Ichor Holdings, Ltd. (ICHR) Q3 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Ichor Systems Third 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.

Thank you, Katrina. Good afternoon, and thank you for joining today's third 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 on file with the SEC 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; our President, Jeffrey Andreson and Larry Sparks, our new Chief Financial Officer. Tom will begin with the recap of our results, strategy and outlook, and then Jeff will provide further detail regarding our growth initiatives before Larry then provides additional details of our third quarter results and fourth quarter guidance. After the prepared remarks, we will open the line for questions. I will now turn over the call to Tom Rohrs. Tom?

Thank you, Claire and welcome to our Q3 earnings call. Today we are pleased to report revenue and earnings at the high end of our expectations. Total sales of $154 million were up 11% from the second quarter with incremental improvement across all aspects of our business. Earnings of $0.30 per share were up 30% from the second quarter. Our revenues grew sequentially for each of the top four customers. Revenues increased for our gas panel and chemical delivery businesses, for weldments and for our precision machining business. The incremental revenues of $15 million over the second quarter came primarily as a result of an increase in our market share gains across all product lines and our EUV shipments, as we discussed on our last call. Importantly, for our overall business, the beginning of our recovery in the industry spending also contributed to a shipment growth in Q3. At this time, I would like to switch gears and comment on the second press release, we issued this afternoon. It is my pleasure to announce that Jeff Andreson will assume the duties of CEO beginning this January. Since our IPO nearly three years ago, one of my primary goals has been to build the strongest possible leadership team for our company. Jeff became President in April, and has been doing a terrific job running the business and engaging with customers. Just work along with that of our executive team, has made the Ichor organization stronger than ever. Heading into 2020, I will continue to work closely with Jeff and the senior management team as Executive Chairman. Together, we'll work on our strategies to solidify Ichor's position as a Premier Company in the semiconductor equipment industry. It is very gratifying to be turning over the CEO reins to Jeff as the industry is at the start of a recovery. Our forecast for Q4 is well ahead of what we expected a quarter ago. At the midpoint of our guidance, we expect revenues to be up 20% over our strong Q3 reflecting outperformance, compact significant outperformance compared to our other suppliers in the industry. The growth equates to about $30 million of incremental revenues over Q3. During the fourth quarter, all aspects of our business will contribute to this incremental growth. We'll have more revenue across gas panels, chemical delivery, weldments and precision machining and increased revenues from each of our top four customers. As others have been reporting, our revenue growth in Q4 is also being driven by the beginning of a recovery and capital equipment spending environment. It is clear that the current level of foundry and logic investments has strengthened considerably in the fourth quarter. And in addition, early signs of incremental memory spending lead us to expect a stronger year in 2020. Looking back over the past five quarters, we have shown that we can operate with strength and profitability during an industry downturn. We have also communicated that our business will fluctuate through the cycle along with our customers, while at the same time, we are executing on our strategy to expand our share of our served markets. Each quarter, we have expressed our confidence that we would emerge from the downturn with significant operating and earnings leverage. That is in fact evident by our Q4 earnings guidance of $0.43 to $0.51 per share which at the midpoint is a 57% increase in earnings off of a 20% increase in revenue. Compared to our Q1 trough quarter, the midpoint of our Q4 guidance is 34% percent higher than revenues, and 88% increase in earnings per share, consistent with our stated objective to grow profits faster than revenue, we are forecasting more than double the growth in earnings compared to revenue from the low point to the high point of 2019. So with this being my last earnings call as CEO of Ichor, I want to take a moment to reflect on the following messages, which I have communicated consistently since our IPO. We are a semiconductor equipment supplier, concentrating on fluid delivery technology. We believe that the semiconductor business will continue to grow faster than other industrial businesses, and that we are very well positioned with our key customer accounts. We are expanding our served markets through strategic and accretive acquisitions. We are continuing to expand our product offerings, and our customer base. Through each of our strategic initiatives, we are expanding our share of our served markets, and through the cycles we have delivered revenue growth outpacing the industry, and have grown revenues faster -- grown earnings faster than revenues. I feel we have done a solid job executing on our strategies and delivering on our message, and I believe you can count on Ichor to continue to deliver strong execution against our strategic initiatives as we enter a new period of semiconductor equipment sales. I'll now turn the call over to Jeff to provide an update on our progress made in the third quarter on our key business initiatives. And then, our new CFO, Larry Sparks will conclude our prepared remarks with the financial details of our third quarter results and Q4 guidance. Jeff?

