Q1 2025 Ichor Holdings Ltd Earnings Call
Speaker Change: Good day ladies and gentlemen and welcome to I-Core's first quarter, 2025 Ernest Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-answer session and instructions will be given at that time.
Speaker Change: Please go ahead.
Speaker Change: Thank you operator, good afternoon, and thank you for joining today's first quarter 2025 conference call.
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.
Speaker Change: Many of which are beyond our control and which could cause actual results to differ materially from such statements.
Speaker Change: These risks and uncertainties include those spelled out in our earnings press release.
Speaker Change: Those described in our annual report on Form 10-K for fiscal year, 'twenty 'twenty four and there.
Speaker Change: As described in subsequent filings with the FCC.
Speaker Change: You should consider all forward looking statements in light of those and other risks and uncertainties.
Speaker Change: Additionally, we will be providing certain non-GAAP financial measures. During this conference call are.
Speaker Change: Our earnings press release, and the financial supplement posted to our IR web site. Each provide a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures.
Speaker Change: On the call with me today are Jeff Henderson, our CEO and Greg White, our CFO Jeff.
Speaker Change: Jeff will begin with an update on our business and then Greg will provide additional details about our results and guidance.
Speaker Change: After their prepared remarks, we will open the line for questions.
Speaker Change: Now I'll turn over the call to Geoff Andreessen, Jeff.
Geoff Andreessen: Thank you Claire and welcome everyone to our Q1 earnings call. Thanks for joining us today.
Geoff Andreessen: First quarter revenues came in right around the midpoint of our expectations, reflecting that the overall customer demand environment has remained relatively consistent since our last earnings call.
Geoff Andreessen: To date, there has been little change to the expectation that 2025 will be a modest growth year for wafer fab equipment or W. F E and our Q1 revenues were up 5% sequentially from Q4 and grew 21% over the same period last year.
Geoff Andreessen: Given our visibility today, we continue to expect our revenue growth. This year will outperform overall W. FTE growth in 2025.
Speaker Change: On the gross margin side first of all let me say that we fully acknowledge that our track record Guy didn't expected improvements in gross margin has been impacted by excursions one too many times at this point.
Speaker Change: In evaluating our results for the first quarter, we too found it challenging to fully understand why our increasing momentum and integrating internally source component has not resulted in more meaningful improvement to our gross margin profile.
Speaker Change: The best way to capture the lower than expected flow through in our Q1 gross margin performance.
Speaker Change: Best summed up as growing pains.
Speaker Change: Once our internal supply is fully up to speed, we will see the benefits of the new product wins through the P&L.
Speaker Change: Our strategy is working the qualifications are continuing and the impactful materialized as we progress forward.
Speaker Change: In Q1, our strategy did not materialize into the margin flow through we anticipated essentially because we ended up purchasing far more external supply than we had forecast.
Speaker Change: So why did that happen.
Speaker Change: Is internally sourced products become a more significant portion of our bill of materials.
Speaker Change: Must improve our processes for the management of the inventory levels needed prior to inserting these components into our manufacturing pipeline.
Speaker Change: In the first quarter the impact of the slower inventory build in the fourth quarter combined with other machine components ramping at the same time.
Speaker Change: <unk> and the need to buy more external supply in order to fulfill our gas panel deliveries and the early part of the quarter.
Speaker Change: Why this resulted in low twenty's gross margin flow through well below expectations is because our strategy is to share a portion of the component cost savings with our customers and therefore, when we purchase more external supply instead of using our own components expected flow through didn't materialize.
Speaker Change: This impact accounts for about two thirds of our gross margin Miss.
Speaker Change: Do you want.
Speaker Change: Most of the remainder of the gross margin impacts came in our non semi business.
Speaker Change: We were awarded a new contract in the commercial space market that began shipments in the quarter.
Speaker Change: As we move from pilot to production. It was determined that a redesign some aspects of the park was required and this resulted in a push out of revenue as well as incurring higher costs than expected, but these initial deliveries.
Speaker Change: And lastly, during the quarter, we made the decision to exit our refurbishment business in Scotland.
Speaker Change: The demand for products, we were license to refurbish declined to a level to low to sustain the operation and exiting this business had a slight impact on both revenue and gross margin in Q1.
Speaker Change: As we look ahead, we have identified what has made an accurate prediction of our gross margin such a challenge over the last several quarters.
Speaker Change: As we build in the processes that better gauge, both the pricing and the cost sides of the equation.
Speaker Change: We are confident you will see a longer term trend developing and how we demonstrate progress towards our gross margin targets.
Speaker Change: Which brings me to an update on our progress in qualifying our proprietary product.
Speaker Change: Which are chiefly comprised of certain components used in our existing gas panel business.
Speaker Change: As well as our next generation gas panel.
Speaker Change: We achieved a significant number of new component qualifications in 2024, and we expect these qualifications to convert into more meaningful internal supply within our gas panel business.
