Q2 2024 Ichor Holdings Ltd Earnings Call

Operator: Good day, ladies and gentlemen, and welcome to Ichor's second 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. If anyone should require operator assistance, 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 call, Claire McAdams, Investor Relations for Ichor. Please go ahead.

Operator: Good day, ladies and gentlemen, and welcome to I-Core's second 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. If anyone wants to require operator assistance, please press star zero on your telephone keypad. As a reminder, this call is being recorded.

Good day, ladies and gentlemen, and welcome to <unk> second 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.

If anyone should require operator assistance. Please press star zero on your telephone keypad.

As a reminder, this call is being recorded.

Claire McAdams: I would now like to introduce your host for today's call, Claire McAdams, Investor Relations for I-Core. Please go ahead.

Claire McAdams: I would now like to introduce your host for todays call Claire Mcadams Investor Relations for Ichor. Please go ahead.

Claire McAdams: Thank you, Maria.

Claire McAdams: Thank you, Maria. Good afternoon, and thank you for joining today's second quarter 2024 conference call. As you read our earnings press release and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, and which could cause actual results to differ materially from those expressed.

Claire McAdams: Thank you Maria good afternoon, and thank you for joining today's second quarter 2024 conference calls.

Claire McAdams: Good afternoon, and thank you for joining today's second quarter 2024 conference call. As you read our earnings press release, and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of the Federal Securities Laws. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in our earnings press release, those described in our annual report on Form 10-K for fiscal year 2023, and those described in subsequent filings with the SEC.

Claire 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 year 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. On the call with me today are Jeff Andreson, our CEO, and Greg Swyt, our CFO.

Speaker Change: 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.

Speaker Change: These forward looking statements are subject to a number of risks and uncertainties many of which are beyond our control and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in our earnings press release. Those described in our annual report on Form 10-K for fiscal year 2023.

Speaker Change: 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 and Additionally, we will be providing certain non-GAAP financial measures. During this conference call.

Claire McAdams: You should consider all forward-looking statements in light of those and other risks and uncertainties.

Claire McAdams: 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 Change: Our earnings press release, and the financial supplement posted to our IR website. Each provide a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures on the call with me today are Jeff and recent our CEO and Greg White, our CFO, Jeff will begin with an update on our business and then Greg.

Claire McAdams: On the call with me today, our Jeff and recent, our CEO, and Greg's White, or CFO. Jeff will begin with an update on our business, and then Greg will provide additional details about our results and guidance.

Speaker Change: We'll provide additional details about our results and guidance after their prepared remarks, we will open the line for questions.

Claire McAdams: After the prepared remarks, we will open the line for questions.

Claire McAdams: I'll now turn over the call to Jeff and Recent.

Claire McAdams: 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 Andreson.

Speaker Change: I'll now turn over the call to Geoff Andreessen, Jeff.

Jeffrey Andreson: Jeff? Thank you, Claire, and welcome everyone to our Q2 earnings call. We are pleased to report solid second quarter results with $203 million of sales near the top end of our forecast, continued sequential improvement in gross margin, and EPS of 5 cents. High course business model typically generates stronger earnings leverage as revenues increase, and in Q2, the stronger gross margin performance on modest sequential revenue growth yielded an 85% improvement in operating income compared to the previous quarter. We are encouraged by the early signs of a recovery in a way for a fast equipment market, and our forecast continues to strengthen for a stronger second half.

Jeff Andreson: Thank you, Claire, and welcome, everyone, to our Q2 earnings call. We are pleased to report solid second quarter results with $203 million of sales near the top end of our forecast, continued sequential improvement in gross margin, and EPS of 5 cents. Ichor's business model typically generates strong earnings leverage as revenues increase, and in Q2, the stronger gross margin performance on modest sequential revenue growth yielded an 85% improvement in operating income compared to the first quarter.

Geoff Andreessen: Thank you Claire and welcome everyone to our Q2 earnings call.

Geoff Andreessen: We are pleased to report solid second quarter results with $203 million of sales near the top end of our forecast continued sequential improvement in gross margin and EPS of <unk>.

Geoff Andreessen: Hi quarters business model typically generate strong earnings leverage as revenues increase and in Q2, the stronger gross margin performance a modest sequential revenue growth yielded an 85% improvement in operating income compared to the first quarter. We are encouraged by the early signs of a recovery in the wafer fab equipment.

Jeff Andreson: We are encouraged by the early signs of a recovery in the wafer fab equipment market, and our forecast continues to strengthen for a stronger second half. In the meantime, we remain steadfast in our focus on gross margin improvement initiatives that we expect will drive yet another sequential increase in margins and profitability for the third quarter, even at similar revenue volumes. While gross margin is the most significant lever driving EPS growth, we also continue to carefully manage costs and working capital to add further tailwinds to profitability and free cash flow performance, as we turn the corner to sustained growth in our top line. From a demand perspective, increasing confidence in a stronger second half for Ichor reflects upticks in demand from every key customer within WFE.

Geoff Andreessen: Shipment market.

Geoff Andreessen: And our forecast continues to strengthen for a stronger second half.

Jeffrey Andreson: In the meantime, we remain steadfast in our focus on gross margin improvement initiatives that we expect will drive yet another sequential increase in margins and profitability for the third quarter, even its similar revenue volumes. While our gross margin is the most significant lever driving EPS growth, we also continue to carefully manage costs and working capital to add further tailwinds to profitability and free cash flow performance as we turn the corner to sustain growth in our top line. From a demand perspective, increasing confidence in a stronger second half for I-Core reflects upticks and demand from every key customer within WI-Feeding. The only meaningful asset to this improving demand profile is our emerging silicon carbide gas panel business, which we expect will be lower in the second half compared to the first half, but is still an incremental driver to our future revenue growth as that market recovers.

Geoff Andreessen: In the meantime, we remained steadfast in our focus on gross margin improvement initiatives.

Geoff Andreessen: That we expect will drive another sequential increase in margins and profitability for the third quarter, even at similar revenue volumes.

Geoff Andreessen: Well our gross margin is the most significant lever driving EPS growth. We also continue to carefully manage costs and working capital to add further tailwind to profitability and free cash flow performance.

Geoff Andreessen: As we turn the corner to sustained growth in our top line.

Geoff Andreessen: From a demand perspective, increasing confidence in a stronger second half for ichor reflects upticks in demand from every key customer within ws eating the only meaningful offset to this improving demand profile.

Jeff Andreson: The only meaningful offset to this improving demand profile is our emerging silicon carbide gas panel business, which we expect will be lower in the second half compared to the first half but is still an incremental driver of our future revenue growth as that market recovers. Within an overall demand environment indicating modest single-digit growth for 2024 and a return to more meaningful growth in 2025, I'll share my views on the key technology inflections and CapEx investments that will drive our return to revenue growth outperforming the overall industry.

Geoff Andreessen: As our emerging silicon carbide gas panel business, which we expect will be lower in the second half compared to the first half, but it's still an incremental driver to our future revenue growth as that market recovers.

Jeffrey Andreson: With an overall demand environment, indicating modest, single-digit growth for 2024, and a return to a more meaningful growth in 2025, I'll share my views on the key technology, inflections, and CAPEX investments that will drive our return to revenue growth, outperforming the overall industry. In leading edge logic, paid all around device architecture is estimated to require an additional 30% more process steps, and the latest generation of FinFET, equating to more process tools per wafer as the device manufacturers incorporate new steps for ALD, FB, selective edge, and CBD. The growing investments in high bandwidth memory DRAM to enable AI, driving close to 20 additional process steps per wafer, in particular for Edge, CBD, ECD, and clean steps.