Thanks, Tom. I'll now provide you an update on our progress against our market share gain initiatives as well as add a few comments on our operating performance before I turn the call over to Larry. We're continuing to see incremental revenues from market share gains, which as expected were up another $5 million in Q3 over Q2. In August, we took about a $10 million haircut to our expectations for the year, bringing the total to $65 million. However, we now think that will be slightly higher than that at $67 million for the couple of million dollars of upside expected for Q4. After several straight quarters of incremental revenues from our share gains, our annualized revenue exit rate as we entered 2020 will be about $25 million to $30 million higher than our 2019 revenues from these share gains. Our gas delivery business gains are largely in place, and will now fluctuate with demand for system shipments, which are now at their early stages of a resumption of growth, and weldments the delay that we experience as our customer manage the supplier transition is largely behind us, and we are now seeing the revenue ramp. In precision machining, we talked about these qualifications having the longest cycle times, but we are now in the final stages of multiple customer qualifications. We expect these qualifications will contribute to our 2020 revenue growth story. The largest growth driver for our chemical delivery business remains our proprietary liquid delivery module. Our partner in Japan is now actively marketing the product, and while it is still in the early innings we are optimistic that we will see first revenue in the second half of 2020 as a result of this partnership. We are very pleased to report the news that we expect to ship our first liquids delivery module beta unit to our largest customer in South Korea in the fourth quarter. This is an exciting milestone achievement for the company to expand its footprint in Korea. Meanwhile, we continue to work closely with our initial OEM customer on qualifying our liquid delivery module with additional ship manufacturers. To summarize, our incremental revenue growth in share gains initiatives has performed well and has improved to contribute approximately $67 million of incremental revenues in 2019, and position as well for a stronger 2020. Beyond these, we continue to make good progress on the development of our next generation gas panels and have fully integrated our Q2 acquisition of a flow control technology and engineering group. We continue to have dialogue with our customers, and expect to have beta units available by mid-year 2020. The addition of this technology, combined with our expanded operational capabilities will serve to expand our value add and margins as this next generation gas panel is adopted. Before turning the call over to Larry to discuss our Q3 results and our Q4 outlook, I would first like to welcome Larry to the team. Larry brings a tremendous amount of financial, operational and industry experience. While he’s only been here for -- with us for about a month, he has hit the ground running. Secondly, I'd like to give some color on the gross margin headwinds we saw in the third quarter. During the quarter, our customers began rebuilding their inventories of our weldment and machining parts at a faster pace than expected, which resulted in a faster release of our higher per unit overhead costs associated with these parts. Our mix of each of these shipments was also a bit lower than expected, and we had a higher mix of gas panels. As we look to the fourth quarter, we expect margins to improve as we begin to see leverage of our fixed cost structure and capacity additions, as we will be adding mainly variable costs as the industry recovery continues. I'll now turn the call over to Larry to discuss our financial performance for the third quarter and provide our fourth quarter outlook.

