Ichor Holdings, Ltd. (NASDAQ:ICHR) Q4 2023 Earnings Call Transcript
Ichor Holdings, Ltd. (NASDAQ:ICHR) Q4 2023 Earnings Call Transcript February 6, 2024
Ichor Holdings, Ltd. misses on earnings expectations. Reported EPS is $-0.0004 EPS, expectations were $0.07. Ichor Holdings, Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, ladies and gentlemen. Welcome to Ichor Fourth Quarter 2023 Earnings Conference Call [Operator Instructions]. I would now like to turn the conference over to your host, Claire McAdams, Investor Relations for Ichor. Please go ahead.
Claire McAdams: Thank you, operator. Good afternoon. And thank you for joining today's fourth quarter 2023 conference call. As you read our earnings press release and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in our earnings press release, those described in our annual report on Form 10-K for fiscal 2022 and those described in subsequent filings with the SEC. You should consider all forward-looking statements in light of those and other risks and uncertainties.
Additionally, we will be providing certain non-GAAP financial measures during this conference call. Our earnings press release in 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. On the call with me today are Jeff Andreson, our CEO; and Greg Swyt, our CFO. Jeff will begin with an update on our business and then Greg will provide additional details about our results and guidance. After the prepared remarks, we will open the line for questions. I'll now turn over the call to Jeff Andreson. Jeff?
Jeff Andreson: Thank you, Claire. And welcome to our Q4 earnings call. Our fourth quarter revenues came in at the upper end of our expectations at $203 million. This equates to sequential growth of 3% from Q3 within an otherwise stable demand environment. I'd like to provide some color on our revenue movements within the fourth quarter. First, the majority of the upside in revenue growth above the midpoint of guidance was essentially passed through. This is because during the quarter, we elected to take the opportunity to reduce inventory levels in order to drive strong free cash flow generation, which in turn was used to reduce our debt levels and ongoing interest expenses. We sold the inventory at zero margin. And so while this decision carries a number of benefits for our ongoing financial performance, it did have a negative impact on our Q4 gross margin.
Further, our Q4 revenue forecast had incorporated expectations of improved mix compared to Q3, but instead, our revenue mix actually became less favorable and this had the largest impact on our lower than expected gross margin. Our build-to-print gas panel business, which is our lowest margin business improved during the quarter to drive both the remaining upside to revenue as well as offset the decrease in our weldment business as our customers continue to focus on reducing inventory levels. While this unfavorable mix shift did have an impact on our gross margin, strength in the gas panel segment of the business is a very good indicator that we are coming off the bottom of the cycle. So in total, we witnessed a temporary low in gross margin performance in Q4 through a combination of unfavorable product and customer mix, the impact of inventory sales at costs and, to a lesser degree, continued E&O headwinds and slightly higher manufacturing costs.
With OpEx just below the midpoint of guidance, operating profit was roughly breakeven. Interest expense came down quarter-over-quarter given our decision to deploy free cash flow towards reducing our debt levels. During Q4, we generated $35 million in free cash flow and reduced our debt levels by $32 million, while still adding $4 million to our cash balance. Given the lower profit versus forecast with the slightly lower OpEx and interest expense and a higher net tax benefit the net loss per share was $0.06. Now I'll turn to our outlook. There are many reasons to be optimistic about the growth ahead. First, we estimate that our exposure to memory WFE declined to just about 25% in 2023, which means we are well positioned to outperform industry growth as memory spending improved, in particular, within the NAND segment.
Next, as our memory exposure has declined over the last few years, we have increased our exposure to a number of growing market segments of WFE, such as EUV lithography and FE gas panels for silicon carbide. As a result of our leadership in providing gas delivery for the EUV market, we added ASML as a third 10% customer for fiscal 2023. We anticipate that our EUV sales will continue to expand in line with unit shipment growth in the years to come. We are also pursuing opportunities to expand our exposure to the overall lithography market and believe we are well positioned to benefit from next generation platforms such as [High-NA] as well as win share in additional areas of lithography. We continue to shift production volume gas panels for the silicon carbide market and have been qualified on the next-generation epi systems.
Our design wins for epi applications resulted in strong growth from our fourth largest customer in 2023. And as the applications and market opportunities continue to grow in support of EV manufacturing in the years to come, we anticipate our silicon carbide exposure will continue to be a tailwind to our revenue growth. We estimate the silicon carbide market for gas delivery to be around $60 million in 2023 and expect it to double in the next three to four years. We are also seeing the emergence of new technology drivers and process inflections that require an increasing use of applications that are more highly dependent on the accuracy and repeatability of the gas delivery system. These include the growing use of certain etch and deposition techniques within advanced logic architectures, 3D DRAM and advanced packaging.
We recently refreshed our investor presentation to reflect the increased use of certain of these growing applications such as selective etch, ALD, deep silicon etch and more. We have a role providing fluid delivery to all of these applications. As EUV adoption continues to proliferate across multiple device types, our process tool customers are witnessing the need for more etch and deposition steps to help create smooth patterns and reduce line with roughness. Additionally, the growing importance of advanced packaging has revealed process challenges that require better film stress management, improved defectivity, enhanced uniformly, increased material selectivity, all of which are enabled by more precise control of gas and fluid delivery. Outside of semiconductor, specifically for our IMG business, we are also driving cross selling opportunities at our historical gas panel customers as well as opportunities to offer Ichor’s components and capabilities to IMG's customer base in medical, aerospace and defense.