Speaker Change: Within an overall demand environment, indicating modest single digit growth for 'twenty 'twenty, four and a return to a more meaningful growth in 2025 I'll share my views on the key technology inflections and Capex investments that will drive our return to revenue growth outperforming the overall industry.

Jeff Andreson: In leading-edge logic, data-all-around device architecture is estimated to require an additional 30% more process steps than the latest generation of FinFET, equating to more process tools per wafer as the device manufacturers incorporate new steps for ALD, EPI, Selective Etch, and CVD. The growing investments in high bandwidth memory DRAM to enable AI to drive close to 20 additional process steps per wafer, in particular for etch, CBD, ECD, and clean steps.

Speaker Change: And leading edge logic gate all around device architecture is estimated to require an additional 30% more process steps and the latest generation of Finfet.

Speaker Change: Equating to more process tools per wafer as the device manufacturers incorporate new steps for a L D.

Geoff Andreessen: Be selective etch and CVD.

Speaker Change: The growing investments in high bandwidth memory DRAM to enable AI driving close to 20 additional process steps per wafer in particular for etch DVD E C D and clean steps.

Jeffrey Andreson: While we are not seeing an initial recovery in 3D-NAND investments beyond technology transitions, we do expect NAND spending will further improve in 2025, which will benefit our business given the greater edge and deposition intensity for this application. Our Silicon Carbide gas panel business, which is slowed heading into the second half, is expected to return as a growth driver in 2025 to support the additional capacity that will need to be put in place in the next few years. And while the more modest pace of EUV deployments has slowed our quarterly build rate of gas delivery systems for the first half of this year, we expect the second half to be stronger and continue to grow as we move into 2025, another tailwind to our growth.

Jeff Andreson: But we are not seeing an initial recovery in 3D NAND investments beyond the technology transition. We do expect NAN spending will further improve in 2025, which will benefit our business given the greater etch and deposition intensity for this application. Our silicon carbide gas panel business, which has slowed heading into the second half, is expected to return as a growth driver in 2025 to support the additional capacity that will need to be put in place in the next few years.

Speaker Change: Well, we are not seeing an initial recovery in three D. NAND investments beyond technology transitions, we do expect NAND spending will further improve in 2025, which will benefit our business given the greater etch and deposition intensity for this application.

Speaker Change: Our silicon carbide gas panel business, which has slowed heading into the second half is expected to return as a growth driver in 2025 to support the additional capacity that will need to be put in place in the next few years.

Jeff Andreson: And while the more modest pace of EUV deployments has slowed our quarterly build rate of gas delivery systems for the first half of this year, we expect the second half to be stronger and continue to grow as we move into 2025, another tailwind to our growth. Finally, in our non-semi business, we are seeing a return to pre-downturn demand levels, as well as incremental share gains ahead within IMG's customer base in aerospace and defense, as well as certain commercial markets.

Speaker Change: And while the more modest pace of <unk> deployments has slowed our quarterly build rate of gas delivery systems through the first half of this year, we expect the second half to be stronger and continue to grow as we move into 2025, another tailwind to our growth.

Jeffrey Andreson: Finally, in our non-semi-business, we are seeing a return to pre-down turn demand levels, as well as incremental share gains ahead, within IMG's customer base and aerospace and events, as well as certain commercial markets. As each of these markets and applications continue to expand, we see opportunities for I-Core to increase our revenue potential and continue to add breadth and diversification to our customer base. Altogether, building a strong story for I-Core's revenue growth as the industry recovery accelerates. Given all of these drivers, we believe we could see strong growth for our primary serve markets within WFE through the next cycle, in particular deposition edge and EUV, as well as in our non-semi-business.

Speaker Change: Finally in our non semi business, we are seeing a return to pre downturn demand levels as well as incremental share gains ahead within <unk> customer base, and aerospace and defense as well as certain commercial markets.

Jeff 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 together building a strong story for Ichor's revenue growth as the industry recovery accelerates.

Speaker Change: As each of these markets and applications continue to expand we see opportunities for <unk> to increase our revenue potential and continue to add breadth and diversification to our customer base.

Speaker Change: Altogether building, a strong story for <unk> revenue growth as the industry recovery accelerates.

Jeff Andreson: Given all of these drivers, we believe we could see strong growth for our primary serve markets with NWFE through the next cycle, in particular deposition, EDGE, and EUV, as well as in our non-semi business. Now, I'd like to update you on our proprietary products pipeline, including our next generation gas panel. We continue to make steady progress in growing our new products this year and are seeing the impact on our profitability with an improved gross margin on similar revenue levels.

Speaker Change: Given all of these drivers we believe we could see strong growth for our primary served markets with nwfp through the next up cycle in particular deposition edge and EV as well as in our non semi business.

Jeffrey Andreson: Now, I'd like to update you on our proprietary products pipeline, including our next-generation gas panel. We continue to make steady progress in growing our new products this year and are seeing the impact on our profitability with improved growth margin on similar revenue levels. I'll start with our next-generation gas panel. We have now shipped over 20 gas panels, which is consistent with the outlook I provided on our last earnings call. Most of these new gas panels are on our customers' evaluation tools that have been shipped to a device manufacturer. Our new gas panels contain about 80 percent proprietary I-Core content, compared to around 10 percent today, which will drive significant expansion of our gross margin profile.

Speaker Change: Now I'd like to update you on our proprietary product pipeline, including our next generation gas panel.

Speaker Change: We continue to make steady progress in growing our new products. This year and are seeing the impact on our profitability with improved gross margin on similar revenue levels.

Jeff Andreson: I'll start with our next generation gas panel. We have now shipped over 20 gas panels, which is consistent with the outlook I provided on our last earnings call. Most of these new gas panels are on our customers' evaluation tools that have been shipped to a device manufacturer. Our new gas panels contain 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 the initial evaluation will be completed and production shipments can begin remains in the fourth quarter.

Speaker Change: I'll start with our next generation gas panel.

Speaker Change: We have now shipped over 20 gas panels, which is consistent with the outlook I provided on our last earnings call.

Speaker Change: Most of these new gas panels are on our customers' evaluations tools that have been shipped to a device manufacturer.

Speaker Change: Our new gas panels contain about 80% proprietary eye core content.

Speaker Change: Compared to around 10% today, which will drive significant expansion of our gross margin profile.

Jeffrey Andreson: Now, these tool evaluations typically take about nine months to complete, so the earliest the initial evaluation will be completed, and production shipments can begin, remains in the fourth quarter. We have been qualified on three applications, and are now expecting to complete two additional applications in the next three to four months. As for our new components products, we are now qualified on fittings that are used in our wealth business, substrates used in our gas panels, fields, and high purity vows. These are all critical components used in the existing gas panels that we assemble. These specific products are now qualified as three customers and have continued to ramp since we began shipping in the second half of the first quarter.

Speaker Change: These tool evaluations typically take about nine months to complete so the earliest the initial evaluation will be completed and production shipments can begin remains in the fourth quarter.

Jeff Andreson: We have been qualified on three applications and are now expecting to complete two additional applications in the next three to four months. As for our new component products, we are now qualified on fittings that are used in our weldment business, substrates used in our gas panels, seals, and high purity valves. These are all critical components used in the existing gas panels that we assemble. These specific products are now qualified at three customers and have continued to ramp up since we began shipping in the second half of the first quarter. All of these new component qualifications can be used in both our existing gas panels that we build today, as well as are all designed into our next generation gas panels.

Speaker Change: We have big qualified on three applications and are now expecting to complete two additional applications in the next three to four months.

Speaker Change: As for our new components products. We are now qualified on fittings that are used in our weldment business substrates used in our gas panels deals and high purity valves.

