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Edited Transcript of ICHR.OQ earnings conference call or presentation 6-Aug-19 8:30pm GMT

Q2 2019 Ichor Holdings Ltd Earnings Call

FREMONT Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Ichor Holdings Ltd earnings conference call or presentation Tuesday, August 6, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey S. Andreson

Ichor Holdings, Ltd. - President & CFO

* Thomas M. Rohrs

Ichor Holdings, Ltd. - Executive Chairman & CEO

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Conference Call Participants

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* Craig Andrew Ellis

B. Riley FBR, Inc., Research Division - Senior MD & Director of Research

* Karl Fredrick Ackerman

Cowen and Company, LLC, Research Division - Director & Senior Research Analyst

* Mitchell Toshiro Steves

RBC Capital Markets, LLC, Research Division - Analyst

* Quinn Bolton

Needham & Company, LLC, Research Division - Senior Analyst

* Claire E. McAdams

Headgate Partners LLC - Managing Partner & IR Officer

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Ichor Systems Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Claire McAdams, Investor Relations for Ichor. Please go ahead.

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Claire E. McAdams, Headgate Partners LLC - Managing Partner & IR Officer [2]

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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 Ichor's 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, those described in our annual report on Form 10-K for fiscal year 2018, 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, and our 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 Ichor's Chairman and CEO, Tom Rohrs, and our President and Chief Financial Officer, Jeff Andreson. Tom will begin with a review of our results, strategy and outlook, and then Jeff will provide further detail regarding our growth initiative, 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 Tom Rohrs. Tom?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [3]

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Thank you, Claire, and welcome to our Q2 conference call. Ichor 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 $0.23 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 our 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 Ichor 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 to the higher level of incremental revenues from these market share gains as well as an uptick in sales to ASML. We believe we will achieve this favorable trend in our results, despite the ongoing weakness in wafer fab equipment, or WFE, 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 ASML.

Recent industry reports indicate that WFE spending in 2019 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. But the . . .

(technical difficulty)

this year. The result is that process tool shipments of etch, deposition and CMP tools, which benefit more from memory spending, are 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 in fab 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 haircut 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 Ichor 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 LDM product of about $400 million. Obviously this is a large opportunity for us.

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 market and 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 or Dainippon Screen, and EBARA.

Japanese OEMs accounted for about $5 billion of the web processing market in 2018, or about 2/3 of the total, and, therefore, serving OEMs in Japan is a significant opportunity for Ichor. 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 a late-stage private company, funded by multiple leading semiconductor device makers and OEMs. This technology will complement and support the next generation of 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-add and 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 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?

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Jeffrey S. Andreson, Ichor Holdings, Ltd. - President & CFO [4]

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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, and 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 to Ichor. This is a delay of about one quarter's ramp as the specific share gains we have won are in place, and will strengthen as business conditions improve.

We continue to expect our share gains to be backend loaded this year, and will exit the year at an annualized rate well above the $65 million we will see in 2019. With our peers and customers seeing declining 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 and 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.

In weldments, we have the majority of the 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 wet 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 with our initial customer on qualifying additional customers of theirs. We made solid strides in our geographic expansion strategy this quarter, with the finalization of our partner in Japan. Our Korean Gas Panel business continues to be negatively 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 your 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 are second half weighted in 2019, positioning 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 P&L metrics discussed today are non-GAAP measure, 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 regions, 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 continue 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 $200,000 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 $0.23.

I'll 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, another IP, for $8.1 million, and repaid $2.2 million on our term loan.

Days 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 $0.25 to $0.31 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 7% and 8% compared to 5.5% in Q2.

Operator, we're ready to take questions. Please open the line.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Quinn Bolton from Needham.

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Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [2]

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Congratulations on the nice results and the outlook for a stronger second half in this tough WFE environment. Wanted to start with the outlook for the third quarter. If I just do some quick math, it looks like the share gain opportunities are probably run rating at about $20 million a quarter 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.

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [3]

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Right.

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Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [4]

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Which implies the core business is actually going to grow sequentially. Wondering if that's all ASML-driven or whether you're seeing strengths in other part of the business.

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [5]

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It's largely ASML-driven, Quinn.

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Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [6]

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Okay. And is that, I assume, knowing ASML's guidance were pretty backend loaded second half, that you would expect that strength to continue into Q4?

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Jeffrey S. Andreson, Ichor Holdings, Ltd. - President & CFO [7]

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Yes.

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [8]

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We would expect so yes.

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Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [9]

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Okay. On the IP acquisition, you had mentioned a couple 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's the big delta quarter-on-quarter in terms of OpEx?