As these new technologies and drivers evolve and proliferate, we see opportunities for Ichor to expand our revenue potential and continue to add breadth and diversification to our customer base. All of these factors build a strong story for Ichor's revenue growth as the industry recovery accelerates. But it's our proprietary products, including our next generation gas panel that we are most excited about as our key initiative to drive overall gross margin expansion within our business. We have been qualified on three applications and are now supporting our customers' evaluation tools that are shipping to a device manufacturer. Our latest investor presentation includes a slight adjustment to our target model to reflect the higher level of investments we are making in R&D in order to develop additional proprietary products, which we believe in turn can drive our gross margin north of 20%.
We are focused on the development of proprietary products that support our customers' long term technology growth roadmaps. These periods of lower demand provide both Ichor and our customers the ability to work on new qualifications. We continue to make very good progress in our key focus areas. These include our next generation gas panel and qualifications of our proprietary machine components. I'm very pleased with the progress of our new gas panel as we are now moving into qualifications at the device manufacturers. We continue to work with multiple customers and expect to add additional customer evaluations over the course of 2024. Our new gas panel contains about 75% proprietary Ichor content compared to around 10% today, which will drive significant expansion of our gross margin profile.
In the next several months, we expect to ship gas panels that will support five additional systems for end user customer tool evaluations. This is a major milestone for the program. Our best estimate of when production systems will begin is late 2024. In our proprietary machine components, we continue to win new qualifications across our customer base. The ramp is taking longer as we work through the inventory on hand, but we are qualified and expect this to positively impact our first quarter gross margin and continue over the course of the year. In summary, I'll remind everyone here today that our revenues tend to recover more sharply when industry spending rebounds. Furthermore, our business model and financial profile tend to generate significant operating leverage as revenues grow.
Current industry expectations are that the business environment for WFE will persist at these levels through the first half of 2024. And given the modest mid single digit growth outlook for the full year, 2024 WFE will likely be more weighted towards the second half. Given our current visibility, we also expect our revenue run rate to continue around the $200 million level through the first half followed by the beginning of a revenue ramp in the second half. As we look ahead to an expected strong recovery year in 2025, we look forward to ramping revenues back towards the $250 million to $300 million plus level in 2025. We expect to be able to deliver significant earnings growth as revenue volumes increase, which is why we continue to make critical investments in our business in support of our future growth.
With that, I'll turn it over to Greg to recap our Q4 results and provide further details around our Q1 financial outlook. Greg?
Greg Swyt: Thanks, Jeff. To begin, I would like to emphasize that the P&L metrics discussed today are non-GAAP measures. These measures exclude the impact of share based compensation expense, amortization of acquired intangible assets, nonrecurring charges and discrete tax items and adjustments. There is a useful financial supplement available on the Investors section of our Web site that summarizes our GAAP and non-GAAP financial results, as well as a summary of the balance sheet and cash flow information for the last several quarters. In the fourth quarter, our revenues were $203 million at the upper end of guidance and up 3% from the prior quarter. With customer demand remaining relatively stable from Q3 levels, the majority of upside in revenues compared to the midpoint of guidance reflected pass through inventory sales at zero margin as Jeff discussed.
With the less favorable product and customer mix, the impact of the sale of our inventory at no margin and some continued E&O and slightly higher manufacturing cost headwinds, our gross margin was 10.4%, which was well below our expectations. We anticipate a significant improvement in margins as we move through 2024. Q4 operating expenses were slightly lower than Q3 at $21.2 million and our operating income for Q4 was roughly breakeven. Our net interest expense was $4.7 million and our non-GAAP net income tax benefit exceeded our forecast at $2.8 million. The resulting net loss per share was $0.06. Now turning to the balance sheet. At the end of the quarter, our cash and equivalents totaled $80 million, a $4 million increase from Q3. We generated $37.6 million in cash flow from operations.
And after deducting $2.3 million of capital expenditures, our free cash flow was $35.3 million. Free cash flow for the quarter was particularly strong given the $37 million sequential decrease in accounts receivable, which drove DSOs to only 30 days. Inventory decreased to $21 million during the quarter to end the year at $246 million and inventory turns increased to 2.8. During the quarter, we paid down $31.2 million of debt and our net debt coverage ratio currently stands at 3.4 times. Now let's discuss our guidance for the first quarter of 2024. With anticipated revenues in the range of $190 million to $210 million, we expect our Q1 gross margins will improve to a range of 13% to 13.5%. At this time, we expect Q1 operating expenses to be approximately $22.3 million.
The increase reflects the seasonal impact of payroll taxes resetting, audit fees and other variable compensation costs. As we move beyond Q1, we expect OpEx to remain at a similar level as we are making targeted investments in IT and R&D. Net interest expense for Q1 is expected to be approximately $4.3 million. Looking beyond Q1, we expect our net interest expense to continue to decline as a result of our focused efforts on reducing our debt levels as well as an anticipated favorable reduction in our interest rate later in 2024. For modeling purposes, you should model interest expense for 2024 to be approximately $16 million. We do not expect to record a tax expense or benefit for Q1. For the full year, we are forecasting a non-GAAP effective tax rate of 5%.
Operator, we are ready to take questions. Please open the line.
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