Speaker Change: These are all critical components used in the existing gas panels that we assemble.

Speaker Change: These specific products are now qualified at three customers and have continued to ramp since we began shipping in the second half of the first quarter.

Jeffrey Andreson: All of these new component qualifications can be used in both our existing gas panels that we build today, as well as our all designed into our next generation gas panel. 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. In contrast to last quarter, when any meaningful uptick in revenue growth was outside of our three-month visibility, today we are pleased to report that a return to sequential growth is now firmly within our near-term forecast.

Speaker Change: All of these new component qualifications can be used in both our existing gas panels that we build today as well as are all designed into our next generation gas panel.

Jeff 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. In contrast to last quarter, when any meaningful uptick in revenue growth was outside of our three-month visibility, today we are pleased to report that a return to sequential growth is now firmly within our near-term forecast. Our confidence has increased around a stronger second half, largely due to the recent strengthening of the Q4 demand profile.

Speaker Change: 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 in.

Speaker Change: In contrast to last quarter, when any meaningful uptick in revenue growth was outside of our three month visibility today. We were pleased to report that he returned to sequential growth is now firmly within our near term forecast our confidence has increased around the stronger second half largely due to the recent strengthening of the queue.

Jeffrey Andreson: Our confidence has increased around the stronger second half, largely due to the recent strengthening of the Q4 demand profile. We are encouraged by the strengthening outlook for Q4, as we move into what is expected to be a much stronger WFE year in 2025, which means we look forward to ramping revenues back towards the $250-$300 million-plus level next year. 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 a future growth.

Speaker Change: For demand profile.

Jeff Andreson: We are encouraged by the strengthening outlook for Q4 as we move into what is expected to be a much stronger WFE year in 2025, which means we look forward to ramping revenues back towards the $250 to $300 million plus level next year. 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 the call over to Greg to recap our Q2 results and provide further details around our Q3 financial outlook.

Speaker Change: We are encouraged by the strengthening outlook for Q4 as we move into what is expected to be a much stronger Wi Fi here in 2025.

Speaker Change: Which means we look forward to ramping revenues back towards the $2 $50 million to $300 million plus level next year, 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.

Greg Swyt: With that, I'll turn the call over to Greg to recap our Q2 results and provide further details around our Q3 financial outlook. Greg.

Speaker Change: With that I'll turn the call over to Greg to recap, our Q2 results and provide further details around our Q3 financial outlook.

Speaker Change: <unk>.

Greg Swyt: Thanks, Jeff. To begin, I would like to emphasize that the P&L metrics discussed today are non-GAT measures. These measures exclude the impact of share-based compensation, amortization of acquired intangible assets, non-recurring charges, and discrete tax items and adjustments.

Greg: Thanks, Jeff.

Greg Swyt: 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.

Greg: 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.

Greg: <unk> of acquired intangible assets nonrecurring charges and discrete tax items and adjustments.

Greg Swyt: There is a useful financial supplement available in the investor section of our website that summarizes our GAT and non-GAT financial results, as well as the summary of the balance sheet and cash flow information for the last several quarters. Second quarter revenues were near the upper end of our forecast at $203 million, up slightly from Q1, and 10% higher than the main period last year. Gross margin improved 80 basis points sequentially to 13%, which was in line with expectations. We are starting to recognize the benefit of our internally produced products, as well as continued improvement in factory efficiency.

Greg Swyt: There is a useful financial supplement available in 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. Second quarter revenues were near the upper end of our forecast at $203 million, up slightly from Q1, and 10% higher than the same period last year. Gross margin improved 80 basis points sequentially to 13%, which was in line with expectations. We are starting to recognize the benefit of our internally produced products, as well as continued improvement in factory efficiency.

Greg: There is a useful financial supplement available in the investors section of our website at <unk>.

Greg: Summarizing 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: Second quarter revenues were near the upper end of our forecast at $203 million up slightly from Q1, and 10% higher than the same period last year.

Greg: Gross margin improved 80 basis points sequentially to 13%, which was in line with expectations.

Greg: We are starting to recognize the benefit of our internally produced product as well as continued improvements and factory efficiencies.

Greg Swyt: Q2 operating expenses came in the low forecast at $21.9 million, a little lower than Q1 due to favorable labor-related costs and continued efforts to control variable spending. Our operating income for Q2 was $4.5 million. Our net interest expense of $1.9 million was down significantly from the Q1 expense of $4.1 million and $15 million debt reduction during Q1. Our non-GAAP net income tax expense was above our forecast at $800,000, which had a 1 cent impact on our EPS within the quarter, a resulting net income per share which five cents. Now, turning to the balance sheet, at the end of the quarter, our cash and equivalent total of $114 million, a $12 million increase from Q1.

Greg Swyt: Operating expenses came in below forecast at $21.9 million, a little lower than Q1, due to favorable labor related costs and continued efforts to control variable spending. Our operating income for Q2 was $4.5 million. Our net interest expense of $1.9 million was down significantly from the Q1 expense of $4.1 million, reflecting the benefit of our $115 million debt reduction during Q1. Our non-GAAP net income tax expense was above our forecast at $800,000, which had a one-cent impact on our EPS within the quarter. The resulting net income per share was $0.05.

Greg: Q2 operating expenses came in below forecast at $21 9 million.

Greg: A little lower than Q1 due to favorable labor related costs and continued efforts to control variable spending.

Greg: Our operating income for Q2 was $4 $5 million.

Greg: Our net interest expense of one 9 million was down significantly from the Q1 expense of $4 $1 million, reflecting the.

Greg: The benefit of our $115 million debt reduction during Q1.

Greg: Our non-GAAP net income tax expense was above our forecast at $800000, which had a <unk> <unk> impact on our EPS within the quarter.

Greg: <unk> net income per share was <unk>.

Greg Swyt: Now turning to the balance sheet, at the end of the quarter, our cash and equivalents totaled $114 million, a $12 million increase from Q1. We generated $17.5 million in cash flow from operations, and after deducting $2.8 million of capital expenditures, our free cash flow was $14.6 million. The cost of receivable decreased from the previous quarter on improved linearity, and DSOs were 29 days. Inventory decreased $9 million during the quarter to end the quarter at $231 million, and inventory turns increased to 3.0. During the quarter, we reduced our current loan balance by $1.9 million to end the quarter with a total debt of $130 million, and our net debt coverage ratio improved to 1.8 times.

Greg: Now turning to the balance sheet at the end of the quarter, our cash and equivalents totaled $142 million or.

Greg: $12 million increase from Q1.

Greg Swyt: We generated $17.5 million in cash flow from operations, and after deducting $2.8 million of capital expenditures, our free cash flow was $14.6 million. The cash receivable decreased from the previous quarter on improved linearity, and DSOs were 29 days. Inventory decreased $9 million during the quarter to end the quarter at $231 million, and inventory turns increased to 3.0. During the quarter, we reduced our term loan balance by $1.9 million to end the quarter with a total debt of $130 million, and our net coverage ratio improved to 1.8 times.

Greg: We generated $17 $5 million in cash flow from operations and after deducting $2 $8 million of capital expenditures, our free cash flow was $14 $6 million.

Greg: Accounts receivable decreased from the previous quarter on improved linearity and Dsos were 29 days.

Greg: Inventory decreased $9 million during the quarter to end the quarter at $231 million and inventory turns increased to three point up.

Greg: During the quarter, we reduced our term loan balance by $1 9 million to end the quarter with a total debt of $130 million and our net debt coverage ratio improved to one eight times.

