand in 2024 have remained relatively stable year-to-date. Within an overall WFE landscape that is expected to be similar to modestly higher from 2023, the current revenue baseline for Ichor continues to be fairly stable at the $200 million level.
Jeffrey S. Andreson: With this transaction, we believe we have significantly improved the company's capital structure as well as our earnings leverage and overall flexibility to execute against future strategic objectives.
Speaker Change: Now I'll turn to our outlook for the year.
Jeffrey S. Andreson: Expectations for industry demand in 2024 have remained relatively stable year to date.
Jeffrey S. Andreson: Within an overall WSI landscape that is expected to be similar to modestly up from 2023. The current revenue baseline for ichor continues to be fairly stable at the $200 million level.
Jeffrey S. Andreson: The midpoint of our Q2 guidance is slightly below that baseline because of some isolated softness in a couple of areas, namely in our silicon carbide gas panel business, which has slowed a bit as the industry digests the capacity installed over the past few years, as well as a slower-than-expected EUV system build rate through midyear, given certain order delays in leading-edge logic. We remain optimistic about an improvement in second half revenue volumes as the demand profile begins to build in advance of a stronger 2025 spending environment. That being said, our visibility remains limited to approximately three months given the return to normalized lead times in the supply chain.
Jeffrey S. Andreson: The midpoint of our Q2 guidance is slightly below that baseline because of some isolated softness in a couple of areas.
Jeffrey S. Andreson: Our silicon carbide gas panel business, which has slowed a bit as the industry digests the capacity installed over the past few years as well as a slower than expected <unk> system build rate through mid year, given certain order delays and leading edge logic.
Jeffrey S. Andreson: We remain optimistic for an improvement in the second half revenue volumes as the demand profile begins to build in advance of a stronger 2025 spending environment.
Jeffrey S. Andreson: That being said our visibility remains limited to approximately three months given the return to normalized lead times in the supply chain.
Jeffrey S. Andreson: And with our current visibility, we are not yet seeing a meaningful uptick in demand for new systems serving the NAND market. The recovery in this market remains in the very early stages, and recent reports indicate that the improvement year-to-date is chiefly focused on technology upgrades. Given the strong etch and deposition intensity characteristic of the NAND market, we look forward to a more meaningful improvement in NAND demand, driving a strong growth year for us in 2025.
Jeffrey S. Andreson: And with our current visibility we are not yet seen a meaningful uptick in demand for new system, serving the NAND market.
Jeffrey S. Andreson: The recovery in this market remains in the very early stages and recent reports indicate that the improvement year to date is chiefly focused on technology upgrades.
Jeffrey S. Andreson: Given the strong etch and deposition intensity characteristic of the NAND market, we look forward to a more meaningful improvement in NAND demand driving a strong growth year for us in 2025.
Jeffrey S. Andreson: In other semiconductor end markets, the emergence of new technology drivers and process inflections, such as gate all around and high bandwidth memory, require an increasing use of applications that are highly dependent on the accuracy and repeatability of the fluid delivery system. These include applications such as Selective Etch, ALD, Deep Silicon Etch, ECD, and more.
Jeffrey S. Andreson: And other semiconductor end market the emergence of new technology drivers and process inflections, such as gate, all around and high bandwidth memory require an increasing use of applications that are highly dependent on the accuracy and repeatability of the fluid delivery systems.
Jeffrey S. Andreson: These include applications, such as selective edge AMD.
Jeffrey S. Andreson: Silicon etch DCD and more we have a role providing fluid delivery to all of these applications.
Jeffrey S. Andreson: We have a role in providing fluid delivery to all of these applications. And while the expected pace of EUV deployments has resulted in a current slowing in the build rate for 2024, as we move into 2025, we expect a significant increase in gas delivery deployment for lithium as well. Outside of semiconductors, specifically for IMG's business, we are also seeing improvement in the overall demand forecast, as well as incremental share gains ahead within IMG's customer space and aerospace and defense, as well as certain commercial markets.
Jeffrey S. Andreson: And while the expected pace of <unk> deployments has resulted in a current slowing in the build rate for 2024 as we move into 2025, we expect a significant increase in gas delivery deployment for lesser as well.
Jeffrey S. Andreson: Outside of semiconductors, specifically for AMG business. We're also seeing improvement in the overall demand forecast as well as incremental share gains ahead within amg's customers base, and aerospace and defense as well as certain commercial markets.
Jeffrey S. Andreson: As each of these markets and applications continue to expand, we see opportunities for Ichor to increase its revenue potential and continue to add breadth and diversification to its customer base. All of these factors build a strong story for Ichor's revenue growth as the industry recovery accelerates. But it's our proprietary products, including our next generation gas panel, that we are most excited about, as our key initiative to drive overall gross margin expansion within our business. And this period of muted demand has enabled us to make steady progress penetrating our new products into the market.
Jeffrey S. Andreson: As each of these markets and applications continue to expand we see opportunities for ichor to increase our revenue potential and continue to add breadth and diversification to our customer base.
Jeffrey S. Andreson: All of these factors build a strong story for iPhone revenue growth as the industry recovery accelerates.
Jeffrey S. Andreson: But it's our proprietary products, including our next generation gas panel that we are most excited about.
Jeffrey S. Andreson: As a key initiative to drive overall gross margin expansion within our business in this period of muted demand has enabled us to make steady progress penetrating our new products into the market I.
Jeffrey S. Andreson: I'm pleased to report that we recorded our first revenue on some of our initial shipments of next-generation gas panels during Q1. By mid-year, we will have over 20 next-generation gas panels shipped and installed in the field, with most supporting our customers' evaluation tools that have shipped to device manufacturers. Our new gas panel contains about 80% proprietary Ichor content compared to around 10% today, which will drive a significant expansion of our gross margin profile. These tool evaluations typically take about nine months to complete, so the earliest these will be completed and production shipments can begin is the fourth quarter for the initial shipment.
Jeffrey S. Andreson: I am pleased to report that we recorded our first revenue on some of our initial shipments of next generation gas panels during Q1.
Jeffrey S. Andreson: By midyear, we will have over 20 next generation gas panel shipped and installed in the field with most supporting our customers' evaluation tools that have shipped to device manufacturers.
Jeffrey S. Andreson: Our new gas panel contains about 80% proprietary ichor content compared to around 10% today, which will drive significant expansion of our gross margin profile.
Jeffrey S. Andreson: These tool evaluations typically take about nine months to complete so the earliest these will be completed and production shipments can begin as the fourth quarter for the initial shipments.
Jeffrey S. Andreson: We have been qualified on three applications and are now expecting to complete a fourth application qualification by mid-year and have four active customer engagements. Our strategy to expand overall proprietary Ichor content extends to our components businesses as well. We are now customer-qualified on fittings that are used in our weldment business, substrates used in our gas panels, as well as Seals and Val. These are all critical components used in the existing gas panels that we assemble.