Thanks, Jeff. First I'd like to remind you that the P&L metrics discussed today are non-GAAP measures unless I identify the measure is GAAP based. These measures exclude the impact of share based compensation expense, amortization of acquired intangible assets, non-recurring 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 Investor section of our website. The third quarter revenues of $154 million increased 11% from the second quarter and were down 12% from the third quarter of last year. Given the headwinds discussed earlier, our third quarter gross margin of 13.5% declined from the second quarter. However, we maintain good control of operating expenses in spite of revenue growth at the high end of expectations. OpEx was relatively flat from the second quarter at $12 million and included the addition of approximately $500,000 associated with the IP purchase that we completed in Q2, as we also absorbed a small engineering team. Operating margin was also similar to the second quarter at 5.8%. Our interest expense in the third quarter remained flat at $2.7 million. Our tax rate for the quarter was a benefit of 7% of pre-tax income. The benefit was due to an adjustment to our full year forecast, as we now expect more income in Singapore, where we have a tax holiday. Third quarter net income of $6.7 million was equal to 4.4% of revenue and $0.30 per share. Now I will turn to the balance sheet. Cash of $30.2 million decreased $11.3 million from the second quarter, primarily due to pay down of $14 million on our debt, which was partially offset by positive operating cash flows of $4.3 million. Day sales outstanding of 45 days increased from 27 days in the prior quarter, as a result of heavily back end weighted revenue quarter, indicative of the higher run rate entering the fourth quarter. Inventory decreased 2% from the second quarter or $2.7 million to $106 million at quarter end. Inventory turns further improved to 5.0. Now I will turn to our fourth quarter guidance. Our forecast is for revenues in the range of $180 million to $190 million which is up 17% to 23% from Q3. Our earnings guidance of $0.43 to $0.51 per share reflects improved operating profitability as a result of the higher revenue volume and improving gross margin, while maintaining tight control of our operating expenses. We expect interest expense will be down sequentially to approximately $2.5 million. We expect our tax rate will be approximately 5% in the fourth quarter, and shares outstanding to be approximately $23 million. Operator, we are ready to take questions. Please open the line.

[Operator Instructions] Your first question comes from Craig Ellis from B. Riley FBR. Your line is open.

Thank you for taking the question and Tom, congratulations on all you've accomplished with the company. Jeff, congratulations on the CEO announcement and Larry welcome aboard. So quite a lot going on. Congratulations guys. Great.

Thank you. You're welcome.

So Jeff, I wanted my first question just to follow up on some of your prepared remarks with product activity and some of the dynamics. It sounds like from the comments around gas delivery, weldments and precision machining, that that some of the things may be lining up. So we have comparatively stronger weldment and precision machining growth heading into calendar 2020 versus gas delivery. Was that a fair read of what you were conveying?

No I think that our kind of our gas, our core gas panel business is growing about the same rate as our other businesses. I think, specifically was referring to in Q3, we had kind of an initial wave that just was a little higher than we expected. And as we've talked about on you know with the downturn, you kind of have higher overhead costs that are in inventory and those just kind of started to flush out sooner than we had expected. But I don't think that we're going to see of all our businesses are kind of growing relatively the same color obviously in the quarter, we saw higher gas panel, which was what took us up to that point.

So one of the things, we just quickly one of the things we had mentioned on previous calls is that we have been gaining market share. And I think you'll recall, we've said that the first types of product to come on board in terms of new share would be gas panels and probably the last that would come onboard would be precision machining and this is strictly or as a result of the amount of qualification effort required for those two different kinds of products. So in some ways, we've been a little bit heavier in gas, in our market share gains, and a little bit lighter in precision machining, but that will even out over the coming months.

That's helpful and Larry since, you handled the financials I'll throw one at you. With regard to operating expense, clear message on good execution in the quarter, and we've got the guidance, but as we think forward to the first calendar quarter, we would typically look for [Indiscernible] and to put some upward pressure on operating expense, but is there anything else we need to bear in mind as we look towards the new year, whether it's French adjustments etcetera? Thanks very much guys.

So go ahead Jeff.

Okay, it’s been here just -- month so maybe I'll just jump in. So obviously you're right. You see the employer tax has come back, and that usually upticks it. The other thing that we're also looking at is you know as we get through our phase, we're an emerging growth company. So our Sarbanes-Oxley, that'll be one of the things that may have an effect in Q1 we're still assessing that right now. But other than that, I think the message is, we tightly control OpEx and when we add it, it's because we need to add it in other words. So I wouldn't see a big uptick, but there may be some modest upticks. Obviously as you go in the fourth quarter, you get a little bit of an uptick on the audit fees. In Q1 you get a little more audit fees, and so there will be an uptick, but mostly around those types of things.