Speaker Change: As we progress through 2025.
As stated previously the increased use of our proprietary internally source components is a key driver to our strategies for gross margin expansion.
Speaker Change: Well 2024 marked a successful year for qualification our work continues.
Speaker Change: As stated before three of our major process tool customers have already qualified our substrate.
Speaker Change: Incorporated into our gas plant.
Speaker Change: Today, we are pleased to announce a fourth customer will incorporate our substrates into their next generation products as they transition to surface Mount technology.
Speaker Change: This same customer will also be incorporating our valve products. Upon successful qualification later this year.
Speaker Change: Last quarter, we announced the second customer qualification for our valves product line we.
Speaker Change: We expect to complete valve qualifications for a third customer this summer as well as the four substrate customer just messing as anticipated by year end.
Speaker Change: For fittings, we announced two customer qualifications in 'twenty 'twenty, four and a third customer qualification remains in the final stages today.
Speaker Change: We likewise are progressing on our fourth qualification for fittings product lines used in our Weldment business, which we expect to achieve later in the second half.
Speaker Change: The key takeaway of our component qualification progress is that by the end of 2025, we expect to have all four of our largest customers qualified on all three of our major product families valves fittings, and substrates, which will mark a significant milestone for <unk>.
Speaker Change: Business. Additionally.
Speaker Change: Additionally, we have several exciting new products under development.
Speaker Change: Scheduled for raise later release this year, enabling us to expand our share of the addressable market of our components.
Speaker Change: Now I'd like to discuss the outlook, we are providing today given the complexities of recent tariff announcements.
Speaker Change: In general today, we are affected by the steel and aluminum section 232 tariffs for certain inbound material to the U S.
Speaker Change: Our Mexico machining business falls under the U S M C a exemption as of today.
Speaker Change: We are working with our suppliers and customers to mitigate <unk> pass on the cost of these tariffs.
Speaker Change: There could be some transitory impacts on our gross margin as we work through the processes and customer discussions to incorporate the additional cost of tariffs and their relative impact on total supply chain costs.
Speaker Change: The final decisions on the semiconductor export controls and tariffs are expected to be issued early this summer.
Speaker Change: Obviously, there is a large range of outcomes, but we will not speculate on the outcome today.
Speaker Change: As we look at our revenue guidance for the second quarter.
Speaker Change: Between 225 and $245 million this is about $10 million lower than what our visibility dictated a quarter ago.
Speaker Change: The lower forecast is not attributable to one particular change in demand.
Speaker Change: But rather several small factors.
Speaker Change: For example, one customer forecast was recently affected when a domestic device manufacturer began to slow their ws he purchases in advance of understanding the broader implications of various tariff policy.
Speaker Change: At the same time, the delivery timelines within lithography and advanced packaging, that's seen some shifting to the right.
Speaker Change: Silicon carbide applications have weakened further.
Speaker Change: This appears to be affecting each of our OEM customers differently, depending on customer and end market exposure and there's absolutely no question that our primary markets, leading edge foundry and high bandwidth memory.
Speaker Change: As well as technology upgrades for NAND continue to move forward on schedule.
Speaker Change: We have not further handicapped our Q2 revenue guidance to account for additional adverse demand impacts that could result from the tariff policy.
Speaker Change: Other than what our customers have already incorporated into our visibility.
Speaker Change: Our visibility is somewhat shorter in duration than where we were on our last earnings call, meaning that this time, we have a good feel for the first half but less confident.
Speaker Change: <unk> and exactly how the second half will shake out.
Speaker Change: At this time, we think our business in 2025 should be relatively even weighted first half to second half but.
Speaker Change: But I will remind everyone that this is the visibility we have today.
Speaker Change: Before turning the call over to Greg a few last comments about gross margin.
Speaker Change: First I wanted to provide a bit more context.
Speaker Change: As to the level of proprietary content, we expect to achieve this year.
Speaker Change: As a reminder, prior to stepping up our R&D investment in launching our new products.
Speaker Change: About 90% of the bill of materials for our gas panels with sourced externally.
Speaker Change: And 'twenty 'twenty four we were able to shrink that by about 5% and 2025. We believe we can make further progress towards reducing external supply down to approximately 75% of the bill of materials.
Speaker Change: This is meaningful progress, but there is still much more progress being made.
Speaker Change: The most leverage will eventually come from increasing penetration of our next generation gas panel, which has roughly 30% external parts and 70% internal.
Speaker Change: These gas panels incorporate a proprietary flow control technology.
Many of the next generation gas panels delivered to date are currently undergoing qualification with and device manufacturers.
These qualifications are particularly important as they represent the first end user qualifications for our proprietary flow control technology.
Speaker Change: Which constitutes the largest portion of our bill of materials.
Speaker Change: The longest qualification cycle.