Jeffrey S. Andreson: We have been qualified on three applications and are now expecting to complete a force application qualification by mid year and half for active customer engagements.
Jeffrey S. Andreson: Strategy to expand overall proprietary ichor content extends to our components businesses as well.
Jeffrey S. Andreson: We are now customer qualified on fittings that are used in our weldment business substrates used in our gas panel.
Jeffrey S. Andreson: As well as seals and valves.
Jeffrey S. Andreson: Are all critical components used in the existing gas panels that we assemble.
Jeffrey S. Andreson: All of these component qualifications can be deployed to our existing gas panels that we built today, as well as being designed into our next generation gas panels. These specific products are now qualified at three customers and began shipping in the second half of the first quarter.
Jeffrey S. Andreson: All of these component qualifications can be deployed to our existing gas panels that we built today as well as being designed into a next generation gas panel.
Jeffrey S. Andreson: These specific products are now qualified at three customers and began shipping in the second half of the first quarter.
Jeffrey S. Andreson: We expect our proprietary component content will continue to increase within our build-to-print gas panel business over the next several quarters. These applications have significant opportunities to drive margin accretion as we further integrate them into our gas panel business. In summary, I remind everyone here today that our revenues tend to recover more sharply when industry spending rebounds. Furthermore, our business model and financial profile tend to generate significant operating leverage as revenues grow.
Jeffrey S. Andreson: We expect our proprietary component content will continue to increase within our build to print gas panel business over the next several quarters.
Jeffrey S. Andreson: These applications have significant opportunities to drive margin accretion as we further integrate them into our gas panel business in.
Jeffrey S. Andreson: In summary, I'll remind everyone here today that our revenues tend to recover more sharply when industry spending rebounds. Furthermore, our business model and financial profile tend to generate significant operating leverage as revenues grow.
Jeffrey S. Andreson: Given the current industry expectations for WFE remaining relatively stable at these levels through 2024 in advance of a strong 2025, we also expect our revenue run rate to continue around the $200 million level until the beginning of a revenue ramp. We look forward to ramping revenues back toward the $250 million to $300 million plus level in 2020. 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 future growth. With that, I'll turn it over to Greg to recap our Q1 results and provide further details on our Q2 Financial Outlook. Greg?
Jeffrey S. Andreson: Given the current industry expectations for <unk> remaining relatively stable at these levels through 2024 in advance of a strong 2025. We also expect a revenue run rate to continue around the $200 million level until the beginning of a revenue ramp.
Greg: We look forward to ramping revenues back towards the 250 million to 300 million dollar plus level in 2025.
Greg: 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 and support future growth.
Jeffrey S. Andreson: With that I'll turn it over to Greg to recap, our Q1 results and provide further details around our Q2 financial outlook Greg.
Greg Swyt: Thanks, Jeff. 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, amortization of acquired intangible assets, non-recurring charges, and discrete tax items and adjustments. There is a useful financial supplement available on the investor section of our website that summarizes our GAAP and non-GAAP financial results, as well as a summary of the balance sheet and cash flow information for the last several quarters.
Greg: Thanks, Jeff to begin I would like to emphasize that the P&L metrics discussed today are non-GAAP measures.
Greg Swyt: These measures exclude the impact of share based compensation amortization of acquired intangible assets nonrecurring charges and discrete tax items and adjustments.
Greg Swyt: There is a useful financial supplement available on the investors section of our website that summarizes our GAAP and non-GAAP financial results as well as a summary of the balance sheet and cash flow information for the last several quarters.
Greg Swyt: First quarter revenues were aligned with our earlier expectations at $201 million, remaining relatively steady from Q4 levels. Gross margin improved 180 basis points sequentially to 12.2%, driven by improved factory efficiencies as well as the pass-through revenue event from Q4 not repeating this quarter. While gross margins improved meaningfully compared to the Q4 trough, we were about 100 basis points shy of forecast due to a less favorable product and customer mix versus forecast, as well as higher costs for our internally produced proprietary products.
Speaker Change: First quarter revenues were aligned with our earlier expectations at $201 million remaining relatively steady from Q4 levels.
Greg Swyt: Gross margin improved 180 basis points sequentially to 12, 2% driven by improved factory efficiencies as well as the pass through revenue events from Q4, not repeating this quarter.
Greg Swyt: While gross margins improved meaningfully compared to the Q4 trough.
Greg Swyt: We're about 100 basis points shy of forecast due to less favorable product and customer mix versus forecast as well as higher costs for our internally produced proprietary products.
Greg Swyt: Q1 operating expenses came in below forecast and were up slightly from Q4 at $22.1 million due to the resetting of labor-related taxes and benefits. And our operating income for Q1 was $2.4 million. Our net interest expense was $4.1 million, and our non-GAAP net income tax expense was above our forecast at $800,000 due to higher international profits and the elimination of our ability to recognize a U.S. tax loss benefit. The change had approximately a 3 cent impact on our EPS within the quarter. The resulting net loss per share was $0.09.
Greg Swyt: Q1 operating expenses came in below forecast.
Greg Swyt: We were up slightly from Q4 at $22 $1 million due to the resetting of labor related taxes and benefits.
Greg Swyt: And our operating income for Q1 was $2 4 million.
Greg Swyt: Our net interest expense was $4 $1 million and our non-GAAP net income tax expense was above our forecast at $800000 due to higher international profits and the elimination of our ability to recognize a U S tax loss benefit the.
Greg Swyt: The change had approximately a <unk> <unk> impact on our EPS within the quarter.
Greg Swyt: The resulting net loss per share was <unk> <unk>.
Greg Swyt: Now turning to the balance sheet, at the end of the quarter, our cash and equivalents totaled $102 million, a $22 million increase from Q4. We generated $4.8 million in cash flow from operations, and after deducting $4.5 million of capital expenditures, our free cash flow was roughly neutral. Accounts receivable increased from year-end due to the back-end loaded revenue profile of the quarter, and our DSOs were 33 days. Inventory decreased $5 million during the quarter.
Greg Swyt: Now turning to the balance sheet at the end of the quarter, our cash and equivalents totaled $102 million or $22 million increase from Q4.
Greg Swyt: We generated $4 $8 million in cash flow from operations and after deducting $4 $5 million of capital expenditures, our free cash flow was roughly neutral.
Greg Swyt: Accounts receivable increased from year end due to the backend loaded revenue profile of the quarter and our Dsos were 33 days.
Greg Swyt: Inventory decreased $5 million during the quarter to end the quarter $241 million and inventory turns increased to $2 nine.
