Q2 2019 Earnings 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 assistance during the conference. Please press Star then zero on your Touchtone telephone as a reminder, this call is being recorded I would now like to introduce your host for today's conference Claire Mcadams Investor Relations for <unk>. Please go ahead.
Thank you Celine good afternoon, and thank you for joining today's second quarter 2019 conference call, which will be available for replay telephonically and on <unk> website.
Shortly after we conclude this afternoon.
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 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 goes described in our annual report on Form 10-K for fiscal year 2018, and those described in subsequent filings with the FCC.
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. An earnings press release contains a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures.
On the call with me today are <unk>, Chairman and CEO , Tom Ward, and our President and Chief Financial Officer, Jeff injuries.
Tom will begin with a review of our results strategy and outlook and then Jeff will provide further detail regarding our growth initiatives.
Second quarter results and third quarter guidance. After the prepared remarks, we will open the line for questions.
I'll now turn over the call to time workers comp.
Thank you Claire and welcome to our Q2 conference call.
I go continues to operate with strength and profitability in the current industry downturn.
Second quarter came in about where we expected with revenue above the midpoint of guidance at $139 million.
Up 1% from the first quarter.
Our second quarter earnings were 23 cents per share at the midpoint of guidance.
And still demonstrating solid profitability at these revenue levels.
I feel that we have done well adjusting to significantly weakened business conditions as we bounce along the bottom.
We have balanced our resources between the cyclical lows of the first half and the increased sales we expect in the second half of 2019.
And a higher run rate entering 2020.
During the quarter, we continued to make progress executing on our strategies to grow our share within our served markets.
Our execution of these market share growth strategies.
Makes I core uniquely positioned within the process equipment market to have a stronger second half compared to the first half in calendar 2019.
As we look forward to the third quarter.
We expect to grow our revenue sequentially due to higher level of incremental revenues from these market share gains as well as an uptick in sales to an assignment.
We believe we will achieve this favorable trend in our results. Despite the ongoing weakness in wafer fab equipment or WFP spending, particularly in memory.
Our incremental revenues for market share gains were about $9 million in Q1.
And increased to about $15 million in Q2.
As expected when you exclude the share gains the base business was down sequentially in Q2 by a few percent due to a one quarter drop in our sales to it somehow.
Recent industry reports indicate the WFP spending in 2019.
It is now even more weighted towards logic and lithography than previously forecast.
The outlook for lithography and process control has strengthened.
And foundry and logic spending is gaining momentum.
Yes.
Yes this year.
The result is that process tools process tool shipments of etch deposition, and CMP tools, which benefit more from memory spending.
Our down at least 25% based on the latest reports.
And as much as memory spending was already significantly reduced in the first half of 2019.
It will be low again in the second half of 2019.
Due to recent adjustments and fast spending in 2019, putting even more weight towards lithography and process control, particularly in the back half.
We are taking our market share gain outlook down from the $75 million revenue level to about $65 million in 2019.
The modest hair cut is largely due to worsening conditions in memory spending this year as well as the speed at which our customers can burn down the inventory they hold from the suppliers we are replacing.
Jeff will discuss our progress in this area during his prepared remarks.
With this trajectory we continue to see a stronger second half for Icore, even though process tool shipments are down.
I'd like now to discuss additional growth objectives that will impact our revenue in 2020 and beyond.
I'll start with the liquid delivery module.
The wet processing wafer fab equipment market was approximately $7.5 billion in 2018.
And this translates to an addressable market for the LTM product of about $400 million. Obviously this is a large opportunity for us.
We've been shaped, but we've been shipping the liquid delivery module for over a year now to our initial customer.
And while we expect to expand our share at this customer we are now in a position to expand to other Oems.
In May we finalized an agreement with a partner in Japan.
Who will marketing sell our liquid delivery module to those Oems that manufacture web process equipment in Japan.
Our partner is a well known supplier to the chemical delivery market.
And today supplies product to Tokyo electron.
DNS are dainippon screen and to borrow.
Japanese Oems accounted for about $5 billion of the web processing market in 2018 or about two thirds of the total.
And therefore, serving Oems in Japan is a significant opportunity for icore.
We are pleased that we have secured the right partner for our growth strategy in Japan.
We have also added to our IP portfolio in Q2, as we completed the purchase of the mass flow product and intellectual property that was being developed by our late stage private company funded by multiple leading semiconductor device makers and Oems.
This technology will complement and support the next generation proprietary gas delivery systems, we have been developing.