Got it. Thanks guys.

Thank you.

The next question is from Patrick Ho from Stifel. Your line is open.

Thank you very much. And I also like to extend my congratulations to you Tom. The success of Ichor is a testament of what you've done for an extended period of time. And Jeff, I also want to wish you the best in your upcoming role as CEO.

Thanks, Patrick.

Thanks Patrick.

In terms of the OpEx structure, maybe I'm sorry in terms of the flexible operating model that you have, you've shown this resiliency through both the ups and downs, but a lot of it has come in the past through your core gas panel delivery systems business. Are there ways to further optimize both the weldments and precision machining since those were acquisitions and you've put a lot of work and effort into fixing those models. Do you believe that there's additional moves you can make to optimize them further?

Patrick, its Jeff. So it's a really good question. I would tell you that in downturns, we spend time optimizing and as we're as we're starting to grow out of this obviously, we've got to add people to the cost structure and whatnot. And we will see better leverage out of those businesses than we did initially when we bought them. So we've had them for a couple of years now, and so we're pretty happy where they're at. And so you know we've always said the incremental margins associated with weldments and precision machining and some of our plastics growth are higher than the average core business model so you know.

There's another element Patrick, which is that over time we expect to leverage especially the precision machining. Also some of the weldments into the gas panel business, both those additional vertical integration, but even more so with additional value added differentiation. So, we're just kind of beginning the journey of taking advantage of these acquisitions, and we're looking forward to adding more and more value with that.

Right. That's really helpful. And as my follow up question, in terms of the gas pedal systems for EUV systems your customer has talked about a strong order flow that they saw this quarter for delivery next year. Those are probably going to be for their next generation systems. Is there any different content or increased capital intensity trends or are you just going to benefit from the volume in 2020?

So, it’s Jeff. That's a good question. Yes, there has been some contentionship between the two generations. We can't obviously tell you specifically whether it is, that’s for our customer, but there's some -- and we're also going to, you know what we expect to see higher volume as we go into 2020 in EUV. And I would also note that our lead time is about two quarters before they typically would ship the tools. So we ship some around five or six months prior to their shipments typically.

We began shipping the new tool in the third quarter, and in fact it -- with some of the young spoken heroes here over the quarter was the guys working on that, in that. As you know through understanding and watching the EUV introductions, sometimes these products don't go all that smoothly into. This is a significant revision of the original EUV tool and everyone performed really well in the coordination, with ASML was terrific. So we're really quite pleased about it.

Great. And again best wishes, Tom.

Thank you. Thanks. Patrick.

Your next question is from Quinn Bolton from Needham and Co. Your line is open.

Hey guys, I'll offer just a group congratulations. And since we already had a number, but I wanted to just step back on the gross margins, you know inventory levels have come down over the last four or five quarters. I understand that you get some of this higher cost inventory flushing through cost of goods at the initial phase of the upturn, but wondering how quickly do you think you start to get the higher margin product flowing through revenue, is that a quarter, is that two quarters? And then, sort of related longer term question if I look back to the peak of the 17, 18 cycle, your margins were hovering around 18% and that’s before you had meaningful contribution from some of the weldments and precision machine parts acquisitions. Is there any reason why you think you can't get back to those previous peak, if not higher, over the next upturn?

Well, I mean if we get to those levels, it would be -- we would think we will get back to there. Obviously I think the mix change will be helpful to that as well. Your first question was how long will it take to kind of normalize your overheads. And it's we have different types of businesses, some will take a little bit longer, but probably on average, we saw a little bit in the third quarter, what I see a little bit more in the fourth quarter, and it may leak into the first quarter to some degree.

Great. And a second question just looking at the end of 2019. We've obviously seen a very strong uptick in foundry logic spending, and I think there is going to be you know also a great fourth quarter on the foundry side. As you look out to the first half of 2020, do you see any pause in that foundry logic side of the business or you think a combination, or maybe if you do, do you think a combination of share gains and the memory business recovering can sort of offset any potential pause you might see in Q1 and Q2 on the foundry logic side of the business?