Speaker Change: Another critical milestone for ichor.
Speaker Change: It is not realistic to think that we will be able to move 100% of our gas panels to the eye core proprietary version, but we expect to continue to make incremental progress.
Speaker Change: The most immediate and significant impact.
Speaker Change: Should see to our gross margin profile will be as we move from the roughly 15% proprietary content.
Speaker Change: In 2024 towards around the 25% level in 2025.
Speaker Change: Q1, we didn't achieve that flow through we anticipated due to purchasing far more external supplies and forecast.
Speaker Change: But as our processes improve and we work through these growing pains, we still expect to show incremental improvements to gross margin through each quarter of the year, even on similar revenue levels.
Speaker Change: In February we were confident that our gross margins for the full year would exceed 6%.
Speaker Change: They were backing off that absolute number which is currently prudent in response to the tariff uncertainties as well as the impact of the Q1 Miss.
Speaker Change: But that said, we currently expect our second half gross margin will be in the 15% to 16% range.
Speaker Change: With that I.
Speaker Change: I'll turn it over to Greg to recap, our Q1 results and provide further further details around our financial outlook Greg.
Greg White: Thanks, Jeff.
Greg White: To begin I would like to emphasize that the P&L metrics discussed today are non-GAAP measures.
Greg White: These measures exclude the impact of share based compensation amortization of acquired intangible assets nonrecurring charges and discrete tax items and adjustments.
Greg White: 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 <unk>.
Greg White: Last several quarters.
Greg White: First quarter revenues were $244 $5 million near the midpoint of guidance and up 5% from Q4.
Greg White: The gross margin for the quarter was 12, 4% an increase of 40 basis points from Q4, but below our forecast of 14, 5%.
Greg White: As Jeff discussed the gross margins were negatively affected by several factors.
Greg White: Primarily the slower transition from externally supplied products to our internally manufactured products as.
Greg White: As well as higher costs associated with the redesign efforts of our commercial space contract.
Greg White: The decision to exit our refurbishment business in Scotland.
Greg White: Operating expenses came in at 23.7.
Greg White: In line with our expectations operating income for Q1 were $6 $6 million.
Greg White: Our net interest expense was $1 $6 million and our non-GAAP net income tax expense was below our forecast at $600000.
Greg White: The resulting EPS was 12.
Greg White: Sure.
Greg White: Turning to the balance sheet, our cash and equivalents totaled $109 million at the end of the quarter up slightly from year end.
Greg White: We generated $19 million in cash flow from operations after deducting $18 $5 million and capital expenditures, our free cash flow was $500000.
Greg White: Our planned Capex investments for 2025 are expected to be above our historical average of 2% of revenue as we execute our global expansion of our machining and non semi business the capabilities.
Greg White: We estimate our 2025 capex will be closer to 4% of revenue and be front half weighted.
Greg White: Our total debt at quarter end was $127 million and our net debt coverage ratio has now improved to just 1.5 times well below any potential threshold for covenants.
Greg White: Now I'll discuss our guidance for the second quarter of 2025.
Greg White: With anticipated revenues in the range of $225 million to $245 million. We expect our Q2 gross margins will improve to a range of 12.5% to 14%.
Greg White: We expect Q2 operating expenses to be approximately $23 $5 million or roughly flat to Q1.
Greg White: We expect our Opex run rate will moderate moderate somewhat in the second half of the year, leading us to expect our year over year increase in operating expenses to be somewhat lower than communicated previously and in the range of about 4% to 6% increase compared to 2024.
Greg White: Net interest expense for Q2 is expected to be approximately $1 $5 million.
Greg White: For modeling purposes, you should model net interest expense for the full year of 2025 to be approximately $6 million.
Greg White: We expect to record a tax expense in Q2 of $800000 for the full year, we are forecasting a non-GAAP effective tax rate of 12, 5%.
Greg White: Finally, our EPS guidance range for Q2 of 10 to 22 cents reflects a share count of <unk>.
Greg White: $34 4 million shares.
Greg White: Operator, we are ready to take questions. Please open the line.
Greg White: Thank you we will now be conducting a question and answer session.
Speaker Change: I'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. You May press star two to remove yourself from the queue for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star keys.
Greg White: One moment, while we poll for questions.
Speaker Change: And our first question comes from Brian Chin with Stifel. Please proceed with your question.
Brian Chin: Good afternoon.
Speaker Change: Thanks, Blake is asking a few questions maybe the first one on.
Speaker Change: Did the change in the revenue outlook for the year.
Speaker Change: Hum understanding kind of what you said Jeff about.
Speaker Change: A couple of different factors.
Speaker Change: Sort of adding up there if you tried to isolate this on the four buckets of NAND DRAM.
Speaker Change: Advanced logic in the church semi which of these do you think is incrementally more cautious relative to your thinking 90 days ago for <unk> and maybe even second half visibility.