Operator: Now I'll provide our guidance for the third quarter of 2024, with anticipated revenues in the range of $195 to $210 million. We expect our Q3 gross margins will again improve sequentially to a range of 13.5 to 14.5 percent. We expect Q3 operating expenses to be approximately $22.6 million, up from our Q2 level of $21.9 million. We expect OpEx to remain at a similar level for the fourth quarter. That interest expense for Q3 is expected to decline to approximately $1.6 million, and we expect it to remain at this level for Q4.

Greg Swyt: Now, I'll provide our guidance for the third quarter of 2024 with anticipated revenues in the range of $195 to $210 million. We expect our Q3 gross margins will again improve sequentially to a range of 13.5% to 14.5%. We expect Q3 operating expenses to be approximately 22.6 million dollars, up from our Q2 level of $21.9 million. We expect our back to remain at a similar level for the fourth quarter. Yeah, this was expense for Q3 as expected to decline to approximately $1.6 million, and we expected to remain at this level for Q4. We expect to record a tax expense in Q3 of $800,000.

Greg: Now I'll provide our guidance for the third quarter of 2024 with anticipated revenues in the range of $195 million to $210 million. We expect our Q3 gross margins well again improved sequentially to a range of 13 five to 14, 5%.

Greg: We expect Q3 operating expenses to be approximately $22 $6 million up from our Q2 level of $21 $9 million we.

Greg: We expect opex to remain at a similar level for the fourth quarter.

Greg: Net interest expense for Q3 is expected to decline to approximately $1 $6 million and we would and we expect it to remain at this level for Q4.

Operator: We expect to record a tax expense in Q3 of $800,000. For the full year, we are forecasting a slightly higher non-GAAP effective tax expense of $3.2 million. Beyond this year, as you update your models for 2025 and beyond, the assumed effective tax rates should be in the range of 10 to 15 percent. Finally, our EPS guidance range for Q3 of $0.05 to $0.15 reflects a share count of 34.3 million shares. Operator, we are ready to take questions. Please open the line.

Greg: We expect to record a tax expense in Q3 of $800000 for the full year, we are forecasting a slightly higher non-GAAP effective tax expense of $3 $2 million.

Greg Swyt: For the full year, we are forecasting a slightly higher non-GAAP effective tax expense of $3.2 million. Beyond this year, as you update your models for 2025 and beyond, the assumed effective tax rates should be in the range of 10 to 15%. Finally, our EPS guidance range for Q3 of $5 to 15 cents reflects a share count of 34.3 million shares.

Greg: Beyond this year as you update your models for 2025 and beyond the assumed effective tax rate should be in the range of 10% to 15%.

Greg: Finally, our EPS guidance range for Q3 of five to 15.

Greg: Reflects a share count of $34 3 million shares.

Speaker Change: Operator, we are ready to take questions. Please open the line.

Operator: Operator, we are ready to take questions. Please open the line. Thank you.

Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 2. Comment, please, while we poll for questions. Our first question comes from Brian Chin on The Sequel. Please proceed with your question.

Speaker Change: Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

Operator: We will now begin to take a question and answer session. If you would like to ask a question, please pass us our one on your telephone key pass. A confirmation tone will indicate that your line is in the question queue. You may press star too if you would like to remove your question from the queue.

Greg: You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the starkey.

Operator: Participants using speaker equipment may be necessary to take your hands as before pressing the star.

Brian Chin: I want to ask you a few questions. Our first question comes from Brian Tinn with The People. Please proceed with your question. Oh, thanks for letting us ask a few questions. Maybe Jeff, just going off some of your commentary, which advanced market are you most encouraged by between, say, Foundry and DRAM in terms of your second half outlook? And can you also put maybe some parameters around what that improvement could look like? Are you thinking sort of low single digits more or less? Yeah, he's right. I would say right now we're probably seeing a little bigger impact from the high bandwidth memory.

Greg: While we pull for questions.

Speaker Change: Our first question comes from Brian Chin with Stifel. Please proceed with your question.

Greg: Okay.

Jeff Andreson: Thanks for letting us ask a few questions. Maybe, Jeff, just going off some of your commentary, which advanced market are you most encouraged by between, say, Foundry and DRAM in terms of your second half outlook? And can you also put maybe some parameters around what that improvement could look like? Are you thinking sort of low single digits, more or less?

Brian Chin: Hi, there sorry about that.

Brian Chin: Thanks for letting us ask.

Brian Chin: Few questions.

Greg: Maybe.

Jeff: Jeff just going off some of your commentary, which are advanced market, where are you most encouraged by between say foundry.

Speaker Change: In DRAM in terms of your second half hour.

Speaker Change: Outlook and can you also put maybe some parameters around.

Speaker Change: What that improvement could look like or are you thinking sort of low single digits more more or less.

Speaker Change: Yeah.

Jeff Andreson: Yeah, hey Brian. I would say right now we're probably seeing a little bigger impact from high bandwidth memory. Okay, so we're seeing that on the chemical side of the business directly. And we also know we can see some DRAM activity, but remember we don't see all the sell-through data. But I would say that it is moving along. And then I found that the logic from what we know is holding up quite well.

Brian Chin: Yeah, Hey, Brian.

Speaker Change: I would say right now, we're probably seeing a little bigger impact from the high bandwidth memory.

Jeffrey Andreson: Okay, so we're seeing that on our clean, the chemical side of the business for sure directly. And we also know we can see some DRAM activity, but remember, we don't see all the sell-through data. But I would say that is moving along, and then I foundry logic from what we know is holding up quite well. And I think, you know, as they start to continue to develop, get all around and bring it to market, we're going to see another uptick on that. But I would say right now, if I was in the cap, which one's bearing the other, I'd say the impact from my bandwidth memory.

Speaker Change: Okay. So we're seeing that on our clean the chemical side of the business for sure directly and we also know we can see some DRAM activity, but remember we don't see all of the sell through data, but I would say that's a that is moving along in that foundry logic from what we know is holding up quite well and I think.

Jeff Andreson: And I think as they start to continue to develop GATE all around and bring it to market, we're going to see another uptick in that. But I would say right now that if I were to handicap which one's better than the other, I'd say the impact of high bandwidth.

Jeff Andreson: And just in terms of quantifying, maybe that uptick in the second half.

Brian Chin: And just in terms of quantifying, maybe that uptick in the second half. I think it's, you know, I don't have the specifics, but I know that from the first half to the back half, it's actually continued to ramp, whether it's 10% in the back half from the front half. I don't have that specific because we don't have all the sell-throughs. Okay. Good. It sounds like that definitely versus year-over-year significantly up. Okay. Sound like you think Q4 is up over Q3, also kind of as if I understand your language correctly. Yeah. You can understand my language, I think. You know, where at this point of visibility, we're kind of seeing maybe high single digits.

Jeff Andreson: I think it's You know, I don't I don't have the specifics, but I know that from the first half to the back half, it's actually continued to ramp up, whether it's up by 10% in the back half from the front half. I don't have that specific because we don't have all the cells through.

Jeff Andreson: Okay, guys, it sounds like, with a note that definitely significantly versus year over year. Sounds like you think Q4 is up over Q3 also, kind of, if I understand your language correctly.

Jeff Andreson: You can understand my language. I think, you know, we're at this point of visibility, we're kind of seeing maybe high So it's not a massive inflection. I wouldn't say we're going to call it an inflection, but it's a good return to sequential growth for us.

Jeffrey Andreson: So it's not a massive inflection. I wouldn't say we're going to call it the inflection, but it's a good return to sequential growth for us. Okay.

Speaker Change: To get returned to sequential growth for us.