Greg Swyt: To end the quarter, we had $241 million, and inventory turns increased to 2.9. During the quarter, we completed an equity offering that raised net proceeds of $137 million. The proceeds were used to pay down $115 million of our revolver ballot.
Greg Swyt: During the quarter, we completed an equity offering that raised net proceeds of $137 billion. The proceeds were used to pay down $115 million of our revolver balance. Our total debt currently has an outstanding balance of $133 million and our net.
Greg Swyt: Our total debt currently has an outstanding balance of $133 million, and our net debt coverage ratio improved to 1.9 times. Now, let's discuss our guidance for the second quarter of 2024. With anticipated revenues in the range of $190 to $205 million, we expect our gross margins will improve to a range of 12.5 to 13.5%. We expect Q2 operating expenses to be approximately $22.2 million, or roughly flat to Q1. We expect operating expenses to remain at a similar level for the remainder of the year.
Greg Swyt: Net debt coverage ratio improved to one nine times.
Greg Swyt: Net interest expense for Q2 is expected to decline to approximately $1.8 million. Looking beyond Q2, we expect our net interest expense to continue to decline as a result of the declining term loan balance, as well as the improvement of our leverage ratio and the applicable spreads associated with the leverage ratio. For modeling purposes, you should model net interest expense for the full year of 2024 to be approximately $9 million. We expect to record a tax expense in Q2 of $500,000. For the full year, we are forecasting a non-GAAP effective tax rate expense of $2.5 million. Finally, our EPS guidance for Q2 reflects the higher share count of 34 million shares.
Greg Swyt: Now, let's discuss our guidance for the second quarter of 2024.
Greg Swyt: With anticipated revenues in a range of $190 million to $205 million, we expect our gross margins will improve to a range of 12 five to 13, 5%.
Greg Swyt: We expect Q2 operating expenses to be approximately $22 $2 million were roughly flat to Q1.
Greg Swyt: We expect.
Greg Swyt: Operating expenses to remain at similar level for the remainder of the year.
Greg Swyt: Net interest expense for Q2 is expected to decline to approximately $1 $8 million.
Greg Swyt: Looking beyond Q2, we expect our net interest expense to continue to decline as a result of the declining term loan balance as well as improvement of our leverage ratio and the applicable spreads associated with their leverage ratio.
Greg Swyt: For modeling purposes, you should model net interest expense for the full year of 2024 to be approximately $9 million.
Greg Swyt: We expect to record a tax expense in Q2 of.
Greg Swyt: $500000 for the full year, we are forecasting a non-GAAP.
Greg Swyt: The effective tax rate expense of $2 5 million.
Greg Swyt: Finally, our EPS guidance for Q2 reflects the higher share count of 34 million shares.
Operator: Operator, we are ready to take questions. Please open the line. Thank you.
Speaker Change: Operator, we are ready to take questions. Please open the line.
Operator: Thank you. At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and one to ask a question, and we'll pause for a moment to allow questions to queue. And we'll take our first question of the day from Brian Chin with Stiefel.
Speaker Change: Thank you at this time, if you would like to ask a question. Please press the star and one on your telephone keypad, you may remove yourself from the queue at any time by pressing star to.
Brian Edward Chin: Once again that is star one to ask the question and we'll pause for a moment to allow questions to queue.
Operator: And we'll take our first question D from Brian Chin with Stifel.
Brian Edward Chin: Hi there. Good afternoon.
Brian Edward Chin: Hi, there good afternoon, and thanks for letting us ask a few questions.
Brian Edward Chin: Thanks for letting us ask a few questions. Maybe just first, maybe some clarification. Historically, I have not been aware of Ichor having material exposure to semi-equipment OEMs that are based in China. I guess, can you firstly maybe just confirm whether that is the case? And then maybe just since we're on the topic of China, indirectly through your larger U.S. OEM customers, do you have any sense of whether China's spending is sort of growing or at least stable this year?
Brian Edward Chin: Maybe just first maybe a clarification.
Brian Edward Chin: Historically I have not been aware of Ike, we're having material exposure to semi equipment Oems that are based in China. I guess can you firstly, maybe just confirm whether that.
Brian Edward Chin: It is the case and then maybe just since we're on the topic of China indirectly through your larger U S. OEM customers do you have any sense of China spending is sort of growing or at least sustaining this year.
Jeffrey S. Andreson: Hey, Brian, it's Jeff. No, we don't sell directly to the Chinese OEMs. So, we don't sell to NARA or AMEC or any of those guys. So, we do not have a Chinese channel.
Jeff: Hey, Brian it's Jeff.
Speaker Change: No we don't sell directly to the China Oems, So we don't sell to narrow or a Mac or any of those those guys. So we do not have a China channel.
Brian: Second part of your question is what are we seeing in China, I think China was still pretty strong I think its going to remain at relatively decent levels are good levels I mean, it in the first half, but indications are that the back half might be a little bit slower, but some of those are going to be offset by high bandwidth memory and some of these other.
Jeffrey S. Andreson: The second part of your question is, what are we seeing in China? I think China is still pretty strong. I think it's going to remain at relatively decent levels or good levels, I mean, in the first half. But indications are that the back half might be a little bit slower, but some of that is going to be offset by high bandwidth memory and some of these other areas that are going to start to continue to kind of grow quarter on quarter and year over year. So, we don't think China will stay at the same levels in the second half. That is kind of our view today.
Jeffrey S. Andreson: Areas that are going to start to.
Jeffrey S. Andreson: To kind of grow quarter on quarter or year over year. So.
Jeffrey S. Andreson: So we don't think China will stay at the same levels in the second half is kind of our view today.
Brian Edward Chin: Got it, and maybe kind of for my follow-up, maybe a bit of a hodgepodge on sort of the second half and sort of how various dynamics maybe impact sort of this, this high-level outlook. I thought it was kind of interesting you mentioned how business could kind of either sustain maybe at sort of the 200 level that you're sort of guiding reported in the first half of each quarter or kind of when revenue ramps, maybe it kind of goes up to 250.
Speaker Change: Got it.
Jeffrey S. Andreson: And maybe for my follow up.
Brian Edward Chin: Maybe a bit of a hodgepodge on sort of second half.
Brian Edward Chin: And sort of how various dynamics maybe impact.
Brian Edward Chin: This kind of high level outlook.
Brian Edward Chin: I thought it was kind of interesting you mentioned how.
Brian Edward Chin: Business could kind of either.
Brian Edward Chin: Either sustain maybe that's sort of the 200 level that youre sort of guiding reported in first half per quarter.
Brian Edward Chin: Or kind of when revenue ramps. It maybe it kind of goes up to 250, <unk> sort of like a binary potential outcome, maybe out to like Q4, right like a 200 or a $2 50.