So, I guess what we're seeing is we see a pretty strong foundry logic this quarter. We don't get all the visibility of the customers, we get past a quarter or something, but it seems to have some carry into the first quarter. But we're seeing some early signs of memory recover in the business as well. So we would agree that if -- and I think in general most people think foundry logic is going to be relatively flat on an annual basis 19 to 20, and so if memory does recover, then we'll see growth year-over-year.

Okay. Great. Thank you.

The next question is from Sidney Ho from Deutsche Bank. Your line is open.

Thank you. Let me echo all the congratulations to all three of you as well. Moving on to the question, I just want to follow up with the last question. How much of an improvement in gross margin should we expect in Q4, and how much do you think gross margin would have been in a normalization situation where you don't flush through to high cost products, assuming the product -- assuming the revenues is the same level and the mix doesn't really change. In other words, are there any one time charges in there that we should be aware of?

No, I don't. I don't think there are any what you would call onetime charges in Q3 other than the fact that you know we had an earlier say pull of inventory into our customer's factories than we had expected. We don't guide margin as you know Sidney, so specifically we will see it improve off of this, this level in the next quarter. I think what I would tell you is that we've already commented on OpEx going up just slightly from Q3 to Q4, so you'll see that there'll be some recovery there, and then, as we continue to kind of normalize our overhead rates and get that through the P&L we'll start to see the margin accretion improve quarter-over-quarter. And obviously the revenue level, the higher it goes, the better it goes for us on the incremental basis. So..

Okay. My follow up question is on the share gain opportunities. I think you mentioned 67 million for the year. That would imply somewhere around $23 million, $25 million in Q4. As you look forward to next year, is there is seasonal impact we should think about, or is it more more like up into the right, and the question is more about the slope of the ramp? And just as a follow to that, in the past, you talked about the four or five different areas of half of share gain opportunities. Can you help us understand, what are the areas you have seen the share gains this year, what are the areas that got pushed out to next year and how that profile may change in 2020?

Yes, Sidney. There are a couple of things. One is, using your number and we knew that the share gain was going to start small in the first quarter and then ramp up. So using your number for the fourth quarter, obviously 25 million times for is 100 million which is more than the 67 we did this year. So we -- works continue just based on the wins we've already had. We will continue to see additional revenue from those gains. I have already mentioned that we've been, let's just say a little slower in terms of getting those wins on the precision machining, and I mentioned the reason why because of the challenges of the qualifications on those products. And you can understand that since it's vitally important for the flow of the gases that control the actual activities inside the chamber. So this is a very critical item. And so, we have not really seen much of that hit the scorecard yet, and we would expect to see that next year. So that would be in addition. Having said that, we've also said that you gain share during the downturn when people have time to do the qualifications, and it was part of our stated strategy from the beginning of the downturn that we're going to work really hard to gain share. And I'm really pleased with A, the amount we've captured and B, the effect it had in terms of helping us through the downturn and more importantly, the ongoing impact it has as we move forward. There's more to come, but I don't suspect you'll see kind of a separate share gain initiative that we spoke of quarter after quarter. I guess the final question was, and basically I think we've answered it already slightly, but the share gains is across all the different product lines. And just because the some of the precision machining hasn't hit the revenue line yet, doesn't mean that we haven't been working on it. We've been working across all the product lines, so that that's done well, there'll be some more. I think we know, we won't be spelling it out though for you. We won't be saying, you know 20 million this quarter 50 million next quarter etcetera etcetera. I think that was a good exercise in keeping you both up to speed on what our initiative was, and it was good for us in terms of you know really committing to it, and then managing and measuring ourselves off that success.

Great. Appreciate it. That may be the last question here. I think you indicated that in your press release, the beginning of the recovery in memory capital investment. What is your current expectations in terms of timing of that? And can you give us a little more color of what you've seen that gives you that confidence is that already showing up in your orders, or perhaps in some of the longer lead time products?