Jeff Andreson: Okay, and then you know good good updates in terms of the proprietary products, and in fact, it is reflected in the Q3 gross margin guidance. Based on the progress you're making there, the potential to ship some next-generation panels maybe by Q4 of this year, maybe that's a swing factor, but do you think 15% is sort of an achievable bogeyman in Q4 when you think about a little bit of an upward tick in the revenue and those gross margin considerations?

Speaker Change: Okay and then.

Brian Chin: And then, you know, good updates in terms of the proprietary products and the fact that it reflected in the Q3 gross margin guidance, based on the progress you're making there, the potential to ship some next-generation panels, maybe by Q4 of this year, maybe that's a swing factor, but you think 15% is sort of an achievable bogey in Q4 when you think about a little bit upward tick in the revenue and those gross margin considerations. It's not revenue growth; you asked, it's gross margin. I would say, yeah, we kind of, as we see it at those revenue levels, we'd probably be right in the mid-15s or so.

Speaker Change: Good good updates in terms of the proprietary products.

Speaker Change: And in fact, it reflected in the Q3 gross margin guidance based on the progress Youre, making there the potential to ship. Some next generation panels, maybe by Q4 of this year, maybe that's a swing factor but.

Speaker Change: You think 15% is sort of an achievable bogey in Q4, when you think about a little bit upward tick in the revenue.

Speaker Change: Those gross margin considerations.

Speaker Change: Okay.

Jeff Andreson: It's not revenue growth you asked; it's gross margin. I would say, yeah, we kind of, as we see it at those revenue levels, we'd probably be right in the mid-fifteens or so. Some of that is a bit of a recovery and some mix, but a lot of it is just continued progress with really the new, I'll call them the passive products, and we are taking, there's revenue each quarter. It's relatively small, but we're seeing revenue from the new gas panels, and as I said, we have 20 deployed already in various stages of evaluation at our customers' customers, and there are about 30 more planned for the next So, it's starting to move forward.

Speaker Change: It's not revenue growth you asked its gross margin I would say, yes, we kind of as we see it at those revenue levels, we'd probably be right in the mid fifteens or so.

Brian Chin: Some of that is a bit of a recovery and some mix, but a lot of it is just to continue progress with really the new, I'll call them, the passive products. And we are taking, there's revenue each quarter; it's relatively small, but we're seeing revenue from the new gas panels. As I said, we have 20 deployed already in various stages of evaluation at our customers' customers, and there's about 30 more. Plan for the next two quarters. So it's starting to move forward. Great. Maybe just one last quick thing. I know first half, 25 is probably beyond your good visibility horizon, but your preliminary customer discussions provide any indication of an acceleration in that time frame.

Speaker Change: Some of that is a bit of a recovery in some mix, but a lot of it is just the continued progress with really the new I'll call them in the passive products and we are taking revenue each quarter, it's relatively small, but we're seeing revenue from the new gas panels and as I said, we have 20 deployed already.

Speaker Change: In various stages of.

Speaker Change: Evaluation at our customers' customers and there's about 30 more planned for the next two quarters.

Speaker Change: So it's starting it's starting to move forward.

Jeff Andreson: I agree. Maybe just one last quick thing. I know first half 25 is probably beyond your good visibility horizon, but do your preliminary customer discussions provide any indication of an acceleration in that timeframe? I would say that

Speaker Change: Okay, Great maybe just one last quick thing I know first half 'twenty five is probably beyond your good visibility horizon, but the euro.

Speaker Change: Preliminary customer discussions provide any indication of an acceleration in that timeframe.

Brian Chin: I would say that it's hard to make the call whether the trajectory will continue or remain flat in the early part of 2025. I would say consistently there's a belief that this is going to be kind of a plus 15% growth, of which a large part will be less. So again, it's been relatively flat this year. So the confidence in next year being a growth year is still there. Exact timing to early to call. Okay, fair enough.

Speaker Change: I would say that.

Jeff Andreson: It's hard to make the call whether the trajectory will continue or remain flat in the early part of 2025. I would say consistently that this is going to be kind of a plus 15 percent growth, of which a large part will be litho. Again, it's been relatively flat this year. So, the confidence in next year being a growth year is still there, but the exact timing is too early to call.

Chris Sankar: Thank you. Our next question comes from Chris. Our next question comes from Chris Sankar. Please proceed with your question. Yeah, hi. I have three questions. There's also one, you know, you kind of spoke a little bit about confidence in next year being a growth year. How do you handicap the impact of what Intel said last week? You know, has that changed your growth profile from next year for Intel? Well, I think, yeah, I mean, obviously, Intel talked about pulling back catbacks. I think I think it obviously will have an impact. The question is, was that already incorporated in some of the outlets that people did?

Operator: Our next question comes from Krish. Our next question comes from Krish Sankar with TD Cowen. Please proceed with your question.

Jeff Andreson: How do you handicap the impact of what Intel said last week? Has that changed your growth profile for next year?

Jeff Andreson: Well, I think, yeah, I mean, obviously, Intel talked about pulling back on the catbacks, I think, I think it obviously will have an impact. The question is, was that already incorporated in some of the outlooks that people did? I think from the analyst community, probably not. But I think, you know, when we think about the second half of the year, we haven't seen any movement that would indicate, you know, the that has impacted this year, but it could possibly.

Jeffrey Andreson: I think from the analyst community, probably not, but I think, you know, when we think about the second half of the year, we haven't seen any movement that would indicate, you know, that has impacted this year. But it could possibly impact the year, obviously, in the fourth quarter, but right now, we're not seeing any significant shifts there. Gotcha.

Jeff Andreson: Thank you for joining us. We appreciate it. Thank you. 4th quarter budget. Right now, we're not seeing any significant change. Gotcha.

Jeff Andreson: I mean, I just want to ask you a different way then, you know, Intel basically gave calendar 25 traffic guidance, which is down 17% year over year. Do you still think WFP growth will happen next year?

Jeffrey Andreson: I mean, I just want to let me ask you a different reason. You know, Intel basically gave a challenge to 25 traffic guidance, which is down 17% year over year. Do you issue big that end? Do you still think WSE growth next year? That is the direction that we're getting. So I mean, obviously, we don't, we don't have the same fab-by-fab market intelligence as many other larger companies have, but I would say we're not hearing a pullback and outlook. So whether it's 15 or it comes down a little bit, you have to be seen and maybe a little bit too early.

Speaker Change: It was down 17% year over year do you is still big that and do you still think that Murphy growth next year.

Jeff Andreson: That is the direction that we're going. So, obviously, we don't have the same fad by fad market intelligence as many other larger companies do, but I would say we're not hearing a pullback in outlook. So whether it's 15 or it comes down a little bit is yet to be seen, and maybe a little bit too early.

Speaker Change: That is that is the direction that we're.

Speaker Change: We're getting so.

Speaker Change: Obviously, we don't.

Speaker Change: We don't have the same fab by fab market intelligence as many other larger companies have but I would say, we're not hearing a pullback and outlook, so whether its 15 or or it comes down a little bit yet to be seen and maybe a little bit too early.

Jeff Andreson: Got it, got it. And I have two other questions, Jeff. You know, last quarter, you kind of spoke about some delays that you saw from leading edge. I'm just kind of curious, where did those end up being taken out? Did they get pushed out further? Are you seeing some of this more? What do you think about that?

Chris Sankar: Got it.

Speaker Change: Got it got it and then two other questions Jeff last quarter, you kind of spoke about.