In addition to the IP and patents, we also added their innovative engineering group.
That will complement the existing team we have in place.
We are in the early stages of our proprietary gas delivery system development, and we have only a limited amount of customer engagement.
However, we expect the additional IP will serve to expand our value added margins in the future.
We will provide updates as this program moves forward.
These factors all demonstrate our continued execution of our strategies for growth.
And contribution.
Two our optum to our optimism that our revenue run rate as we exit the year should be a positive indicator for a much stronger period of financial performance ahead.
And now I'll turn over the call to Jeff to provide an update on the progress made in the second quarter on our key business initiatives.
Before he concludes our prepared remarks with the financial guidance of the second quarter results and the Q3 guidance Jeff.
Thanks, Tom.
As Tom mentioned, our outlook for our share gains. This year is now expected to be about $65 million.
We continue to be pleased with our gains in the reduction is largely a result of the softer memory market and our customers ability to burn down the current suppliers inventory prior to moving the demand ticor.
This is a delay of about one quarter's ramp as the specific share gains we have one are in place.
And will strengthen as business conditions improve.
We continue to expect our share gains to be back end loaded this year and we'll exit the year at an annualized rate well above the $65 million, we will see in 2019.
With our peers and customers seem decline build rates for the third quarter, our ability to grow sequentially is largely due to our share gains.
In our gas delivery business. These gains are largely in place.
I will now fluctuate with product demand in the second half I'd note that we have gained share we have share gains at both of our largest customers.
And Weldments.
We have the majority of the quality qualifications complete that we expected to win this year and the revenue ramp will now be a function of the timing of the transition.
By our customer and the recovery in the memory segment of the market.
The largest growth driver for our chemical delivery business remains our proprietary liquid delivery module.
As Tom discussed earlier, we now have a partner in Japan that will be addressing the largest geographical segment of the web processing market.
We also are continuing to work with our Korean customer and expect to have a beta unit delivered this year and finally, we are continuing to work with our initial customer on qualifying additional customers of theirs.
We made solid strides and our geographic expansion strategy this quarter with the Finalization of our partner in Japan.
Our Korean gas panel business continues to be negatively impact impacted by the lower level of memory spending in South Korea. This year.
We are utilizing the downturn to work on penetrating additional Oems as well as expand within the customers we have today.
To summarize we made solid progress in our incremental revenue initiatives with our gas delivery and weldment shares largely in place.
Revenues from these share gains are expected to strengthen in the third quarter and our second half weighted in 2019 position us well for a stronger second half and into 2020.
And now I'll discuss our financial performance and the third quarter outlook.
First I'd like to remind you that the PNM metrics discussed today are non-GAAP measures unless I identify the measure as GAAP based.
These measures exclude the impact of share based compensation expense amortization of acquired intangible assets nonrecurring charges and discrete tax items and adjustments.
I'd also like to note that a schedule, which summarizes our GAAP and non-GAAP financial results as well as key balance sheet and cash flow metrics and revenue by geographic region can be found on the investors section of our website.
Second quarter revenues of $139 million increased 1% from the first quarter and were down 44% from the second quarter of last year.
Our second quarter gross margin of 14.2% declined slightly from the first quarter, but was largely in line with our outlook entering the quarter. The decline from the first quarter was primarily due to a less favorable product mix and lower volumes in our plastics business, which continued to experience the effects of the slower memory spending recovery.
Operating expenses of $11.6 million remained relatively flat from the first quarter and included the addition of approximately $200000 associated with our recent IP purchase in which we also absorbed a small engineering team.
Operating margin of 5.9% represented a 50 basis point decrease from the first quarter as a result of the lower gross margin and a relatively flat revenue environment.
Our interest expense in the second quarter remained flat at $2.8 million.
Our tax rate for the quarter was 5.5%.
The lower rate was due to a year to date adjustment for the lower full year rate that we are now forecasting.
Second quarter net income of $5.1 million was equal to 3.7% of revenue earnings per share was 23 cents.
I will now turn to the balance sheet.
Cash of $41.5 million increased $9.8 million from the first quarter driven by strong free cash flow generation of $19.7 million.
During the quarter, we completed the purchase of a patent portfolio and other IP for one $8.1 million and repaid $2.2 million on our term loan.
Day sales outstanding of 27 days declined from 36 days in the prior quarter.
Inventory decreased 5% from the first quarter or $5.7 million to $108 million at quarter end inventory turns further improved to 4.3.
The highest level, we've seen since the second quarter of 2018.