Brian Edward Chin: So it almost seems sort of like a binary potential outcome, maybe out to like Q4, right, like a 200 or a 250 situation. But, kind of, maybe that's not the right way to think about it. But what sort of inventory layer I think still exists, maybe with some of your larger OEM customers that you're still maybe working through, they're working through, and maybe what will be a little bit of a kind of throttle on revenue, maybe over the next few quarters, as that sort of burns off, is that maybe the right way to think about that? And what is sort of the gross margin dynamic, in terms of not being able to capture maybe a normalized mix if there's still some of this inventory layer to burn off through the next couple quarters?
Brian Edward Chin: Situations, but kind of.
Brian Edward Chin: Maybe that's not the right way to think about it but what sort of.
Brian Edward Chin: What kind of inventory layer I think still exist maybe with some of your larger OEM customers that you are still maybe work, they're working through and maybe will.
Brian Edward Chin: It will be a little bit they a kind of a.
Brian Edward Chin: Throttle on revenue maybe over the next few quarters, how does that sort of burns off as that maybe the right way to think about that and whether sort of the gross margin dynamic.
Brian Edward Chin: In terms of not being able to capture maybe a normalized mix.
Brian Edward Chin: Some of this inventory layer to burn off through the next couple of quarters.
Jeffrey S. Andreson: All right. That's a good question with seven parts, Brian. I'm going to take it on right now.
Speaker Change: Alright, Thats a good question with seven parts, Brian I'm going to take it on right now.
Jeffrey S. Andreson: So the way I think about the second half of the year is I don't think we wanted to give you an indication that we're going to be absolutely flat through the end of the year. What I would tell you is that we're now four months into the year. We're not really seeing as much of an inflection as we would have anticipated yet, but that's not saying that the 2025 timing is clear to us and maybe to our customers at this stage. So we still view 2025 as an up year, year on year. The timing of when that happens will have the biggest effect on our fourth quarter.
Jeffrey S. Andreson: So.
Jeffrey S. Andreson: The way.
Jeffrey S. Andreson: I think about the second half of the year is I don't think we wanted to give you an indication we're going to be absolutely flat through the end of the year. What I would tell you is we're now four months through the year, we're not really seeing as much of an inflection as we would've anticipated yet, but that's not saying that 2025 timing is clear too.
Jeffrey S. Andreson: And maybe to our customers at this stage. So we still view 2025 is is an up year year on year. The timing of when that is will have the biggest effect on our fourth quarter.
Jeffrey S. Andreson: Second part of your question is really around where we have with the inventory burn off.
Jeffrey S. Andreson: The second part of your question is really around where we are with the inventory burn off. I think we'll go through largely through the end of the year with some of the components still needing to be burned off. The biggest impact is probably on our weldment business. And then machining second, I think, from gas panels and stuff, they're kind of more normalized. I would say we're what we are. We've been running flat now for, 6 quarters, something like that, going through last year, you know.
Jeffrey S. Andreson: Is that how do you think will go through largely through the end of the year with some of.
Jeffrey S. Andreson: The components still needing to be burned off largest impact is probably to our weldment business.
Jeffrey S. Andreson: And then machining second I think from gas panels and stuff.
Jeffrey S. Andreson: They're kind of more normalized I would say where we are.
Jeffrey S. Andreson: We've been running flat now for.
Jeffrey S. Andreson: Six quarters, something like that going through last year, we did.
Jeffrey S. Andreson: So, I think most of those things have been gas panels are just kind of in the normal range of whether something falls out of a forecast and needs to be reconfigured. I don't think there's a pileup. Thank you very much.
Jeffrey S. Andreson: So I think most of those things have been gas panels are just kind of in the normal range of whether something falls out of our forecast and it needs to be reconfigured I don't think theres a pile up of gas panels. So it's all in the component side of the business now having said that thinking about the gross margin.
Jeffrey S. Andreson: R R.
Jeffrey S. Andreson: [inaudible] Our qualifications that we've had that we just finished kind of describing in totality will have an effect on the gross margin, and we typically create margin kind of quarter over quarter on revenue around 25%. It might be a little bit better than that. But our view of the fourth quarter, I would say, not regardless of revenue levels, but even at revenue levels like this, you're seeing our, our guidance, the gross margin is going up.
Jeffrey S. Andreson: Our qualifications that we've had that we just finished describing in totality will have.
Jeffrey S. Andreson: The effect on the gross margin and we typically create margin kind of quarter over quarter on revenue of about 25% it might be a little bit better than that but our view of the fourth quarter.
Speaker Change: I would say.
Jeffrey S. Andreson: A big portion of that is as we start cutting these things in and as we come up the learning curve and get the efficiencies in the factories and things like that worked out, we'll get behind some of the cost headwinds from Q1. And we'll see the margin continue to accrete at similar revenue levels. And as you know, once we inflect, we generally will outpace gross margin. So, I mean, the view we gave you on the last call is relatively intact from our view of our cost initiative to drive gross margin.
Jeffrey S. Andreson: Not regardless of revenue levels, but even at revenue levels like this youre seeing are our guidance. The gross margin is going up a big portion of that is as we start putting these things in and is as we come up the learning curve and get the.
Jeffrey S. Andreson: Efficiencies in the factories and things like that worked out.
Jeffrey S. Andreson: We'll get behind some of the cost headwinds from Q1, and we will see the margin continue to accrete.
Jeffrey S. Andreson: At similar revenue levels and as you know once we inflect.
Jeffrey S. Andreson: Generally we will outpace gross margin so I mean.
Jeffrey S. Andreson: The view, we gave you on the last call I think is relatively intact from our view of our cost initiatives to drive gross margin.
Brian Edward Chin: Okay, thanks for all the detail.
Speaker Change: Okay. Thanks, Thanks for all the detail.
Speaker Change: You're welcome.
Craig Andrew Ellis: Our next question will come from Craig Ellis with B. Reilly Securities.
Brian Edward Chin: Our next question will come from Craig Ellis with B Riley Securities.
Craig Andrew Ellis: Yeah, thanks for taking the question and all the color so far, guys. Jeff, I wanted to start just by following up on a comment that you made in response to Brian's question. So with regard to the point that you're not seeing as much of an inflection in 24 as you might have thought three months ago, which of the businesses, gas panels, weldments, etc., is that having a greater impact on, or is it impacting all of those about equally as you think about where we are and where we could be in the back end?
Craig Andrew Ellis: Yes, thanks for taking the question and all the color so far guys.
Speaker Change: I wanted to start just by following up on a comment that you made in response to Brian's question. So.
Craig Andrew Ellis: With regard to the point that.
Craig Andrew Ellis: Youre not seeing as much of an inflection in 'twenty four she might have thought three months ago.
Craig Andrew Ellis: Each of the businesses gas panels, weldment et cetera is there.