Speaker Change: Yeah, I would actually I think of it a little bit differently and I'll come back to the segments, but I think the way you guys should think about this as etch and deposition for us are generally.
Speaker Change: Same kind of outlook as we came in I would say were softer in.
Speaker Change: In our lithography business today, but more than half of this is coming out of our decision to exit Scotland.
Speaker Change: Softer non semi business that we see not ramping as fast in the first half which affects the whole year and then silicon carbide.
Speaker Change: And so that's much much softer almost to the point, where it's most of it has shifted into 2026, so from a dep and etch.
Speaker Change:
Speaker Change:
Speaker Change: It's stable and if you if you kind of look at the flat half over half, it's really about $30 million.
Speaker Change: And I would say more than half of that is kind of what I would call kind of outside of our core dep and etch business. So it's largely stayed the same but like we said we have these pockets that.
Speaker Change: Softened up.
Speaker Change: So that's kind of what I would tell you that from a segment point of view as we.
Speaker Change: We see the same visibility from what we can tell that the NAND investment is continuing that DRAM is strong around it you know.
Speaker Change: Uh Huh, AI and others and foundry logic is relatively stable maybe with the exception of one North America OEM, that's kind of rationalizing their capex.
Speaker Change: Got it got it okay.
Speaker Change: And then maybe sort of even one question follow ups around gross margins and then you know that the tariffs, which is I know not yet fully quantifiable at this moment, but.
Speaker Change: In terms of the execution in Q1 on the gross margin.
Speaker Change: Internalization of some of those components.
Speaker Change: Out of 100% how how.
Speaker Change: What do you expect it to execute what percent did you actually execute on it in terms of the internal sourcing and then.
Speaker Change: I know, we're a month into the second quarter, but how much progress have you already seen here to start the quarter to give you confidence that you know, it's sort of back on a better trajectory.
Speaker Change: Yeah, I would say.
Speaker Change: I'm just trying to think I mean, the shortfall some of it started last quarter materialized into this quarter in the by the early part of the quarter. We knew we would have to buy some external supply because we couldn't get we couldn't get caught up versus what we exited last quarter. We were trying to so I'd probably say we got.
Speaker Change: I'll leave it or not maybe 75 or 80% of what we wanted out of there.
Speaker Change: Of the new stuff Weldment fine that's always that's that's been 10% of the gas box and that Didnt have any hiccups in the quarter. So.
Speaker Change: I think we still see some external purchases into the into our second quarter, which we've incorporated into our outlook.
Speaker Change: I think that the head count we need to kind of ramp this and doing that is starting to turn the corner and we are.
Speaker Change: Have much better alignment between keep in mind. Some of these parts that we manufacturers. These are tens of thousands of parts that precision machine parts. So we had some disconnects between what we were able to get out of the factory and what we needed to buy so I think you know from a confidence.
Speaker Change: There is some.
Speaker Change: There is still a little bit of a headwind that we've incorporated into the next quarter and then we kind of talked about the second half of the year being in that 15 16, you're starting to see the flow through even on flat revenue.
Speaker Change: Revenue levels, increasing again, so you guys said on the call I think the strategy is working we're still kind of growing pains and executing to get all of this aligned.
Speaker Change: Through our factories and you know we have three large integration site.
Speaker Change: Got it and I, just just to close out I imagine when you have to sort of no resource or increase a source of some of your suppliers, maybe it sound that now.
Speaker Change: And on the best terms and in terms of that short window, but it sounds like overall the.
Speaker Change: The qualifications and the cut ins are kind of progressing as you expected or just sort of.
Your ability to catch up in an efficient way, what's that I'd almost yeah, Brian that's a good point I mean, I don't want to say that they were they came out of the gate a little stronger than we were ready for it. So I think they're progressing even as well as we thought and maybe a little bit better.
Speaker Change: So alright, thank you.
Speaker Change: Thank you.
Speaker Change: And our next question comes from the line of Krishna Shankar with TD Cowen. Please proceed with your question.
Speaker Change: Yeah, Hi, Thanks for taking my question I ask you then just supposed to dwell on this too.
It's probably the gross margin.
Speaker Change: Growing pains are you seeing customers trying to do.
Speaker Change: As shown the tightest pause until they felt like it was like.
Speaker Change: You all know that has not been a factor yet.
Speaker Change: I would say, where we're fortunate enough in my earlier comments that our factory in Mexico. As example through the U S. M. C. A exemption I'd say, the 90 day exemption for semiconductors and Capex has gotten.
Speaker Change: Most of ours covered I think the area that we're most exposed at today, it's as sections 232, which is really around steel. It really is our weldment business that shifts back to the U S and so we're still working on that process to push that through pricing and things like that so we like we.
Said, we might see some transitory we're hoping that.
Speaker Change: We can get all of this stuff worked out between our customers and ourselves I think our customers truly understand what split with what's happened here I think there's a pretty good.