Now I'll turn to the third quarter guidance.
Our forecast is for revenues in the range of $145 million to $155 million, which is up 4% to 11% from Q2.
Our earnings guidance of 25 to 31 cents per share reflects improved operating profitability inclusive of the headwinds in our plastics business.
And a slightly increased level of operating expenses related to our recent IP acquisition compared to the second quarter.
We expect our tax rate will be between will be between seven and 8% compared to 5.5% in Q2.
Operator, we're ready to take questions. Please open the line.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Your first question comes from the line of Quinn Bolton from Needham Your line is open.
Quinn.
Hi, Moshe everybody Hi, sorry.
Can you hear me now.
Yes, Sir good yeah, sorry about that I was on mute congratulations on the nice results and the outlook for a stronger second half in this tough Wi Fi environment wanted to start with it with the outlook for the third quarter. If if I just do some quick math it looks like the share gain opportunities are probably run rating at about $20 million of quarter in <unk> in the second half so up about 5 million quarter to quarter. If I just use the midpoint your guidance for the entire business is up about 11 million I think if I'm doing the math right, a nice which implies the core business is actually going to grow sequentially.
Wondering if thats all his CML, driven or whether you're seeing constraints in other part of the business.
It's largely SNL driven Quinn.
Okay and is that I assume knowing ESM els guidance for pretty back end loaded.
Second half that you would expect a that strength to continue into Q4.
Yeah, we would expect so yes.
Okay.
On the IP acquisition, you mentioned a couple of hundred thousand of Opex in the second quarter can you give us sort of what you think a full quarter effect would be because it sounds like that the the big delta quarter on quarter and in terms of Opex.
Yeah, I mean, a quarter on quarter. It was almost all of it it'll be a little bit higher than that probably around 300 k. It may have some fluctuation.
Because you know where were now developing a product. So you get some R&D material in there, but 300 K is a good number.
Okay, Great and then my last question just on the signing of the Japanese partner for the liquid delivery module you now have that contract in place.
How long does it take to sort of go to market to fill that channel you know how how confident I guess are you to recognize revenue from that partnership in calendar 20.
Yeah, I think I think we have plans in place to to achieve some revenue and 2020 I will tell you that.
This was done within the last month or so and.
And and the energy level is good on both sides of this they're very excited partner and so I I really think that we can.
Do some good stuff together and as Tom talked in his comments. This is a kind of a well known business in Japan and they they already work and.
Kind of the wet processing tools space. So we're excited to kick this thing off and.
And and it's it's well underway.
Yeah, I think that's a great point when this is a.
This this company is a already a supplier to the people the Oems as I mentioned that are important Japan, so that come with ready made relationships. If you will.
And Moreover, they chose they chose that they you know they want it to represent and distribute our product which is a very nice acknowledgement of the work we've done and the product we have so we feel very good about it overall.
We we had been working on them until the deal was done in the last month or so we have been working on it for quite a while.
And we've spoken to you it's on a couple of quarters now.
And where we've been around long enough to know that you just don't waltz into Japan and end up with a lot of business very quickly. So there'll be some more work to be done in some more learning to be done but were quite optimistic about the partner we've been able to work with.
Great. Thank you.
Thanks, Mike.
Your next question comes from the line of Craig Ellis with B. Riley FBR. Your line is open.
Thanks for taking the questions and I'll echo the congratulations on the good execution and ability to grow in the second half when many others cannot the first is just a clarification Jeff on the gross margin point you made in the second quarter you identified two things that were at play one was I believe volume and other was plastics mix and in that latter item sounds like its impacting the third quarter can you provide a little bit more color on that and and what are the implications beyond the third quarter for that item.
Well I think in a in Q2 it was really the lower level of revenue we had with our lithography customer that was that was the biggest mix piece and then in our plastics business. It's been affected by the kind of the memory reduction more than other pieces of our business and that its just running at much lower volumes and we're trying to maintain and infrastructure for future growth. So it has impacted the level of the gross margin and it will continue to have some effect in Q3, which me, it's a little bit of the market share gain upside yeah I think.
That's right Craig and.
Hey, we need to remind you that along with.
Etch and deposition when Threed NAND was hot CMP was very hot as well.
And as the memory business has cooled off.
We all know about that.
And we think of etch and deposition, but it also has cooled off Sam piece. So it has lowered the business through that site.
And.
As you recall this was a site we acquired back in 2016 and has been performing very well for us and we're very happy with it.