Craig Andrew Ellis: Having greater impact on or is it impacting all of those about equally.
Craig Andrew Ellis: Think about where we are and where we could be in the back half.
Operator: Well, um, I'm sorry. We're gonna have to go. We're gonna have to go. I apologize.
Craig Andrew Ellis: Well.
Operator: We're gonna have to go. Thank you. Bye, bye. Thank you. Bye.
Jeffrey S. Andreson: I think, you know, gas panels are still pretty close to two-thirds of our business, or 60, I don't know the exact number, but, and then chemical integration, I mean, they're going to be the ones that we need to see improve, but the biggest impact to drive gross margin would be, you know, recovery in our component side of the business as well, because they'll bring through more incremental margin on a per revenue basis. And so those are kind of the drivers, I think, that we see.
Speaker Change: Hey, thank gas panels is still pretty close to two thirds of our business or 60, I don't know the exact number but.
Jeffrey S. Andreson: And then chemical integration I mean, theyre going to be the ones that we need to see inflect.
Jeffrey S. Andreson: But the biggest impact to drive gross margin would be recovery in our components side of the business as well because they'll bring through more incremental margin.
Jeffrey S. Andreson: On a per revenue basis.
Jeffrey S. Andreson: And so those are kind of the drivers I think that we see and our visibility I think I mentioned it is really kind of three months with I would call. Good visibility I think after that.
Jeffrey S. Andreson: And our visibility, I think I mentioned it, is really kind of three months with, I would call, good visibility. I think after that, there are pockets where it's really well understood, and there are other areas where we're not seeing the visibility. And largely because the industry's kind of pulled back to normal lead times and visibility.
Jeffrey S. Andreson: There are pockets, where it's really well understood and there's other areas, where we're not seeing the visibility and largely because the industry has kind of pulled back to normal lead times and visibility.
Craig Andrew Ellis: Yep. Yeah, sure. So some of that's just a cyclical artifact. Got it. Okay.
Speaker Change: Yeah, Yeah sure. So some of that's just the SEC required effect.
Craig Andrew Ellis: Got it Okay, and then Greg just turning to gross margins.
Craig Andrew Ellis: Okay.
Craig Andrew Ellis: First is our expectations, we're tracking around 100 basis points lower than we thought in the first half of the year.
Craig Andrew Ellis: As you look at the business in that way it can trend in the back half and admittedly we.
Craig Andrew Ellis: We have a hard time seeing beyond maybe <unk> bet.
Craig Andrew Ellis: But how do we think about gross margins or are you thinking that we can execute to fairly steady gains that $20 to 25% incremental margin I think Jack referred to or is there either any cost tied on more mix item that can give us more of a step up as we think about.
Greg Swyt: And then, Greg, just turning to gross margins versus our expectations, we're tracking around 100 basis points lower than we thought in the first half of the year. As you look at the business and the way it can trend in the back half, and admittedly, we have a hard time seeing beyond maybe 3Q, but how do we think about gross margins? Are you thinking that we can execute to fairly steady gains of that 20 to 25% incremental margin I think Jeff referred to, or is there either any cost item or mix item that can give us more of a step up as we think about second half trends? Thank you.
Greg Swyt: Second half trends. Thank you.
Greg Swyt: Sure.
Greg Swyt: Yeah, hi Greg. So, as Jeff said, we expect that as we drive incremental revenue, the 25% flow through is still where we believe we're driving to and expect to see. So that will continue as we move through the year. The other thing, as Jeff talked about, is we've got our proprietary side that will start to drive some incremental margin improvements in the second half of the year. How much? We're working through all of that, but for now, the 25% flow through is what you should still model.
Speaker Change: Yes, Hi, Greg.
Speaker Change: So as Jeff said right.
Greg Swyt: We expect that as we drive incremental.
Greg Swyt: Mental revenue the 25% flow through is still.
Greg Swyt: Where are we believe we're driving to and expect to see.
Greg Swyt: So that will continue as we move through the year. The other thing is as Jeff talked about is we've got our proprietary side that will start to drive some incremental.
Greg Swyt: Margin improvements in the second half of the year.
Greg Swyt: How much were working through all of that but for for now.
Greg Swyt: 25%.
Greg Swyt: Flow through is what you said still model.
Jeffrey S. Andreson: Craig, maybe just to follow on is I think our view of our, I'll call it internal proprietary products that we're now integrating into our existing gas panel business, not necessarily our new generation of gas panels, is tracking to what we expected as we kind of entered the year. I'd say, with the exception of Q1, revenue was very similar, but we just kind of were too low down the learning curve in cutting some of these new fabricated parts, but they'll quickly overcome that.
Speaker Change: Hey, Craig maybe just a follow on is I think our view of our I'll call. It internal proprietary products that we're now.
Jeffrey S. Andreson: Integrating into our existing gas panel business not necessarily our new generation of gas panels is is tracking to what we expected as we kind of entered the year.
Jeffrey S. Andreson: With the exception in Q1 revenue was very similar but we just kind of we were too low down the learning curve and cutting some of these new fabricated parts, but they'll quickly overcome.
Craig Andrew Ellis: God, that's helpful. Thank you very much, God.
Craig: Got it that's helpful. Thank you very much guys.
Speaker Change: Youre welcome.
Craig Andrew Ellis: Yes.
Krish Sankar: Our next question will come from Krish Sankar, with TD Cowen.
Craig Andrew Ellis: Our next question will come from Krish Sanka with TD Cowen.
Krish Sankar: Okay.
Krish Sankar: Yeah, thanks for taking my question. Jeff had a couple of them. One is, you know, when I compare or contrast it to your closest peer reported last evening, they've been kind of growing very nicely for the last couple of quarters, while you guys have kind of flatlined.
Krish Sankar: Yeah, Hi, Thanks for taking my question, Jeff I had a couple of them one is when.
Krish Sankar: When I compare and contrast, it to your closest peer.
Krish Sankar: As reported last evening, maybe you can kind of growing revenues in the last couple of quarters.
Krish Sankar: You guys have been kind of flatlined.
Krish Sankar: Is the Delta as simple as they are more tiny SEMICAP OEM exposure? You have more silicon carbide, or is there something fundamentally going on with the top large US SEMICAP OEM?
Krish Sankar: Delta as simple as they have more Chinese semi cap William exposure more silicon carbide, but is there something fundamentally going on.
Krish Sankar: Large U S semi cap Williams.
Jeffrey S. Andreson: Well, I don't want to speak for my competitors, but we overlap around 40%. I would say, largely, I don't see much deviation where we compete. Having said that, obviously, some of his upside was this Chinese revenue base that I don't. And so the profiles are just a little bit different because the businesses are not apples to apples.
Krish Sankar: Well.