So the simple answer is yes. I mean we -- as we acquired a business in Korea, we're a little closer to the memory big customers as you know. And so we were seeing. And by the way that business was as we've talked about you know in the first quarter, we added as if there's probably two or three times what it did last quarter. So it's been the timing has been bad. They're definitely tied to memory in particular 3D NAND. So what we're seeing now is early stages of 3D NAND investment.

Great. Thank you. Congrats on all the good results and guide and also all the new roles that you guys have.

Great. Thank you.

The next question is from Karl Ackerman from Cowen. Your line is open.

Hey, good afternoon. Tom, it's been great getting to know you since your IPO and I wish you all the best in your future endeavors. And Tom and Larry, certainly congrats on your new positions of influence. A few if I may, a question on gross margins the first. Last quarter, you spoke about some mixed headwinds from your plastics business as well as the fact that some of the share gains in gas are initially at lower margin. I guess at the same time you spoke about how well mints would add ballast to margins in the December quarter. So maybe just provide a bit more color on the various subcomponents and how they formulate your view for margins in the December quarter as well as early 2020? And then I have a follow up.

Yes, I mean. So let me just go one at a time and hopefully, I cover him. So our plastics business is going to be from our view now as is still not recovering to the level we're seeing on our gas distribution business. So to some degree, that headwind is still in place in the fourth quarter as well which is not helpful to the gross margin, but we are starting to see the early stages of that revenue growth coming back to more normalized. It's just not happening as quickly as on the gas distribution side. I think the point we made about gas distribution is when our average margins were in the mid-teens you know we have things that are higher, and things are lower. So when gas grows a little faster, it's incremental flow through is less than weldments and particularly our probably our highest flow for is on precision machining. So all of those have begun. Now it took us a little while to get through the transition from one supplier to another one. But our weldment, new weldment shares are starting to grow, maybe not as much as we anticipated at the beginning of the year, but they are going to be incrementally positive to the gross margin. And so as we come through the next two quarters and with higher revenue growth, we'll see margin accretion from those. So I hope that answered all these questions.

It does, Tom. On outsourcing, I believe of the initial 75 million of incremental share gains, the weldment and plastics portion ramp was dependent on or predicated on a recovery from the memory market. So when should we see the ramp of the weldments business next year? And would you say that opportunity is the same size or is it just much much larger than expected 90 days ago?

So, it's Jeff. So plastics is really tied to today. The large component of that is foundry logic. So that's what drives our plastics business in general, particular LDM is tied to a logic customer. Our other plastic businesses are tied to other applications that are more in the foundry space and so on plastics memory will be helpful at some stage, when 3D NAND gets going. We do have some piece parts and components that we manufacture that'll grow. On the weldment side, you know when we made the acquisition of Cal‑Weld several years ago it was primarily focused on our largest customer, which has a very heavy portion in their business to memory. So as memory goes, that business will grow quicker. Having said that, we have by adding our second largest customer weldment position, we have a much more balanced now weldment business as that grows across more applications.

Thanks Jeff. One more, if I may. Recently, China big fund [ph] revealed that phase 2 will focus on etching machines and film and testing cleaning equipment. Given your unique position within the supply chain, I'm curious how you or your team see the development of indigenous China Technology on Etch and CVD equipment as well as their ability to improve yields on existing manufacturing processes and whether their desire to develop their own equipment is additive to your model next year or two? Thank you.