But it is also one of the more capital intensive sites that we have so there is more fixed costs and.
Plastic machining than there is in a lot of the other things we do so.
When the CMP business goes down along with the memory business, we do see an effect there and that's exactly what we're reporting to you now.
That makes sense. Thanks for the color following up with the next question.
Tom a quarter ago, I think you expressed.
Satisfaction with where inventory levels were at large customers given the movement that were seeing in the mix of spending in the middle of the year and into the back half of the are you still comfortable with where inventory levels stand.
Yes, I am I think.
We see now.
And we mentioned this last quarter a lot of those adjustments are over and done with.
To a reasonable extent the whatever the decreases in the main business and the base business is is a single digit kinds of decreases.
And so inventory levels are not dropping dramatic at our customer's site.
And.
We think the alignment is actually quite good I didn't make a reference though to where we're gaining market share.
And especially in the Wellman side.
When the customers are changing from supplier Ada supplier b, it's very different than.
When they're just changing from low volume excuse me from high volume to low volume.
And they tend to build up a bit of a safety stock of supply or raise inventory before they turn on supplier b.
In this case, where supplier B, which is the one you want to be but.
We I think probably missed a little bit on our calculations as to how long they would build up that safety stock for this transition period. So we're seeing some things there.
That we didn't quite expect but those are as high as Jeff mentioned quite correctly those are simply timing episodes.
And they'll work their way through the system and in due time.
That's helpful. And then lastly for me and it may be closely related to the comment you just made Tom.
Still looking for a very strong 65 million in share again this year the variance between that and the prior 75 would we expect that 10 million to come to I core in the first half of 2020 or how do we think about that variance and when it's realized depicts realized.
Yes, you should.
And we do.
Some of it is due to what I just explained in terms of.
Some of the shares.
Even if we win them don't hit the PNM quite as quickly as we had hoped but they will eventually.
And the other is we've mentioned all along that it's been the toughest wants to do are always the ones with the deep qualifications.
Which are the precision machining ones.
We expect the first qualifications to be done.
In this quarter with shipments beginning next quarter I'm, having said that again, those though the timing of those were a little bit slower than we had hoped bottom line, though is to your question. Yes, we expect all of those share gains to hit.
In 2020.
Thanks, and good luck guys.
Thanks.
Your next question comes from the line of Karl Ackerman with Cowen Your line is open.
Good afternoon.
Jeff or Tom of the 65 million of incremental revenue you expect this year.
Is that primarily from the logic market or are there other opportunities you see in the September quarter I have a follow up.
To be clear call, it's really hard for us to distinguish it that component part level.
Whereas the end users with the end use device is going to end up being weather.
And I see or.
NAND obviously.
In some cases, it's a little bit easier so for sure.
There.
There are some parts that we know are going to be for memory and some but it's really hard for us to distinguish.
The only thing we can say is that over the course of the year.
Memory has gotten progressively weaker.
Analogic has gotten progressively stronger.
Albeit the overall wafer fab equipment market still looks like it's going to be down 15 to 20.
So.
I you know I think that in terms of the effect on the business I don't think its all that critical what the end use of the device happens to be.
That's helpful.
I guess as you think about your longer term revenue opportunity from these new products that are beginning to just ramp today.
Is there any change to your outlook for revenue opportunities, our Japanese equipment suppliers from the increased trade tension between Japan and South Korea.
And I guess, if it were to intensify it would seem that the opportunity for you would be perhaps orders of magnitude lower so just so I guess.
How do we think about the ramifications of that.
That's a good question.
We you know.
Since we are shipping to Oems, who are the ones shipping to the device makers, who are the ones and eventually shipping to the users we're kind of at the back end of the supply chain.
Which means that the market affecting activities are quite a bit removed from us.
And.
You know, we don't necessarily get an opportunity to talk to the people who are the ultimate users of the device.
And what we do get to do is keep our eyes open in our in our antenna up in terms of what's actually going on.
So there are two things that kind of work the opposite each other one is that.
Obviously Korea and Japan our.
Having a.
Bit of a trade war themselves of that doesn't.
On the surface of it I think we can all say that a trade war does not help us regardless of who's in it.
But the flip side is we also know that the us in China or in a trade war.
Theoretically.
That could.
Do some things to help a Japanese supplier like Tokyo electron.
Into China.
And so how those end up sorting themselves out Carl I do not know.
But I do know whether it's the same as we think it is today.
Or worse or better regardless, it's going to be a significant opportunity.