Krish Sankar: I don't want to speak for my competitors, but we overlap around 40% I would say largely I don't see much deviation, where we compete having said that obviously some of his upside was China.
Jeffrey S. Andreson: Revenue base that I don't I don't.
Jeffrey S. Andreson: Have a channel for or we don't chase it as well as services business is different they recently required another.
Jeffrey S. Andreson: Another kind of I guess I'd call it a sub fab gas delivery.
Jeffrey S. Andreson: Business as well so.
Jeffrey S. Andreson: We don't overlap as much as people see but where I think we play.
Jeffrey S. Andreson: Don't really see at the bottom line question is are we seeing share shifts we don't see it so.
Jeffrey S. Andreson: And so the profiles are just a little bit different because the businesses are not apples to apples.
Krish Sankar: Sorry, Jeff. I mean, you kind of spoke about, you know, EUV delays for the leading edge. I'm kind of curious, can you just talk us through the mechanics of like, when your EUV customer ASML gets a booking to when they ship a tool to when you get the order and when you ship it? Because I'm just kind of curious how to figure it out compared to this year versus next year and given their build out profiles.
Jeffrey S. Andreson: Sorry.
Jeffrey S. Andreson: Got it and then you guys spoke about you know easily delays for leading edge I'm kind of curious can you just talk to the mechanics. So like.
Krish Sankar: When youre easy customer anthem I'll get the booking.
Krish Sankar: Two when they ship it to do when you get the order and when you ship. It can you just talk us through the timeline because I'm just kind of curious.
Krish Sankar: How do you figure it out competitive just deal with next year and given the Buildout profile.
Jeffrey S. Andreson: We ship about five months before a tool can be shipped by them, and then I don't, I'm not going to purport to know their revenue recognition on the other end, but we're about, we go in about five months before they deliver a tool. We did see, again, some modest reduction within the quarter from the entry point of the quarter, and then we've seen a kind of, you know, when we talk about the midpoint being down a little bit, quarter over quarter, it's probably about half silicon carbide and half the UV, and then... I think we're starting to pick up other sub-assemblies and things like that that are helping us kind of increase the content we get on each EUV tool as well.
Krish Sankar: We ship about five months before tool can be shipped.
Jeffrey S. Andreson: By them and then I don't.
Jeffrey S. Andreson: Not going to report to know their revenue recognition on the other end, but whereabouts. We go in about five months before they deliver a tool.
Jeffrey S. Andreson: We did see again, some modest reduction within the quarter from the entry point of the quarter and then we've seen in Ghana.
Jeffrey S. Andreson: When we talk about the midpoint being down a little bit quarter over quarter, it's probably about half silicon carbide and have the UV and then.
Jeffrey S. Andreson: They have taken down some of their build plans and I think <unk> been pretty straightforward with with their comments and so that just flows through to us and all we're seeing is it going into 2025. So it sets us up for a good growth here in 2000.
Jeffrey S. Andreson: As I look out to <unk>.
Jeffrey S. Andreson: <unk>.
Jeffrey S. Andreson: Right now and.
Jeffrey S. Andreson: The other thing we're doing is we've had this relationship now for probably six or seven years I think we're starting to pick other sub assemblies up and things like that that are helping us kind of increase the content, we get an <unk> tool as well.
Krish Sankar: Got it, got it. And one final question, if I can just squeeze it in.
Speaker Change: Got it got it and one final question if I can just squeeze it in.
Krish Sankar: If you kind of spoke about on the inventory side to Brian's question, how gas panel inventories are kind of normalized, but weldments and machining are still pretty high. I'm just going to curious, if you look at your product, where would you say is the stickiest market share to the lowest? I'm guessing gas panel is probably a high market share, but it's pretty sticky compared to machining and weldments, which could be more fungible. Just your thoughts on that would be helpful. Thank you. Yeah, I would say so.
Krish Sankar: If you kind of spoke about on the inventory side to Brian's question.
Krish Sankar: Gaslog and please look under normalized but weldment and machining is still pretty high.
Krish Sankar: I'm just kind of curious as you look at your product.
Krish Sankar: Where would you say is the stickiest market share to the lowest I'm guessing gas panel is probably high market share.
Speaker Change: Sneaky come back do machining and development, which could be more.
Speaker Change: <unk>, yes.
Krish Sankar: Just your thoughts on that would be helpful. Thank you.
Speaker Change: Yes, I would say.
Jeffrey S. Andreson: Certain portions of the addressable market within weldments are highly fungible. We call it orbital welding, a little more of a with gas panels. We still view ourselves as the largest market share, somewhere around 30s, below 30s, I would say, percentage of market share globally. So that's pretty sticky as well. And new entrants are fairly rare, maybe one in the last five years have come in.
Krish Sankar: Certain portions of the addressable market within Weldment or highly fungible.
Jeffrey S. Andreson: We call it orbital welding a little more of a.
Jeffrey S. Andreson: Less skilled when it comes to taking a more sophisticated combinations of weldment and sub assemblies that are a little bit sticky I mean in the long run nothing sticky to be honest, but.
Jeffrey S. Andreson: I think with machining, it's fairly sticky.
Jeffrey S. Andreson: Those take long qualification periods. So once you have a machine shop.
Jeffrey S. Andreson: That's that becomes fairly sticky in the long run obviously with gas panels, we still view ourselves as the largest market share somewhere around 30, low <unk> I would say percentage of market share kind of globally.
Jeffrey S. Andreson: That's pretty sticky as well.
Jeffrey S. Andreson: New entrants are fairly rare maybe one in the last five years.
Jeffrey S. Andreson: <unk> come in.
Jeffrey S. Andreson: Yeah.
Speaker Change: Got it thanks, Jeff.
Speaker Change: You bet.
Tom Diffley: Our next question will come from Tom Diffley with D.A. Davidson.
Jeffrey S. Andreson: Our next question will come from Tom <unk> with D. A Davidson.
Tom Diffley: Yeah, good afternoon. I appreciate the chance to ask a question.
Thomas Robert Diffely: Yes, good afternoon I appreciate the chance to ask a question.
Thomas Robert Diffely: Maybe Greg first a clarification on the cost side for the components was that material costs was it expediting what caused the.
Thomas Robert Diffely: The variance in the cost this quarter.
Tom Diffley: So.
Tom Diffley: Maybe, Greg, first a clarification on the cost side. For the components, was it material cost? Was it expediting? What caused the variance in the cost this quarter?
Thomas Robert Diffely: On the component side, Tom So.
Speaker Change: Really it was I would say more of a mix within the customer mix there not.
Greg Swyt: On the component side, Tom, really, it was, I would say, more of a mix within the customer mix. They're not doing well; I was about half of it.
Greg Swyt: Not.