Jeffrey Andreson: I don't have two other questions. Jeff, you know, last, but we kind of spoke about some easy delays that we saw for Meeting Edge. I'm just kind of curious. I'll read it. Those end up taking out. Do they get to start for this? I think specifically around our EV business. I think Q2 was the low point. We're seeing it grow again. And I would say kind of in the neighborhood of supporting any of the outlooks that have been provided by our customer. So I think that it was a kind of a reflow temporary, and then we see growth again in the second.

Speaker Change: E delays have yourself, a leading edge I'm just kind of cute.

Jeff: Where did those end up taking out does it get pushed out further leasing some of the disposals of how we're thinking about that.

Jeff Andreson: I think specifically around our EOV business, I think Q2 was the low point, and we're seeing it grow again, and I would say kind of in the neighborhood of supporting any of the outlooks that have been provided by our customers. So I think that it was a kind of a reflow, temporary, and then we will see growth again in the second half for sure.

Speaker Change: I think specifically around our <unk> business I think Q2 was the low point, we're seeing it.

Speaker Change: Grow again, and I would say kind of in the neighborhood of supporting any of the outlooks that have been provided.

Speaker Change: By our customer so I think that it was a kind of a re flow temporary and then we see growth again in the second half versus the first half.

Jeffrey Andreson: can have persons of her set. Got it, got it.

Jeff Andreson: Got it, got it. And then a final question, Jeff, you kind of spoke about the new gas panels and said they should have higher growth margins. And if I look at some of those, you know, high proprietary content subsystem component suppliers, we have like 35-40% growth margin. Would these new gas panels just by themselves alone have that higher growth margin? How do you think about the margin for those? Yeah, I mean,

Speaker Change: Got it got it and then a final question, Jeff I know you kind of spoke about a new gas panels and should have a higher gross margin.

Jeffrey Andreson: And then a final question, just you know, you kind of spoke about the new gas finance and should have higher growth margin. And if I look at some of those, you know, I would try to decontent subsystem component suppliers. We have like 35, 40% growth margin. Would these new gas panels just by themselves alone have the higher growth margin? How to think about the margins for those? Yeah, I mean, obviously, we're going to be moving from about 10% internal content to around 80% on some of the initial shipments that we have. So it'll move it into the lower end of that bracket, more than likely.

Jeff Andreson: Yeah, I mean, obviously, we're going to be moving from about 10% internal content to around 80 on some of the initial shipments that we have. So it'll move it into the lower end of that bracket more than likely. But, you know, most of the components bring similar kinds of margin structures if you were to sell them independently.

Jeffrey Andreson: But, you know, most of the components bring similar kind of margin structures if you were to sell them independently. Got it, got it.

Operator: Thank you very much.

Chris Sankar: Thank you very much.

Charles: Thank you. Our next question comes from Charles. I would need a moan co. Please proceed with your question. Hey, Jeff, a question. The first one, what's your thought on man's WFU recovery, the timing of in terms of a getting to that inflection point. Obviously, 25, it looks like you're optimistic about the next year, but any thoughts on when you're going to see that pick up, first half, second half, mid-year, what's the latest thought? I mean, I would tell you that, you know, we're once removed from our customers that are probably closer to it. We don't really see it inflecting now.

Operator: Our next question comes from Charles Shai with Unam Co. Please proceed with your question.

Jeff Andreson: Hey, Jeff, question, the first one: what's your thought on NAND WFP recovery, the timing of In terms of getting to that inflection point, obviously 2025, it looks like you're optimistic about the next year, but any thoughts on when you're going to see that pick up? First half, second half, mid-year? What's the latest thought? Oh, I mean...

Jeff Andreson: Well, I mean, I would tell you that, you know, we're once removed from our customers that are probably closer to it. We don't really see it inflecting now. I would say largely that the assumption is it's all geared around technology transitions, but, you know, I've kind of been saying consistently now for nine months or so that I think it's going to be kind of a mid-year or later. Thank you for joining us today.

Jeffrey Andreson: I would say largely the assumption is it's all geared around technology transitions. But, you know, I've kind of been saying consistently now for nine months or so that I think it's going to be kind of a mid-year later time when they'll start adding new capacity. Got a mid-net all late 25. Sounds like. Yeah. And obviously, we would love it to happen sooner because it's very edge in depth, intense intensity, and so that's very helpful for us. Got it. Yeah, obviously.

Speaker Change: Kind of been saying consistently now for nine months or so that I think it's going to be kind of a mid year later.

Speaker Change: Time, when they will start adding.

Speaker Change: New capacity.

Jeff Andreson: Got a mid or late 25, it sounds like.

Speaker Change: Got it mid or late plenty of Fi sounds like yes.

Jeff Andreson: And obviously, we would love it to happen sooner because it's very etched in depth. Thanks for watching.

Speaker Change: Obviously, we would love it to happen sooner, because it's very etch and depth and.

Speaker Change: Intense intensity and so that's very helpful for us.

Jeff Andreson: Got it. Yeah, yeah, obviously.

Speaker Change: Got it yeah, yeah, obviously.

Charles: Then the other question, I do want to ask more about the UV side of the business because it's an interesting business because your revenue leads, your customers' revenue by half a year. Your customers' revenue probably leads a lot of the depth and edge also by some margin. But I recall a while back, you were saying you don't really see any inflection in a UV-build plan. I mean, the demand coming to you, I see the rest of the year, but do you see any pick up? Because the way you answered the question to Chris, it sounds like you're seeing some improvement, but I just want to clarify with that.

Speaker Change: Then the other question I do want to ask you more about that UE side of the business because it's an interesting business because you're working your revenue leads customers revenue by half a year ago Cosmos revenue probably leads a lot of the dep and etch also by some margin.

Jeff Andreson: Then the other question, I do want to ask more about the EUV side of the business, because it's an interesting business, because your revenue leads your customers' revenue by half a year. Your customers' revenue probably leads a lot of the depth and edge by some margin, too. But I recall a while back you were saying you don't really see any inflection in the EUV build plan. I mean, the demand coming to you, I see the rest of the year, but do you see any pickup? Because the way you answered the question to Krish, it sounds like you're seeing some improvement, but I just want to clarify that.

Speaker Change: But I recall, a while back you were saying you don't really see any inflection in the UV build a plan I mean, the demand coming to you I see the rest of the year, but do you see any pick up because the way you answered the question to Chris It sounds like you're seeing some improvement.

Speaker Change: But I just wanted to clarify with that.

Jeff Andreson: Yeah, hey Charles, good question. I would say half over half. We see it increasing. I think Q2, you know, we saw it kind of modulate down a little bit in Q1 and some in Q2, and so it's going to increase quarter over quarter, I won't tell you how much, but it's going to, the back half of the year will be stronger than the front half of the year. So, you know, I think that lines up with all the other commentary out there.

Jeffrey Andreson: Yeah.

Charles: Hey, Charles. Good question. I would say half over half, we see it increasing. I think Q2, you know, we thought kind of modulate down a little bit in Q1 and hope something Q2. And so it's going to increase quarter over quarter. I won't tell you how much, but it's going to. The back half of the year will be stronger. in the front half of the year. So, you know, I think that lines up with all other commentary out there. So the improvement would you characterise that as more or less like as the sequential improvement or we should we expect some very meaningful inflection to the upside for the UV business.

Speaker Change: Yeah, Hey, Charles Good question, I would say half over half we see it increasing.

Jeff Andreson: So the improvement, would you characterize that as more or less like a sequential improvement, or should we expect some very meaningful inflection to the upside for the UV business? Well, I would say it's more of a function of Q2's dry weather.

Jeff Andreson: Well, I would say it's more of a function of Q2's drop and then kind of going back to some of the volumes that we saw as we exited the fourth quarter. I mean, how that fits into the whole EUV thing. We do more than just EUV, you know, one for one matches; there are some service components and other things that we sell.