It's either going to be a significant opportunity a very significant opportunity or a or a company you know, making kind of significant opportunities. So with that said, we're happy about it we're really excited about it we're going to work forward aggressively and we'll let the geopolitical chips fall where they may.
Sure I appreciate that one more if I may.
Jeff maybe you discuss your lead times are your top customers.
Entering the September quarter, and whether you think they are now approach whether you think your own shipments were now approaching customer shipments or if they're actually somewhat disconnected from an inventory overhang within the supply chain. Thank you know I think Tom alluded to I mean on the gas delivery side and for that matter chemical I think you know with any of the LD EMS. We do they are very closely aligned from a lead time perspective, we probably deliver.
Say a month five weeks before they probably ship a tool sometimes we do merge and transit, but we don't always know when that is occurring. So there. They are pretty closely align we may lead by four or five weeks and gas delivery and I think.
You know I think the lead times are lead times are not that long, but where are we.
So might ship something out of precision machine or even a weldment might be just slightly earlier than that.
That helps thank you.
[noise].
Your next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open.
Hi, This is Jeff on for Cindy have you guys seen any change in kind of your conversations with your largest customers are there any increased optimism that the memory market has stabilized and that we're prepared for a recovery going into 2020.
I would say this I spent most of our customers feel like they're about out the bottom, but I wouldn't say that they're seeing.
The turn yet.
And so.
Well, we've all been observing is that as we went into this year, we thought the second half of this year would be.
The time when memory turned its obviously not the case.
So were hearing some talk that of the first half of next year might be that period.
We still haven't seen any definitive any definitive evidence that that is the case.
Nor have I believe our customers have seen that and so I think.
Uh huh.
The situation right now we just too.
A a one where we won't put ourselves into a <unk> operating position that we feel is.
Capable being run profitably in our case, we're augmenting that with taking this opportunity to gain share and also taking this opportunity to invest and to move ourselves into a new market spaces or new geographies I'm sure. Our customers are doing the same type of thing.
But I suspect most of them will tell you that there.
Not that sanguine about a first half recovery at this point in time.
Great. Thank you and just following up has your visibility into a custom orders and kind of the outlook improved at all over the first half of the year.
Yes, [laughter] first it was pretty bleak.
Well I mean, we we tell that we can tell a little bit around.
Yeah, just the amount of what you would call churn in the quarter and we'd say well that's that's stabilized to a large degree for us so it's much more.
Predictable, who we ship and when that stuff so that that means the visibility is better.
Great. Thank you.
Our last question comes from the line of Mitch Steves with RBC capital markets during <unk> during alive.
Hey, Thanks for taking my question for me is just the first one in terms of the gross margin profile looks like it was down sequentially, but based on your commentary it sounds like the second half is going to be better. So if I assume that.
Gross margins are essentially bottom would that be a fair characterization or or aggressive.
Relatively fair also.
We don't guide our gross margin or you can think a lot yeah.
That it'll start as we get kind of a bigger chunks up in revenue that well our flow through will help drag that up and right. Now, we're just kind of dealing with little bit of headwind in our plastics business. That's muted here in Q3 and slightly in Q4.
Yeah, we've had one or two things.
We talked about the plastics I think that's well understood.
The other aspect is the gain share gains have shown up have been in the lower margin ones first so the gas delivery or market share gains showed up first that.
Not.
Yeah, basically different from our ongoing gas delivery gross margins.
The the Weldments will start to kick in now that will be helpful.
The larger margins will be on the precision machining type products.
Ill kick in some of the Q4 of them, but they will be mostly the ones that spill over into next year.
And so the profile of that has.
Been.
A little lower than the beginning then we might have hoped but it'll it'll still all work out through the course of the next three or four months.
Okay, and then secondly, just given the the answer was brought up a few times, we know that Hey man Lambert coming kind of coming down.
Revenue wise. This year is there potential for small to be a 10% customer. This year, just trying to get an idea of scale out here in terms of what how much the ramping up.
No I I hope not.
[laughter], yeah, because it wouldn't be on the up I've got a big data I want I don't think we don't want it to be 10% based on the denominator.
I would I wouldn't want you to think that because you know given the outlook that you guys are probably putting together, it's it's still got a ways to go to get there.
Okay perfect. Thank you.
Thank you.
[noise].
There are no further question at this time I will now turn the call back over to Tom Roars.
Well, thank you for joining us on our call this quarter and we look forward to updating you again on our Q3 call in November Thank you.
This concludes today's teleconference. You may now disconnect.
[laughter].