Speaker Change: Collaboration at this point to help them and help us through this so I think it's I think it's moving it's moving in the right direction.
Speaker Change: And so some of the other.
Speaker Change: Customer is it can you like ship stuff for me a militia D can mitigate the status of it doesn't work that didn't go to big customers out in the U S.
Speaker Change: Also have systems these overseas.
Speaker Change: Yeah, all of our customers.
Speaker Change: Have.
Speaker Change: Facilities overseas and I would say.
Speaker Change: We have kind of a natural hedge that we could affect dependent on how the tariffs workout and pass throughs. The cost of building in the U S versus Malaysia, they might be closer than you think between tariffs and no tariffs, but until there's kind of a final agreements country by country. Obviously, you know we have one large customer.
Speaker Change: That manufacturers.
Speaker Change: Most all of their assistance now I'm sure we can support them slowly.
Speaker Change: And then one customer that's probably built well I won't say what percentage, but a very large proportion that we service out of Singapore. So.
Speaker Change: So I think and our fourth largest customers largely.
Speaker Change: Singapore based operation to so.
Speaker Change: Bit less of an impact for that.
Speaker Change: Got it got it and then final question if I understand that there's so many moving parts the status in the macro but it.
Speaker Change: They call them fighting sticking out some I guess, what's the what do you still have pretty healthy growth literally it looks like 13, certainly wasn't feasible for you guys.
Speaker Change: Yeah.
Speaker Change: Our visibility is getting about four to five months. So I'm just kind of curious when you look into that is it fair view.
Speaker Change: That is the strength for you in calendar Q2, and your conviction on kind of the kids are coming from is it just the leading edge any colors on that.
Speaker Change: Yeah, I mean, we obviously, we don't get all the sell through it but I would say NAND still pretty strong I'd say, obviously, we are we can see DRAM strength.
Speaker Change: I'd say, we could see that into the third quarter I'd say.
Speaker Change: Our lithography business is probably trough in the second quarter. So that'll kind of start we believe kind of start growing in the second half obviously you.
Speaker Change: You know we have four large customers with kind of different outlooks and so but I would tell you is we're very closely mirror to all of our process tool customers and what they're seeing out there.
Speaker Change: We do build ahead of when they revenue and things like that but yeah, we still see the strength in Q2 around of the Dep and etch side, which is really driven by you know.
Speaker Change: The investments in foundry logic, NAND upgrades and and.
Speaker Change: In DRAM.
Speaker Change: Thanks, a lot. Thank you.
Speaker Change: You bet Chris.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Charles <unk> with Needham and company.
Speaker Change: Please proceed with your question.
Charles: Hey, good afternoon.
Speaker Change: Yes, Greg.
Obviously I think you will get this question a lot if you if you have it.
Speaker Change: Your largest customer is guiding to a softer second half of the year. Obviously, we don't know if they just want to be conservative or that's the two I look at what they are seeing but it sounds like you are.
Speaker Change: Now for I mean, anticipating maybe a second half will be flattish half over half.
Speaker Change: Well, what do you think that will.
Speaker Change: It will be in a disconnect between what you see and what that what that largest customer is the guiding everyone to I E.
Speaker Change: Terms of the second half thank you.
Speaker Change: Yeah, well it's good.
Speaker Change: Good question I mean, we did anticipate that we might get this I I would tell you that we're pretty we're pretty mirrored with our customers and our customers all have different.
Speaker Change: Trajectories front half second half, but I would tell you is we.
Speaker Change: We believe the second quarter is the low point for us in our U V and lithography products, so that offsets semi will get stronger.
Speaker Change: In the second half so we have natural kind of offsets for anything that they they see and forecast I won't comment specifically, what we see from them obviously.
Speaker Change: But I would tell you we don't see any significant disconnect a front half to back half from what our customers are talking about in the marketplaces as well.
Speaker Change: And then the other thing I might point out Charles is that and I don't know the exact percentages, but our largest customer and our second largest customer within a few percentage points.
Speaker Change:
Speaker Change: Okay.
Speaker Change: And so we have to really pretty large for us.
Speaker Change: Uh huh.
Speaker Change: Yeah, Yeah got it got it got it got it I.
Speaker Change: I Gotta go point about that the second and not being too far behind on that.
Speaker Change: Yeah.
Speaker Change: So, Jeff maybe and maybe another question.
Speaker Change: I do want to come back to one thing it's that I bet that regarding the approach ace I'd like to turn a resource that components.
Speaker Change: Was this something kind of really caught you off the guard.
Speaker Change: Something really surprised you there.
Speaker Change:
Speaker Change: Talking about ended up but they wanted a more kind of stuff.
Speaker Change: I thought that this is something.
Speaker Change: Well, well Cosmo has to qualify even maybe what customers need.
You need to qualify it at the conclusion was made a long time ago.