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Jeffrey S. Andreson, Ichor Holdings, Ltd. - President & CFO [10]

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Yes. I mean quarter-on-quarter it was almost all of it. It'll be a little bit higher than that, probably around 300k. It may have some fluctuation because we're now developing a product, so you get some R&D material in there. But 300k's a good number.

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Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [11]

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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? How confident, I guess, are you to recognize revenue from that partnership in calendar '20?

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Jeffrey S. Andreson, Ichor Holdings, Ltd. - President & CFO [12]

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Yes. I think we have plans in place to achieve some revenue in 2020. I will tell you that this was done within the last month or so. And the energy level is good on both sides of this. They're a very excited partner. And so I really think that we can do some good stuff together.

And as Tom talked in his comments, this is kind of a well-known business in Japan and they already were in kind of the wet processing tool space. So we're excited to kick this thing off, and it's well underway.

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [13]

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Yes. I think that's a great point, Quinn. This company is a regular supplier to the OEMs, as I mentioned, that are important in Japan. So they come with ready-made relationships, if you will. And moreover, they chose that they wanted 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 have been working on -- although 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 on a couple quarters now. And 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 and some more learning to be done, but we're quite optimistic about the partner we've been able to work with.

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Operator [14]

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Your next question comes from the line of Craig Ellis with B. Riley FBR.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [15]

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I'll echo the congratulations on the good execution and ability to grow in the second half when many others cannot.

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, another was plastics mix. And in that latter item sounds like it's impacting the third quarter. Can you provide a little bit more color on that? And what are the implications beyond the third quarter for that item?

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Jeffrey S. Andreson, Ichor Holdings, Ltd. - President & CFO [16]

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Well, I think in Q2, it was really the lower level of revenue we had with our lithography customer. That was the biggest mix piece. And then in our plastics business, it's been affected by kind of the memory reduction more than other pieces of our business, in that it's just running in much lower volumes, and we're trying to maintain an 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 mutes a little bit of the market share gain upside.

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [17]

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Yes. I think that's right, Craig. And we need to remind you that along with etch and deposition, when 3D 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 CMP. 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 also one of the more capital-intensive sites that we have. So there is more fixed cost in 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.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [18]

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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 we're seeing in the mix of spending in the middle of the year and into the back half of the year, are you still comfortable with where inventory levels stand?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [19]

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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, whatever the decrease is in the main business and the base business is single digit kinds of decreases. And so inventory levels are not dropping dramatically at our customer's site. And we think the alignment is actually quite good.

I did make a reference, though, to where we're gaining market share especially in the weldment side. When the customers are changing from supplier A to supplier B, it's very different than when they're just changing from high volume to low volume, and they tend to build up a bit of a safety stock of supplier A's inventory before they turn on supplier B. In this case, we're 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 Jeff mentioned quite correctly, those are simply timing episodes and they'll work their way through the system in due time.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [20]

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That's helpful. And then lastly for me -- and it may be closely related to the comment that you just made, Tom. Still looking for a very strong $65 million in share gain this year. The variance between that and the prior $75 million, would we expect that $10 million to come to Ichor in the first half of 2020? Or how do we think about that variance and when it's realized, if it's realized?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [21]

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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 P&L quite as quickly as we had hoped, but they will eventually. And the other, as we've mentioned all along, that the toughest ones 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.

Having said that, again 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.

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Operator [22]

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Your next question comes from the line of Karl Ackerman with Cowen.

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Karl Fredrick Ackerman, Cowen and Company, LLC, Research Division - Director & Senior Research Analyst [23]

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Just for Tom. Of the $65 million of incremental revenue you expect this year, is that primarily from a logic market? Or are there other opportunities you see in the September quarter? Then I have a follow-up.

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [24]

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To be clear, Karl, it's really hard for us to distinguish at that component part level what the end use device is going to end up being, whether an IC or a NAND. Obviously in some cases it's a little bit easier. So for sure 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 and logic has gotten progressively stronger, albeit the overall wafer fab equipment market still looks like it's going to be down 15 to 20. So in terms of the effect on the business, I don't think it's all that critical what the end use of the device happens to be.

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Karl Fredrick Ackerman, Cowen and Company, LLC, Research Division - Director & Senior Research Analyst [25]

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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 at Japanese equipment suppliers from the increased trade tension between Japan and Korea? And I guess if it were to intensify, it would seem that the opportunity would be perhaps [or as a] magnitude lower. So I guess how do we think about the ramifications of that?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [26]

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That's a good question. Since we are shipping to OEMs, who are the ones shipping to the device makers who are the ones eventually shipping to the users, we're kind of at the back end of the supply chain, which means that market-affecting activities are quite a bit removed from us. And we don't necessarily get an opportunity to talk to people who are the ultimate users of the device. And what we do get to do is keep our eyes open and our antenna up in terms of what's actually going on.