Well there's a lot of different ways to go about try and answer that question. And a lot of it is tied to the different geopolitical trade wars and whatever going on, and to the extent that current countries tried to prioritize their internal manufacturing. I think we're at a stage right now where that seems to be the case, and there's no doubt that there are a couple of very good manufacturers inside of Japan. One of them that had done a lot of MOCVD tools which are not very interesting to the bulk of the semi space has some capabilities and edge tools, so we expect to see that. Although to be honest with you, I expect that to be pretty small. The second has some really good and interesting capabilities in the clean space. We don't have -- our products are today not really tied into the clean space, but we think they could be through the liquid delivery module. So in many ways that's an interesting space to us. But again, this particular company those successful and kind of had a nice little splash on the stock market, they are not that large either. So the bottom line is, in my opinion two reputable companies the Chinese fabs will use as much of their equipment as they can, but they don't think it'll be all that much compared to the spending of a fab. I think there's a flip side to that story, which helps us dramatically which is the kind of a Larry, trade war between Korea and Japan. This one is actually probably even more meaningful in that, there's a lot of activity going on in Korea today to try to replace Japanese based product with American based product and beyond semiconductor, this goes for any type of product coming into Japan and coming into Korea. So this is a great opportunity for less Tokyo Electron product where we have very little share as you know and more opportunity for lambs and applied materials where we have a very large share. So I think this particular activity will far over away whatever we might lose from an edge tool in China coming from an indigenous supplier.

Very helpful. Thank you gentlemen.

Your next question is from Mitch Steves from RBC. Your line is open.

Hey guys, thanks for taking my question. Really just had two pretty high levels, so just the first one is just kind of the component cost when you go to 780 meter and below kind of these new equipment products. Is there any sort of a content change story or pricing story when it relates to creating the higher end tools? And then secondly, do you guys kind of think you can get the high teens gross margins long term again, remember those kind of a higher end target and we got there for a couple of quarters. Is that back on the table, assuming that there's a memory recovery in the back half of 20?

Yes. First of all, as you go to different nodes there's not a discernible difference in component costs for our products. It goes without saying. As you march down any maturity curve, you are going back to be getting lower component costs as people grow and develop and mature. But it's not something that is, oh here comes 7 nanometer and you know all of a sudden prices are going to be shrinking etcetera. So I wouldn't. I wouldn't worry too much about that. What was your second question?

Second was just gross margin, so I missed that…

Let me -- let me answer it this way. Let me answer it this way. So we have a business model, the business model says our long term goal is 19% to 20% gross margin. We're not changing that. And we certainly believe during upturns that margins will improve and as a bunch of the things that we've been working on. As I said before, start to hit the scoreboard margins will improve and that'll happen over some time which is why we call it a long term model. To be blunt, in first quarter of 2018 almost two years ago now, we did have some very high margins. And fundamentally, that was a huge jump in volume. I think we did 183 in the fourth quarter of 17 and 260 in the first quarter of 18. And so a lot of that came from just incredible amounts of overhead absorption, and Labor stretching etcetera, etcetera as opposed to something that was long lasting. Having you know. So the bottom line is that the business model of 19 to 20 still is correct, and we're marching towards that every day.

Okay, that's helpful. And just one really small one, just is 12 million to 30 million kind of a normalized OpEx we should assume, or is or is there going to be some more or that increase if revenues increase let’s say 20%?

Well I think, if you're talking about the fourth quarter the 13 numbers way too high. I mean, I would say as we look at next year, we have to become SOX compliant and we're looking at potentially in ERP upgrade, we might get to that higher end at some point in the year.

Got it. Okay. Thank you.

Thanks, Mitch.

Next question is from Tom Diffely from D.A. Davidson. Line is open.

Yes, good afternoon and congrats to everybody. And Tom, we're going to miss your industry street talk going forward. Big shoes projects to fill. So a couple of questions here. I guess the first one on the share gains, just to confirm, now when you get to the steady state of $100 million $120 million run rate, at that point going forward do you expect that business to ramp with the rate of your other business ramping up does it ramp slower or faster? What do you think is the natural ramp is from there?

You mean of the market share gains, we've been telling about Tom.

Yes. So once you get that you know those market share is in place.

Yes. I mean, I think, I think on the gas panels side they're in place. I mean, we're going. We're going to now flex with the market on those. There may be another leg at some point but the ones we've won, we won pretty early in the year, and so now they're floating with the market. I think there are certain components particularly, I think when memory recovers, we'll see a little bit faster growth in both the precision machining and weldments versus when memories kind of run in sideways, so that'll be helpful when that occurs. And like we said, we think we see some of the early signs of that spending coming back.