Speaker Change: And that's why this is happening and if any additional color you can provide us and as.
Speaker Change: We do want to know whether this is a temporary setback or or or or maybe would you have to think of this is that it's going to be very we need to think about different right.
Speaker Change: Rate of adoption for your fully internally sourced components. Thank you.
Speaker Change: Yeah actually Charles I think it's a good question and hopefully I can help add a lot of clarity here. One is I think the demand for our products and qualification says is in line if not a little stronger or are challenges lining that up with making sure that it gets delivered on time.
Speaker Change: Two our integration sites and that's where we had the challenges. So it's not from a demand point of view, it's really from the supply point of view, we don't have customers, saying don't buy our stuff once youre qualified.
Speaker Change: We have Oh, we can go fully and cut it in and use our supply. We can also use external supply obviously that because we had to do that to fill in our gaps, but we do not have any months dictate to us what we can or cannot use stage. So.
Speaker Change: These are passive parts. So once theyre qualified we can use them across all our product lines. So that's not the problem. The problem was getting our supply up quick enough to cut in in advance of we made the decision at a pricing level, we share some of the benefits of in sourcing with our customers.
Speaker Change: And maintain a lot of the margin accretion internally and that that had an effect as well because and we didn't get there.
Speaker Change: Our profit on the parts that we built <unk>, we didn't get to absorb our factory overhead as well in that.
Speaker Change: Two primary pieces of the gross margin.
Speaker Change: Got it.
Speaker Change: Maybe Jeff if I may kind of squeezing one quick question, maybe this is a clarification.
Speaker Change: On the on.
Speaker Change: On the press release there.
Speaker Change: You've got the footnote two.
Speaker Change: Our GAAP and non-GAAP to GAAP reconciliation.
Speaker Change: Operating maybe it's not operating it as a total expenses about $1 5 million in.
Speaker Change: The footnote says.
Speaker Change: It represents severance costs are associated with that global reduction in force program I think I heard you're only talking about exiting Scotland, but.
Speaker Change: It definitely sounds like it's.
Speaker Change: It's not the not a restructuring just around the Scotland somewhere else as well if you can clarify that that'd be great. Thank you.
Speaker Change: Hey, Charles this is Greg I'll take that so obviously, we mentioned that we have made the decision to exit Scotland that was the majority of that $1 $5 million severance costs that we took for <unk>.
Speaker Change: Those individuals' impacted.
Speaker Change: And so that was the majority of it we did have some smaller re.
Reductions in the quarter, but Scotland was by far the majority of that charge.
Speaker Change: We plan.
Speaker Change: Plan for those individuals to to exit.
Speaker Change: Thank you Greg. Thank you. Thank you Jeff.
Speaker Change: Thanks Charles.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Craig Ellis with B Riley Securities. Please proceed with your question.
Craig Ellis: Yeah. Thanks for taking the question.
Speaker Change: And at the risk of beating a dead horse I will start with gross margins. So Jeff you've provided a lot of color I think what I'm I'm missing as I, just listen to a pretty full discussion of what's going on is.
Speaker Change: Where exactly the the issue arose is it the company's inability to forecast the amount of supply needs and get that on site. So that it can do some initial work is with the initial work and the second part of the question is what what new monitoring steps have been.
Speaker Change: <unk> put in place and how quickly or how.
Speaker Change: Regularly are things being monitored so bad you on your dashboard have optics into what's going on and can comp.
Speaker Change: Confidently steer gross margins to guidance going forward.
Craig Ellis: Yeah. Good question Craig So.
This is the simple answer is yes, as we were forecasting this business, we had the demand forecast it pretty clearly the supply inbound and coming out of the machining operations is often complicated we had other products that ramp that we had cut in front of other products and by the time we.
Craig Ellis: Realize that we had to make the decision to buy some external because you know two thirds of our business is still the gas panel integration business. So we can't risk deliveries there.
Craig Ellis: So yeah, we we kind of didn't get our you know our I call. It that goes into them that goes out is lined up but.
Craig Ellis: This quarter I, what I would tell you is the level of detail of which.
Craig Ellis: I'm digging in and and others on my team are digging in her training and to ensure alignment good to me.
Craig Ellis: Man.
Craig Ellis: We're just going to go deeper into the organization. So it doesn't get to us I mean.
Craig Ellis: We could've done a better job of forecasting is the bottom line and.
Craig Ellis: We probably could've predicted some of this which would've.
Craig Ellis: Probably manifested in a similar result that giving you guys some visibility to it.
Craig Ellis: When I talked about quarter to Craig. We also said there's still some headwinds that we're working through they're much less significant and so the front half of the year, It's got a more muted gross margin for.
Craig Ellis: For the full year, obviously, we won't get to the to.
Craig Ellis: To the 16% we talked about on the last call just because you can't make up for lost time and and the margin stack.