So there are two things that kind of work opposite each other. One is that obviously Korea and Japan are having a bit of a trade war themselves. 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 flipside is we also know that the U.S. and China are 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, Karl, 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 company-making kind of significant opportunity.

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.

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Karl Fredrick Ackerman, Cowen and Company, LLC, Research Division - Director & Senior Research Analyst [27]

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Sure. I appreciate that. One more, if I may. Jeff, maybe discuss your lead times at your top customers entering the September quarter and whether you think they are now -- whether you think your own shipments are now approaching customer shipments or if there is a somewhat disconnect from an inventory overhang within the supply chain?

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Jeffrey S. Andreson, Ichor Holdings, Ltd. - President & CFO [28]

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I think Tom alluded to it. I mean on the gas delivery side and, for that matter, chemical I think, with any of the LDMs we do, they're very closely aligned from a lead time perspective. We probably deliver, say 1 month, 5 weeks before they probably ship a tool. Sometimes we do merchant transits, but we don't always know when that is occurring. So they're pretty closely aligned. We may lead by 4 or 5 weeks on gas delivery. And I think the lead times, our lead times are not that long. But where we might ship something out of precision machine or even a weldment might be just slightly earlier than that, if that helps.

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Operator [29]

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Your next question comes from the line of Sidney Ho with Deutsche Bank.

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Unidentified Analyst, [30]

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This is Jeff on for Sidney. 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?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [31]

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I would say this. I think most of our customers feel like they're about at the bottom. But I wouldn't say that they're seeing the turn yet. And so what 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. It's obviously not the case. So we're hearing some talk that the first half of next year might be that period. We still haven't seen any definitive evidence that that is the case, nor have, I believe, our customers have seen that. And so I think the situation right now leads to one where we've all put ourselves into a operating position that we feel is capable of 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 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 they're not that sanguine about a first half recovery at this point in time.

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Unidentified Analyst, [32]

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Great. Thank you. And just following up. Has your visibility into customer orders and kind of the outlook improved at all over the first half of the year?

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Jeffrey S. Andreson, Ichor Holdings, Ltd. - President & CFO [33]

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Yes. First half was pretty bleak.

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [34]

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Well, I mean we can tell a little bit around just the amount of what you would call churn in a quarter, and we'd say that's stabilized to a large degree for us. So it's much more predictable who we ship and when and stuff, so that means the visibility is better.

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Operator [35]

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Our last question comes from the line of Mitch Steves with RBC Capital Markets.

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Mitchell Toshiro Steves, RBC Capital Markets, LLC, Research Division - Analyst [36]

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Just a couple for me. 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 margin's at essentially bottom, would that be a fair characterization or aggressive?

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Jeffrey S. Andreson, Ichor Holdings, Ltd. - President & CFO [37]

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Relatively fair, I'll say. We don't guide our gross margin. You can think a lot that it'll start as we get kind of bigger chunks up in revenue that our flow through will help drag that up. And right now, we're just kind of dealing with a little bit of headwind in our plastics business that's muted it here in Q3 and slightly in Q4.

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [38]

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Yes. We've heard one or two things. We talked about the plastics. I think that's well understood. The other aspect is the share gains have shown up, have been the lower margin ones first. So the gas delivering market share gain showed up first. That's not basically different from our ongoing gas delivery gross margins. The weldments will start to kick in now; that'll be helpful. The larger margins will be on the precision machining-type products. They'll kick in some in the Q4. But they'll be mostly the ones that spill over into next year. And so the profile of that has been a little lower in the beginning than we might have hoped, but it'll still all work out through the course of the next 3 or 4 months.

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Mitchell Toshiro Steves, RBC Capital Markets, LLC, Research Division - Analyst [39]

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Okay. And then secondly, just given that ASML was brought up a few times, and we know that [AMEC] and Lam are coming down revenue-wise this year, is there potential for ASML to be a 10% customer this year? Just trying to get an idea of scale here in terms of how much they're ramping up.

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Jeffrey S. Andreson, Ichor Holdings, Ltd. - President & CFO [40]

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No, I . . .

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [41]

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We hope not.

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Jeffrey S. Andreson, Ichor Holdings, Ltd. - President & CFO [42]

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Yes, because it wouldn't be on the up. I mean they'd have to . . .

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [43]

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We don't want it to be 10% based on the denominator.

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Jeffrey S. Andreson, Ichor Holdings, Ltd. - President & CFO [44]

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Yes. I wouldn't want you to think that because given the outlook that you guys are probably putting together, it's still got a ways to go to get there.

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Operator [45]

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There are no further questions at this time. I will now turn the call back over to Tom Rohrs.

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [46]

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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.

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Operator [47]

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This concludes today's teleconference. You may now disconnect.