Greg Swyt: Well that was about half of it yeah, yeah about.
Greg Swyt: How about the about half of the mess.
Greg Swyt: Yeah, yeah, about half of the mess on the components, not expediting. We're not seeing any of that now in the market from supply chain on fees and things like that. It's more about the customer mix inside of the components.
Greg Swyt: On the components not expediting, we're not seeing any of that now in the market from from supply chain on fees and things like that it's more about.
Greg Swyt: The customer mix with inside of the components, specifically and machining.
Greg Swyt: Specifically in machining, when you're starting to ramp up, you're doing smaller lot quantities, so you're not getting as much throughput. So it almost equates to a learning curve. And the more volume you get, the lower the average cost per unit will come down. We just didn't hit what we thought we could coming out of the gates.
Greg Swyt: Yes.
Greg Swyt: When you when you are starting to ramp up youre doing smaller lot quantities. So you're just not getting as much throughput. So.
Greg Swyt: Yes.
Greg Swyt: Almost equates to like a learning curve and as the more the more volume you get the lower the average cost per unit will come down so.
Greg Swyt: We just didn't hit what we thought we could coming out of the gates.
Tom Diffley: Okay, that's helpful. And then when you look at the proprietary products that you have going forward, you know, weldments, fittings, precision machining, which of those do you think is the biggest market for you, ultimately? And is there any type of margin difference between the three?
Speaker Change: Okay. That's helpful. And then when you look at the proprietary products that you have going forward weldment fittings precision machining, which of those do you think is the biggest market for you ultimately and is there any type of a margin difference between the three.
Jeffrey S. Andreson: I would say from the least sophisticated, more ubiquitous types of parts, they're probably in the low 30s, and you might get into the low 40s, so the range is not that far off from them. You know, the markets that we address today, and precision machining, and things like that are kind of measured in billions of components and things like that. So they're big opportunities. Individually, I'd say the flow controllers are the ones that can help move the needle the most in the long term, but in the near term, it's definitely going to be the components I mentioned on the conference call because those are going into existing gas panels we manufacture today. So they're also going on the new stuff, but the new stuff is obviously in the early stages of qualification.
Tom Diffley: I would say from the least sophisticated more you know.
Jeffrey S. Andreson: Equities types of parts there, they're probably in the low thirty's and you might get into the low 40. So the range is not that far off from from them I would say.
Jeffrey S. Andreson: The markets that we address today in precision machining and things like that or kind of measured in billions.
Jeffrey S. Andreson: Components and things like that so there are big opportunities individually I'd say the flow controllers are the ones that can help move the needle.
Jeffrey S. Andreson: Most in the long term, but in the near term, it's definitely going to be the components I mentioned on the conference call because those are going into existing <unk>.
Jeffrey S. Andreson: Gas panels, we manufacture today, so that theyre also going on the new stuff, but the new stuff. Obviously is in early stages of qualifications.
Tom Diffley: Okay, that's helpful. And then finally, when you look at you talked about some inventories that you need to burn off, but at what point do you need to start building inventory for the gas panels? And how far before revenue do you start to see that? Well, I would say
Speaker Change: Okay. That's helpful. And then finally when you look at you talked about some inventories, but you need to burn off but at what point do you need to start building inventory for gas panel and how far before revenue do you start to see that.
Jeffrey S. Andreson: Well, I would say maybe the way to think about it, Tom, is that we'll know the inventory burn is largely gone when we see our component business start to inflect because they have the longest lead times. Our contractual lead times are three weeks, four weeks for gas panels. They're longer than that for EUV gas delivery, but the volumes are much, much smaller, obviously. So we usually see them on the component side. And that's still running fairly sideways for us in the first half.
Tom Diffley: Well I would say.
Tom Diffley: Maybe the way to think about it Tom is that.
Jeffrey S. Andreson: When we will know the inventory burn is largely gone when we see our component business start to inflect.
Jeffrey S. Andreson: Because they have the longest lead times I mean, our contractual lead times are three weeks four weeks for gas panels.
Jeffrey S. Andreson: Longer than that for.
Jeffrey S. Andreson: The EV guests delivery, but the volumes are much much smaller obviously so.
Jeffrey S. Andreson: So we usually see it on the component side first.
Jeffrey S. Andreson: And Thats still running fairly sideways for us in the first half of the year.
Speaker Change: Okay. Thank you.
Speaker Change: You bet. Thanks, Tom.
Ross Cole: Our next question will come from Ross Cole with Needham and Company.
Jeffrey S. Andreson: Our next question will come from Ross <unk> with Needham <unk> company.
Ross Cole: Hi, thank you for taking my question on behalf of Charles Xi. In the past, you had mentioned that you expect the two largest OEMs to reach a restocking point in the second half of this year. Do you still think that's the case that they might not want to wait until inventory gets back to historical normal levels? Or do you think that management and those companies will still want to maintain a higher inventory buffer than they have in the past?
Ross Cole: Alright. Thank you for taking my question on behalf of Charles <unk>.
Ross Cole: In the past you had mentioned that you expect the two largest Oems to reach a restocking point in the second half this year.
Ross Cole: Do you still think Thats the case that they might not want to wait until inventory get back to historical normal levels or do you think that the management and those companies will still want to maintain a higher inventory buffer than they have in the past.
Jeffrey S. Andreson: I would say I don't know what levels of buffers. I know that we're carrying higher levels of buffers, which should alleviate their need to do so. So we've added safety stock to be able to handle, you know, bursts and things like that. And so I think once they get through their inventory normalization, in those particular pockets of our component business, they'll be back to normal lead time ordering.
Ross Cole: I would say I don't know what levels of buffers I know that we're carrying higher levels of buffers, which should alleviate their need to do it. So we've added safety stock to be able to handle.
Jeffrey S. Andreson: Burst and things like that and so I think once they get through their inventory normalization.
Jeffrey S. Andreson: And those particular pockets of our component business that there'll be back to normal lead time ordering.
Speaker Change: Great. Thank you.
Jeffrey S. Andreson: Yes.
Jeffrey S. Andreson: Yeah.
Jeffrey S. Andreson: Okay.
Christian Schwab: Our next question will come from Christian Schwab with Craig Hollum Capital Group.
Jeffrey S. Andreson: Our next question will come from Christian Schwab with Craig Hallum Capital Group.
Christian Schwab: Great, thanks for taking my question. Would you say that on your, um... Utilization rate and gas delivery systems that you're keeping your workforce in the factory a little bit elevated with the hope of being able to gain market share?
Christian David Schwab: Okay, great. Thanks for taking my question.
Christian Schwab: Would you say that on your.
Christian Schwab: Utilization rate on.
Christian Schwab: Gas delivery systems that youre, keeping your workforce and the fact that a little bit elevated with the hope of being able to gain market share.