Jeffrey Andreson: I would say it's more of a function of Q2's drop and then kind of going back to some of the volumes that we saw as we exited the fourth quarter. I mean, how that fits into the OLEV thing. We do more than just EUV, you know, one-for-one matches. There's some service components and other things that we sell.

Craig Ellis: Thanks, yeah. Our next question comes from Craig Ellis with B. Riley Securities. Please proceed with your question. Yeah, thanks for taking the question and all the color stuff out, guys.

Operator: Our next question comes from Craig Ellis with B. Reilly Securities. Please proceed with your question.

Operator: Yeah, thanks for taking the question and all the colors so far, guys. Jeff, I wanted to start just by following up on a point you made about returning to $250 million to $300 million in quarterly revenues and what I wanted you to understand how you're looking at that. Are customers telling you the business is going to need to be ready to get to those levels? Or are you seeing visibility just coming from some of the improvements you've been talking about as you look deeper into 2025? Or is that just something that's more aspirational for now, but at least things are moving in that direction?

Jeffrey Andreson: Jeff, I wanted to start just by following up on a point you made on returning to 250 million to 300 million in quarterly revenues. And what I want to do to understand how you're looking at that are customers telling you the business is going to need to be ready to get to those levels, or are you seeing this ability just coming from some of the improvement you've been talking about. It should look deeper into 2025 or just something that's more aspirational for now, but at least things are moving in that direction.

Jeffrey Andreson: I want to say yes, yes, and yes, but the answer is, as we look at next year, I think with 3D man not recovering till the second half, it's likely that we could, you know, run sideways for a little bit and then start to inflect again. There's pretty strong strength that we see continued around high bandwidth memory, which we talked about. And I think eight all around is going to continue to drive some incremental boundary logic. So I think, you know, as we look at it, it's not necessarily aspirational, but I think if you get a 15 percent year-over-year growth and it's back half-weighted, you'll see those revenue run rates be pretty close in that area.

Jeff Andreson: I want to say yes, yes, and yes, but the answer is, as we look at next year, I think with 3D NAND not recovering until the second half, it's likely that we could run sideways for a little bit and then start to inflect again. There's pretty strong strength that we see continued around high bandwidth memory, which we talked about, and I think GATE all around is going to continue to drive some incremental boundary logic.

Speaker Change: Strong strength that we see continued.

Speaker Change: High bandwidth memory, which we talked about and I think gate all around is going to continue.

Speaker Change: To drive some incremental found.

Speaker Change: Foundry and logic, so I think as we.

Jeff Andreson: So I think, you know, as we look at it, it's not necessarily aspirational, but I think if you get a 15% year-over-year growth and it's back half-weighted, you'll see those revenue run rates be pretty close to that.

Speaker Change: We look at it it's not necessarily aspirational, but I think if you get a 15% year over year growth and its back half weighted youll see those revenue run rates would be pretty close in that area.

Craig Ellis: That's real helpful.

Jeff Andreson: That's really helpful. And then the second question, and it's much more of a near-term question, and it may have been implicitly answered in some of your commentary, but earlier this year, you expressed some concern about inventory levels at some of your customers and that being a headwind for sequential gains in the business. Has that issue been resolved, or where do we stand with inventory for different customers? It's fitness for the demand that there is.

Speaker Change: That's real helpful. And then the second question and it's much more of a near term question and it may have been in.

Greg Swyt: And then the second question, and it's much more of a near-term question, and it may have been implicitly answered in some of your commentary. But earlier this year, you'd expressed some concern about inventory levels that some of your customers, and that being a headwind for sequential gains in the business. Has that issue resolved, or where do we stand with inventory at different customers and its fitness for the demand that they're seeing?

Speaker Change: Implicitly answered in some of your commentary, but earlier. This year you had expressed some concern about inventory levels at some of your customers and that being a headwind for sequential gains in the business is that issue resolved or where do we stand with inventory yet different.

Speaker Change: Customers and.

Speaker Change: Fitness for the demand that they're seeing.

Greg Swyt: Yeah, I won't talk specifically at customers. I think that it's not an all-for-one. We're seeing things be resolved in every turn back to normal ordering patterns going forward. But what I would tell you is that when you look at the business of Business. I would say art; we typically would have seen some surge in our component business already. We still haven't seen that. I'd say it's still muted from where we expected entering the year, where we're going to exit the year. And so our gas panel business has actually grown. I would say slightly gas panel.

Jeff Andreson: Yeah, I won't talk specifically to customers. I think that it's not an all for one thing.

Speaker Change: Yeah, I won't talk specifically at customers I think that it's not an all for one we're seeing things be resolved and every parent.

Jeff Andreson: We're seeing things get resolved and turned back to normal ordering patterns going forward. But what I would tell you is that when you look at the business, I would say we typically would have seen some surge in our component business already. We still haven't seen that.

Speaker Change: Turned back to normal ordering.

Speaker Change: Patterns going forward, but what I would tell you is is that when you look at the business.

Speaker Change: I'd say our we.

Jeff Andreson: I'd say it's still muted from where we expected entering the year where we're going to exit the year. And so our gas panel business is actually growing, I would say, slightly gas panel, I'll call it integration, which includes our chemical delivery too, slightly above WFE growth this year. So the strength has really been in the integration.

Greg Swyt: I'll call it integration, which includes our chemical delivery too, slightly above WFP growth this year. So the strength has really been in the integration side.

Greg Swyt: Yeah, and so you're getting some of this nice gross margin improvement without significantly higher weldments or precision machining mix, but you could get that next year. And so what does that mean for how significantly gross margin can arise next year? Well, as you look at it, I think the flow through on relatively flat revenue is about $2 million. So you know, that's a pretty healthy percentage. I'll start to calculate on a revenue basis, but it'll help accelerate that because those are higher-margin products. You have the infrastructure in place. So kind of the incremental margins are probably in weldments maybe around the high 20s, and machining can start probably in the mid 30s and go up to around 40 or so.

Jeff Andreson: Yeah, and so you're getting some of this nice gross margin improvement without significantly higher weldments or precision machining mix, but you could get that next year. And so what does that mean for how significantly gross margin can rise next year?

Jeff Andreson: Well, you know, as you look at it, I think the flow-through on relatively flat revenue is about $2 million. So, you know, that's a pretty healthy percentage. Well, it's hard to calculate on a revenue basis, but it'll help accelerate that because those are higher-margin products. You have the infrastructure in place, so kind of the incremental margins are probably in the high 20s, and machining can start probably in the mid-30s and go up to around 40 or so. So they'll be helpful once that inventory normalizes.

Greg Swyt: So they'll be helpful once that inventory normalizes.

Christian Schwab: Thanks for all the college. Good luck. Our next question comes from Christian Schlob with Craig Howell. Please proceed with your question. Great. Thanks for taking my question. I just heard the EV silicon carbide side. Can you quantify that? Give us an idea of what that business is doing to strong in, you know, a second half of 23, what it's doing now and what it could recover to back to those type of levels in 25. So we just have an idea of the order of magnitude. Well, I'm not sure we've ever cited specifically, but I'll give you some relative growth patterns.

Operator: Thanks for all the college help. Good luck!

Operator: Thank you. Good luck. Good luck, Craig.

Operator: Our next question comes from Christian Schwab with Craig Allum. Please proceed with your question.

Operator: Great, thanks for taking my question. Just on the EV silicon carbide side, can you quantify that? Give us an idea of what that business was doing very well in, you know, the second half of 23, what it's doing now, and what it could recover to back to those type of levels in 25. So we just have an idea of the order of magnitude.