Okay. And then from the initial 100 million projection back four, five quarters ago, I just want to confirm it was just market driven declines and not losses of programs that drove the decrease in and then the subsequent increase?

So the answer is yes, and then I'd say you know and Tom already talked about it. It's just taken us a lot longer to qualify some of the precision machining component trays. So, some of that decline was just that being delayed, but we're still working on those, and actually progressing much better than this time on our last call. And then the other -- the other part of that business is you know LDM is a little lighter as we said versus what we wanted to achieve this year, and our liquid delivery module so that'll pick up steam next year too as our customer starts to qualify additional customers of theirs. Success in Korea, we're really happy with the progress in Japan that we're seeing in the first three months of our partnership.

Okay. And then I guess when you look at the prospects of a nice ramp over the next several quarters, are you finding it to be a tougher market to ramp up your employees?

A little bit. You know we're at 3.6% unemployment in this country. And Singapore is probably at that same level or lower so. And there's clearly a situation where there's more opportunities than able bodied workers these days. So it's a little bit harder, but we have ways of doing it. And at this point in time, we're very satisfied with all of with the success we're having in terms of getting the people in the right place at the right time.

Okay. And the other half of that was during the slowdown, were you able to maintain kind of the skilled welding capacity that you needed?

Absolutely. Absolutely. And when during a slowdown we don't take. Reduce the headcount dollar for dollar with the slowdown we are in the same ratio. There's a certain degree of people who we're not -- who are key to the processes and number of people who are very important to getting materials and engineering and processes running properly. They – those people we never let go of.

Great. Congratulations everybody and thanks again.

Thank you.

Thanks, Tom.

All right. Next question is from Gus Richard from Northland. Line is open.

Yes. Thanks for taking my question. Going into the downturn, you guys underperformed as your customers normalized them in February and it appears that you're going to outperform. I mean, you're into a little bit of an upturn. Can you talk a little bit about where your customers are with their inventory, and sort of when you think they're normalized to their run rate of shipments? It's hard to desegregate that from share gains.

Yes. We were just talking about this. Obviously in many ways, it's a little bit hard for us to understand exactly where the customer inventory levels are. And I know as we were going down, you folks would ask where the inventory is in terms of the customers. And some of them we knew and some of them we didn't. Having said that, it is normal that they would be rebuilding some inventories. However, we were just talking about this, and I think where things are right now is, most of what we will build this quarter will go into shipments, and a very small amount of it will go into rebuilding inventory. And to the extent that the ramp continues, that percentage and ratio might change, but this quarter, we don't anticipate a great deal of our product going onto their shelves. I think most of the product we shipped to them will go into their tools and out to the customer.

Got it. And then Tom, we’ve talked about value added products. Now I was just wondering if you could kind of walk through. You know when you expect to start beta testing those, getting them into customers hands, and when we might expect you know a ramp of new programs with more value added higher margin content.

Hey, Gus. Good question. It's Jeff. Our first prototypes won't be available until about mid-year and then it's a long cycle of getting those designed into products with that are customers. So I don't want to lead you to believe that next year is going to have some big bubble, because of this. It may be a several year journey, because it's a pretty novel approach to some degree. Having said that, and we've talked about it before our capability that we've added with weldments and machining, there’s more components that we can sell to our customers. That we buy today. So we're focused on that too. So while we're also talking about our next generation gas panels, we're also starting to position other components that we can manufacture at those sites to increase our values that we actually manufacture on gas panels, which will be helpful to the margin.

Okay. So just to regurgitate, you're going to -- in the near term you are going to drive content per box. Longer term, you're going to drive value per box.

Yes, that's a good way of thinking about.

Okay. All right. Thanks so much, congratulation.

Thanks, Gus.

Thanks, Gus.

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Tom Rohrs.

Well thank you all for joining us on our call this quarter. And I'd also like to thank our shareholders and employees, customers and suppliers for their contributions to Ichor during my tenure here. Next quarter, you'll have Jeff and Larry update you on our Q4 results. And thank you. And we'll look forward to great quarter.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.