Christian Schwab: If when the recovery starts in 2025, or have you kind of leaned that down?
Christian Schwab: Yes, when the recovery starts in 2025 or have you kind of lean that down.
Jeffrey S. Andreson: I would say we have right-sized our workforce, but we leave enough excess such that we can burst. Think of it as in the 10 to 20% range, you know, so be it. While we've lowered our, I'll call it, the direct labor workforce quite a lot, we still keep some excess capacity such that we do get pockets, and we have to address them. So, and then I would definitely say on the component side, because those are tougher skill sets to acquire as you ramp up.
Speaker Change: I would say, we have we have right sized our workforce, but.
Jeffrey S. Andreson: But we leave enough excess such that we can burst.
Jeffrey S. Andreson: Think of it is in the 10% to 20% range So b y.
Jeffrey S. Andreson: We've lowered our I'll call it the direct labor workforce quite a lot we still keep some excess capacity such that we do get pockets.
Jeffrey S. Andreson: And we have to address those and so and then I would say definitely on the component side, because those are tougher skill sets to acquire.
Jeffrey S. Andreson: You ramp though.
Christian Schwab: Okay, perfect. That makes great sense.
Speaker Change: Okay perfect that makes great sense and then my last question kind of regarding the NAND recovery right.
Christian Schwab: And then my last question, you know, kind of regarding, you know, a NAND recovery, right? I mean, the NAND manufacturers are just finally coming out of, you know, kind of an unprecedented money-losing situation given such a consolidated marketplace, and they have a whole lot of money to get back for the money that they lost to make future investments. Did you think that there'll be a substantial improvement? In your NAND business, and I guess if it is more 25 weighted, it seems to me that without a material increase in smartphones or PCs, we kind of need that in order to see a material improvement.
Christian Schwab: Manufacturers are just finally coming out of.
Christian Schwab: You know kind of almost an unprecedented money losing.
Christian Schwab: Situation given.
Christian Schwab: Our consolidated marketplace.
Christian Schwab: A whole lot of money to get back for the money that they lost to make future investment did.
Christian Schwab: Did you think that there'll be a substantial improvement.
Christian Schwab: In your NAND business in 'twenty, five and I guess, if it is is it more 25 weighted it seems to me that without a material increase in smart phones or Pcs that.
Christian Schwab: We kind of need that in order to see a material improvement in Andrew my thinking about that wrong.
Christian Schwab: And Andrew, am I thinking about that wrong?
Jeffrey S. Andreson: I think you're largely right. I think NAND inflecting will be very beneficial to Ichor. I think our position with, you know, our largest customer, we have the largest close share of the NAND market as soon as it begins to inflect, and I think the view is that it will inflect in 2025. I've also, and I'm not an expert on, you know, AI and all of this, but NAND is used in that as well, because they need the storage near the new, you know, AI, generative AI and stuff
Andrew: No I think you're I think you're largely right I think NAND inflect team will.
Jeffrey S. Andreson: Be very beneficial to ichor, I think our position with our largest customer we have the largest share of the NAND market soon as that begins to inflect.
Jeffrey S. Andreson: The view is that it will inflect in 2025 I've also.
Speaker Change: I'm not the expert on.
Jeffrey S. Andreson: All of this but NAND is used in that as well because they need the storage near the new.
Jeffrey S. Andreson: So I think that's helping NAND as well. Obviously, we're seeing that with some strengthening on the D-RAM side, things like that. So, but I think you're right. I mean, NAND is at its lowest levels, and I don't want to say forever, but it's pretty close all the time, Lowe's. You know, and I would say recently somebody talked about the material side and the engineering side of this being less than half the WFE for the first time in history, too.
Jeffrey S. Andreson: Hey.
Jeffrey S. Andreson: Generative AI and stuff, so I think thats, helping manned as well, obviously, we're seeing that with.
Jeffrey S. Andreson: Some strengthening on the DRAM side.
Jeffrey S. Andreson: Like that so.
Jeffrey S. Andreson: But I think Youre right I mean, NAND is at its lowest levels and.
Jeffrey S. Andreson: I don't want to say forever, but it's pretty close all time lows.
Jeffrey S. Andreson: And I would say recently somebody talked about.
Jeffrey S. Andreson: The materials side engineering side of it as being less than half the WMC for the first time in history too and you've got you've got.
Jeffrey S. Andreson: And you've got, you know, you've got The Litho guys being a significant percentage of it. So while we have a position there, obviously, the ASPs on that are significantly bigger than process tools, so our percentage of their content is much lower than a process tool.
Jeffrey S. Andreson: The little guys being a significant percentage of it.
Jeffrey S. Andreson: While we have a position there obviously the asps on that or.
Jeffrey S. Andreson: Significantly bigger than process tools.
Jeffrey S. Andreson: So our percentage of their content is much lower than a process tool.
Christian Schwab: Great, no other questions, thank you.
Speaker Change: Right right great no other questions. Thank you.
Christian Schwab: Thanks, Christian.
Speaker Change: Thanks Christian.
Christian Schwab: Yeah.
Jeffrey S. Andreson: There are no further questions at this time. I will now turn the call over to Jeff Andreson for closing comments.
Christian Schwab: There are no further questions at this time I will now turn the call over to Jeff Andreessen for closing comments.
Operator: I want to thank all of you for joining us on our call this quarter. I'd like to thank our employees, suppliers, customers, and investors for their ongoing dedication and support. We look forward to the opportunity to meet with investors during several upcoming investor conferences, including the B. Riley, Craig Hallam, and Cowan conferences taking place later this month and the CEO Summit in early July. Please feel free to reach out to Claire directly to follow up with her. We look forward to updating you on our Q2 earnings call scheduled for early August. Operator, that concludes our call. Thank you. This does conclude today's conference call. Thank you for your participation. You may now disconnect.
Jeffrey S. Andreson: I want to thank.
Operator: All of you for joining us on our call this quarter.
Operator: Thank our employers employees suppliers customers and investors for their ongoing dedication and support.
Operator: We look forward to the opportunity to meet with investors during several upcoming investor conferences, including the B Riley Craig Hallum and Cowen conferences, taking place later this month and the CEO summit in early July.
Operator: Please feel free to reach out to Claire directly to follow up with US. We look forward to updating you on our Q2 earnings call scheduled for early August operator that concludes our call.
Operator: Thank you. This does conclude today's conference call. Thank you for your participation you may now disconnect.
Operator: Yeah.
Operator: No.
Operator: Yeah.
Operator: [music].
Operator: Okay.
Operator: Yeah.
Operator: Uh-huh.
Operator: [music].
Operator: Hmm.
Operator: Mhm.
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Operator:
Operator: Okay.
Operator: Hello.