Jeff Andreson: Well, I'm not sure we've ever cited them specifically, but I'll give you some relative growth patterns. I would say when we first started delivering gas panels, it was about mid-year in 23.

Jeffrey Andreson: I would say when we first to start delivering gas panels, it was about mid year and 23. We expected that to naturally double. So it was kind of running at a relatively flat run rate. And that has kind of fallen off. And I would say both this year is probably going to be somewhere between 25% and say 50%, depending on if we see a fourth quarter recovery. So it's dipped down in the second half of this year. But I expect it to return back at least to where we started. Our customer will be adding more customers, but there's clearly a digestion period going on.

Jeff Andreson: We expected that to naturally double, so it was kind of running at a relatively flat run rate. And that has kind of fallen off, and I would say growth this year is probably going to be somewhere between 25 and, say, 50 percent, depending on whether we see a fourth quarter recovery. So it's dipped down in the second half of this year, but I expect it to return back at least to where we started. Our customers will be adding more customers, but there's clearly a digestion period going on.

Christian Schwab: And your revenue in China, so the Silicon Carbide EV strength that you're talking about, predominantly driven by European manufacturers, should not sell in broadly that you're aware of inside of domestic China. Is that fair? No, we we we sell to a process tool manufacturer and they they sell it on. We don't actually know the actual end-use customer. So I couldn't tell you specifically who their customers are. Okay, and all right, great. That's very helpful. No other questions. Thank you. All right, Christian.

Jeff Andreson: And your revenue in China, so the silicon carbide EV straight that you're talking about, predominantly driven by European manufacturers, you're not selling broadly that you're aware of inside of domestic China, is that fair? No, we sell to a process store.

Speaker Change: China for the Silicon carbide, EV straighten that youre talking about predominantly driven by European manufacturers.

Speaker Change: So it's broadly that you're aware of insight into domestic China is that fair.

Jeff Andreson: No, we sell to a process tool manufacturer, and they sell it on. We don't actually know the actual end-use customers, so I couldn't tell you specifically who their customers are.

Speaker Change: We sell to a process tool manufacturer and then they sell it on we don't actually know the actual end user customers. So I Couldnt tell you.

Speaker Change: Specifically, who their customers are.

Speaker Change: Okay.

Speaker Change: And alright, great.

Operator: That's very helpful. No other questions. Thank you.

That's very helpful. No other questions. Thank you.

Operator: All right, Christian. Thank you.

Christian: Alright Christian thank you.

Thomas Diffely: Thank you. Our next question comes from Thomas Diffely with DA Davidson. Please proceed with your question. Yes, good afternoon. First to follow up on Craig's question early on the margins. When we look at getting back to the 250-300 range, what is the incremental margin from today, assuming, you know, it's constant next before all the new products come into play? It would probably be somewhat dependent on the next 20 or 22 percent at the high end.

Operator: Our next question comes from Tom Diffely with D.A. Davidson. Please proceed with your question.

Speaker Change: Our next question comes from Tom <unk> with D. A Davidson. Please proceed with your question.

Operator: Yes, good afternoon. First, a follow-up to Craig's question earlier on the margins. When we look at getting back to the 250-300 range, what is the incremental margin from today assuming, you know, just constant mix before all of the new products come into play?

Tom: Yes. Good afternoon, maybe first a follow up on Craig's question earlier on the margins when we look at getting back to the $2 5300 range. What is the incremental margin from today, assuming constant mix before all of the new products come into play.

Jeff Andreson: It would probably be somewhere, depending on the mix, 20 or 22% at the high end. It'll be north of 25% as you bring new products in, I would think.

Speaker Change: It would probably.

Speaker Change: Be somewhat dependent on the mix 20 or 22% at the high end.

Jeffrey Andreson: It'll be north of 25 as you bring new products in as how I would think of it. Okay, and Jeff, when we look at the new gas panel, the next generation gas panel is 80 percent of your own components. Does this require your customers to have a ramping new product, or is this going to be placed in existing OEM products that are going up the door? I would say initially it's the most of this is focused on new product introductions, intersecting a new tool going out; having said that. The passive products that we have substrates, seals, fittings, all of this is backward compatible and valves.

Speaker Change: It'll be north of 25, as you bring new products and that's how I would think of it.

Jeff Andreson: Okay, then Jeff, when we look at the new gas panel, the next generation gas panel with 80% of your own components, does this require your customers to have a ramping new product? Or is this going to be placed in existing OEM products that are going out the door?

Jeff Andreson: I would say, initially, most of this is focused on new product introductions, with a new tool going out. Having said that, the passive products that we have, substrate, seals, fittings, all of this is backward compatible, and valves. So those are being integrated into the gas panels today and being delivered. So it's a combination of both, Tom.

Jeffrey Andreson: So those are being integrated on the gas panels today and being delivered. So it's a combination of both. Okay, so when you look out to the next generation gas panel at 70 percent content, in your mind is that a two to three year level of adoption or two to three year time to get it across most of the gas cells? Yeah, because you're incorporating the new mass flow controller, these things will be qualified customer by customer, our customers as well and their customers as well. And I think, so I think it is a multi-year ramp.

Jeff Andreson: Okay, so when you look out at the Next Generation Gas Panel itself, with 80% content, in your mind, is that a two to three year level of adoption or a two to three year time frame to get it across most of the gas?

Jeff Andreson: You know, because you're incorporating the new Mass Flow Controller, these things will be qualified customer by customer, our customers as well as their customers as well, and I think, so I think it is a multi-year ramp. I don't think that we believe that we'll be the sole source of all gas panels, so, you know, as we talked about. In the past, you don't need a tremendous amount of penetration into the gas panel market to really move the needle and get into that kind of our model, the target model for revenue of 19 to 20...

Thomas Diffely: I don't think that we believe that will be the sole source of all gas panels. So you know, as we talked about in the past, do you need a tremendous amount of penetration into the gas panel market to really move our needle and get into that kind of our model target model for revenue of 19 to 20. No, very helpful.

Jeff Andreson: Okay, no, but very helpful. Thanks, Jeff.

Thomas Diffely: Thanks, Jeff.

Operator: Thanks, Tom. There are no further questions at this time.

Jeff Andreson: There are no further questions at this time. I would now like to turn the floor back over to Jeff Andreson for closing comments.

Jeffrey Andreson: I would now like to turn the floor back over to Jeff and for closing comments. I want to thank you for joining us on our call this quarter. I'd like to thank our employees and suppliers, customers, and investors for their ongoing dedication and support. We look forward to the opportunity to meet with investors during the third quarter, including at the upcoming virtual and Medium Semiconductor Conference, as well as the Jefferies Investor Conference in Chicago. Please feel free to reach out to Claire directly to follow up with us.

Jeff Andreson: I want to thank you for joining us on our call this quarter. I'd also like to thank our employees and suppliers, customers, and investors for their ongoing dedication and support. We look forward to the opportunity to meet with investors during the third quarter, including at the upcoming virtual Needham Semiconductor Conference, as well as the Jeffries Investor Conference in Chicago. Please feel free to reach out to Claire directly to follow up with us. We look forward to updating you on our Q3 earnings call scheduled for early November. Operator, that concludes our call.

Jeffrey Andreson: We look forward to updating you on our Q3 earnings call scheduled for early November.

Operator: Operator, that concludes our call. You may now disconnect your lines at this time. Thank you for your participation.

Operator: You may now disconnect your lines at this time. Thank you for your participation.

Operator: BF-WATCH TV 2021 BF-WATCH TV 2021 BF-WATCH TV 2021 Thanks for watching!

Speaker Change: [music].

Speaker Change: Yeah.

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