Craig Ellis: And then just looking at revenues Jeff.
Craig Ellis: We've got a range for the current quarter can you just frame up what.
Craig Ellis: What's different from the low end to the high end of the range in terms of you know.
Craig Ellis: What you can see today, what would it take for for revenue should come in at the woman what would need to happen for revenues to come in pilot. Thank you, yeah, So low and I think as things just start to shift to the right for whatever reason demand.
Craig Ellis: And start to shift customers wanted to push things out today, so I'd say holding pretty well to get to the high end.
Craig Ellis: You know, it's just customers really shifting from quarter, three probably end of quarter, two and just starting to pull some stuff in.
Craig Ellis: A little bit and then.
Craig Ellis: You know you just we get a tremendous amount of demand moving between quarters and every quarter. So so we try and range that kind of uptown downtown but.
Craig Ellis: I would say, we're probably not going to get any significant new tariff news until early Q3, but that could have an effect, which we have not incorporated.
Speaker Change: Got it and then if I could sneak one in for Greg Greg You gave some color on to Q Opex as we look at the back half of the year should we expect it to be fairly steady or.
Craig Ellis: How do things trend. Thank you.
Craig Ellis: Oh, Hi, Craig I think we said we would moderate it so we said yes.
Craig Ellis: Last time, we were saying 5% to 7% so.
Speaker Change: Florida, Florida, 6% it.
Craig Ellis: It will be down slightly but not materially in.
Speaker Change: In the second half as we've had some front end loaded.
Craig Ellis: Costs in Q1 Q2.
Speaker Change: So.
Speaker Change: You can moderate it down a little bit but not significantly.
Thanks, guys.
Speaker Change: Thanks, Craig.
Speaker Change: And our next question comes from Tom definitely with D. A Davidson. Please proceed with your question.
Tom: Yes. Good afternoon. Thank you.
Speaker Change: So Jeff I was curious has your view of the required manpower or the actual yield of the internal source.
Speaker Change: Changed at all and how is your long term view of the incremental margins from this project changed at all.
I'll answer the easy question the incremental margin in the in the.
Speaker Change: The long run it has not changed I think we still have to get.
Speaker Change: Down in what I'd call the learning curve I think the resources.
Speaker Change: The machinists are coming along pretty well.
Speaker Change: But keep in mind, we also need assembly people and things like that and and so.
Speaker Change: A lot of this has centralized around our Minnesota operations and so that the head count is coming in.
Speaker Change: Pretty well.
Speaker Change: And then that helps us offset some of the higher cost.
Speaker Change: External resources that we use to start this ramp.
Speaker Change: It is a long term plan to regionalize. This when you do this in every region or is it going to be a global operation.
Speaker Change:
Speaker Change: And we will and I think you know a few if you look our capex was pretty healthy in Q1, that's all largely around our kind of global expansion for what we see coming.
Speaker Change: Which the largest piece is going to be a machining operation in Malaysia.
Speaker Change: We are going to globalize, it and build certain things in certain places and.
Speaker Change: You know that that strategy may in fact actually helped a little bit if tariffs stick around personnel and things like that so but that facility is kind of a 2026 startup.
Speaker Change: Okay, Great and then just as a follow up Greg maybe just somebody you didn't quantify there's still aluminum tariff impact on you.
Speaker Change: Yeah.
Speaker Change: So.
Speaker Change: Quantify you know Tom we've.
Speaker Change: We've looked at what we think.
Speaker Change: You know it was going to be so.
Speaker Change: Right now it's.
Speaker Change: About 15% of our inbound is it really coming from Asia U S. U S. Inbound right. So Malaysia is kind of the largest piece of it but the <unk>.
Speaker Change: Steel side.
Speaker Change: Hum.
Speaker Change: Right now is.
Speaker Change: Let's see what did we say it's.
Yeah, and the 232 tariffs so that's the steel right. So it's not significant.
Tom: You know Tom at this point, because we've worked through ways too.
Speaker Change: You know mitigate that.
Speaker Change: Yes through finding suppliers or diverting it to or not.
Speaker Change: Not coming into the U S. Also remember Mexico is not exempt from that at this point, yeah, and our our largest weldment facility as Malaysia, which is.
Speaker Change: It dwarfs any other capabilities and volume that we have in our in the U S. U S does I would call more sophisticated weldment sub assemblies and so we have to work. That's the one that's getting US $2 32 does not allow a duty drawback.
Speaker Change: Either for our customers or for us if we do it. So that's the one that is the biggest obstacle.
Speaker Change: Okay. No that's helpful. I appreciate the time.
Speaker Change: Thanks, Tom.
Speaker Change: And our next question comes to Edward from Edward Yang with Oppenheimer and company. Please proceed with your question.
Edward Yang: Thank you thanks for the time.
Edward Yang: Jeff You mentioned, the core Dep and etch outlook has not changed what's your level of confidence that that stays strong you had a large OEM and process control postpone their analyst day and.
Edward Yang: Are there any historical parallels that you could draw on in terms of the current environment.
Edward Yang: Relative to the past that could kind of guide you in terms of forecasting.
Edward Yang: Okay.
Edward Yang: I, it's not COVID-19 at that went the other direction I I mean, I think the uncertainty and.
Edward Yang: Uh huh.
Edward Yang: The fact that people are being a little careful is really around the geopolitical uncertainty.
Edward Yang: Of what's going to happen once they make a final determination for semiconductors and semiconductor capital equipment, and then the supply chain below it I don't I mean, you'd have to ask the other company why they they pushed something out but.
Edward Yang: Today, all I can do is tell you what I'm, saying, we do not see a demand erosion beyond the pockets that I talked about earlier in the call.
Edward Yang: We see we still have a clear message.
Edward Yang: You know that.
Edward Yang: 2026 is going to be a pretty strong year.
Edward Yang: Don't start planning for that we all have to wait out the final.
Edward Yang: Export control and tariff situation.
Edward Yang: Before we can make any final determinations on if that's going to lead to some level of demand reduction, but right. Now I think most of US are just dealing with what we can see in front of us.
Edward Yang: By early summer I think we'll start to hear the next wave around semiconductors.
Edward Yang:
Edward Yang: Whether they're going to continue to be exempt remember they're exempt in the one area, where we're really worried outside of the U S.
Edward Yang: China.
Edward Yang: China is still allowing a flow of frequency.
Edward Yang: Got it and.
Edward Yang: Maybe a longer term question, but with all this tariffs.
Edward Yang: Sticks uncertainty.
Edward Yang: Or are your customers more open to outsourcing components and sub assemblies.
Edward Yang:
Edward Yang: I think.
Edward Yang: The way I would think about that is we have a global footprint, we have some flexibility that can work with them.
Edward Yang: But you have to go one step deeper AD, which is where's the sourcing of the steel coming into the U S and that's what's getting us as not everything is U S. R. Our non semi business, our IMT business, we talked about it takes down by anything outside of the U S. We buy most of our base materials in the U S. It's really the tube.
Edward Yang: And weldment that were getting.
Edward Yang: Getting affected on so those have some ability to flex around over time, but you would have to have a clear vision before you start making those moves.
Okay.
Edward Yang: <unk>.
Edward Yang: Thanks, Ed.
Speaker Change: And our next question comes from Christian Schwab with Craig Hallum. Please proceed with your question.
Speaker Change: Thanks, guys I wasn't clear to me that the size of the Scotland.
Speaker Change: Operations annual basis can you give us an idea of what the average annual revenue of the Scotland operation was in 'twenty three 'twenty four.
Speaker Change: Yeah, I would say.
Speaker Change: I don't have it on the top of my head, but I would say 23 was probably 20 ish little lighter in 'twenty four got tremendous slate later towards the end of 'twenty four than in Q1, it just the demand dissipated.
Speaker Change: They did some legacy tool refurbishments under a license that license expired they were not able to.
Speaker Change: Backfill and another business. So I would say on the full year somewhere close to 10 million kind of came out of our horizon.
Speaker Change: Great and then and then it wasn't clear to me you gave a lot of.
Speaker Change: Numbers of around gross margins, but let's just start with like.
Speaker Change: Where you started with 90% external component what is what is that right what does that percentage need do.
Speaker Change: Go down too.
Speaker Change: Your your aspirational gross margin target of 18% to 20%.
Speaker Change: I think by the end of 'twenty five we'll be at about 25 internal 75 external we'd have to get some proportion of the flow controller in there I can tell you the truth I, probably be yes, and Christian it exactly how much but.
Speaker Change: To get there.
Speaker Change: We would have to have them.
Speaker Change: Some reasonable level of either the full gas panel.
Speaker Change: The new gas panel and or whether the flow control. The next generation is really going to be backwards compatible and that's probably going to be a faster move.
Speaker Change: I don't know if I was to guess 40 or $50 million of that probably gets us pretty close to the 19%.
Speaker Change: Okay, great no other questions.
Speaker Change: On the passive parts today.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: With that there are no further questions at this time I would now like to turn the floor back to Jeff Anderson for closing remarks.
Jeff Anderson: I wanted to thank 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.
Later this month, we will be participating in the B Riley conference in L. A.
Craig Hallum Conference in Minneapolis.
Jeff Anderson: And the TD Cowen Conference in New York.
Jeff Anderson: After that we will look forward to our next quarterly update in early August for our Q2 earnings call in the meantime, please feel free to reach out declared directly if you'd like a follow up on that thank you.
Jeff Anderson: <unk>.
Jeff Anderson: Thank you with that this does conclude today's teleconference. We thank you for your participation you may disconnect your lines at this time.
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