Good day, ladies and gentlemen, and welcome to Ichor's Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to introduce your host for today's conference, Claire McAdams, Investor Relations for Ichor.

Please go ahead. Thank you, operator. Good afternoon, and thank you for joining today's third 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 and the financial supplement posted to our IR website 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 incoming CFO. Jeff will begin with an update on our business, and then Greg will provide additional details about our results. After the prepared remarks, we will open the line for questions. I'll now turn over the call to Jeff Andreson.

Thank you, Claire, and welcome to our Q3 earnings call. Our third quarter revenues came in at the upper end of our expectations at a $197 million, up 6% from Q2, due primarily to a rebound in our core gas delivery business. Reflecting that the trough quarter for semiconductor process equipment is behind us. Earnings of $0.07 per share were aligned with our expectations, as we were able to offset some headwinds in gross margin during the quarter with lower Opex and higher net tax benefit, which Greg will discuss in his remarks. After two quarters in a row of revenues at the upper end of our expectations, at this time, our Q4 revenue forecast is fairly similar Q3 levels, and therefore, our revenue outlook for the full year remains consistent with the expectations we've shared throughout the year. Last quarter, we described the factors that are causing our expected revenue decline in 2023 to be a bit steeper than the overall market versus our relative customer and end market exposure, which is more weighted towards the areas seen in the bulk of the softness this year, especially process tools for the NAND Memory segment. As the year has progressed, it has become increasingly clear that the strong growth witnessed and action deposition over the last few years has been largely fueled by the capacity expansions underway at the 5 leading manufacturers of 3D NAND and in 2023, this segment has witnessed spending declines of as much as 75%. We estimate that memory WFE has declined to represent just about 1/4 of our total revenues in 2023. Furthermore, the component side of our business has witnessed deeper and more prolonged cuts as our customers work to reduce their inventory levels. The bright spots for us this year are definitely within…

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 our investors section of our website that summarizes our GAAP and non-GAAP financial results. As well as summary balance sheet and cash flow information for the last several quarters. In the third quarter, our revenues were $197 million at the upper end of guidance and increase [Technical Issues] from the second quarter. Our Q3 gross margin was 13.1%, which was lower than our expectations, primarily due to the additional inventory provisions recorded during the quarter as well as a less favorable product mix compared to our forecast. With close control of spending, Q3 operating expenses of $21.3 million declined from Q2 levels. The resulting operating margin for Q3 was 2.2%. Our net interest expense was $5 million and our non-GAAP net income tax benefit for the quarter exceeded our forecast at $2.9 million. Consequently, our net earnings for the quarter came in at the midpoint of Q3 guidance at $0.07 per share. Now turning to the balance sheet. At the end of the quarter, our cash and equivalents totaled $76 million, a $9 million decrease from Q2, primarily due to our net debt reduction of $12 million. We generated $4 million in cash flow from operations and after deducting $2.4 million of capital expenditures, our free cash flow for the quarter was $1.6 million. This was below our expectations for free cash flow given the back end loaded revenue profile of the quarter, which drove an $8 million increase in accounts receivable. Inventory remained flat at $267 million. Day sales outstanding…

Thank you. We will now be conducting a question and answer session. [Operator Instructions]. Your first question comes from Charles Shi with Needham & Company.

Hi, thanks for taking my question. Good afternoon, Jeff. I want to start the first question, in terms of the first half 2023. I heard you talk about the first half 2024, maybe that's an industry comment. You're expecting a consistent with that Q4 level, for the first half 2024. I wonder, what do you see the Ichor business going to 2024 and I think it's tied to this question that, how much inventory do you think your customers are still holding at this point of your products and, whether they have included caution to be depleted, which actually could, lead to a slightly higher steadier growth for Ichor business going to first half 2024.

All right, Charles. Thanks for the questions and if I miss any piece of it, just remind me. We I think what we see looking into 2024 are very similar levels of revenue, kind of bounce along the bottom here. I think in, an outlook for WFE, I would say, in general, I think that kind of mirrors what most people are expecting, I think, in the market with an inflection beginning in the second half. In general, it's going to have to inflect, sometimes near to the fourth quarter unless the 2025 outlook changes materially, but I think most people are looking at a very strong 2025, similar. Now your question around inventory, how much? We don't know. We don't have that visibility, but we can tell from the order patterns that were still at, I'll call it muted levels versus where we would have expected to be through this quarter and probably will last and be a bit of a headwind as we go even into next year and the reason we can stay relatively flat, I think, over the next couple of quarters is we are bringing in some incremental share gains to offset some of that. Did I did I miss any other pieces?

No. Yeah. Thanks. Thanks very much. Jeff, that that was a very good answer. So maybe the next question, I want to, ask a little bit more about the gross margin, performance over the last quarter because you did highlight, right, if I heard you correctly, the two items there, one is the, maybe the product mix was not as favorable, but you actually pointed to the rebound of a gas panel business, somewhat of a rebound, but the other thing, is about inventory reserve. I just want to ask, what was that inventory reserve that you took in Q3? Why was a little bit higher? Sounds like it's a little bit higher than you previously expected. Why did you take that action and well, what's behind that?

Can I start with the product mix and I'll let Greg answer the reserve level. With the product mix, I would say as we entered, the quarter, in our machining side of the business, we expected some relatively decent growth, not super, but it just stayed relatively the same and actually declined slightly. So this is what leads us to believe that we still have inventory in the channel that has to get burned off before we start to see an inflection and that's primarily where you saw the mix. We offset that obviously with the gas panel integration business, which comes lower margins versus our machining margin and then I'll let Greg talk a little bit about inventory reserves, and it's a complex subject. I'll leave it at that.

Okay. Thanks, Jeff. Hey, Charles. Regarding the inventory reserves in Q3, you know, we saw some headwinds in our various business units of inventory using our normal E&O inventory reserve process and as we do our lookbacks, we had some inventory roll off, from prior quarters that we had to take some additional reserves for. That was predominantly the driver for Q3 and we do expect to see some benefit in Q4 as we worked down some of that inventory that we had reserved, but we do expect it to return back to some level of normality as we exit the year, for 23.

Maybe a quick follow-up, Greg. I know that's a complex subject, how should we think about what's normality? Is there anything quantitatively, you can point out?

No. I think Charles that's a bit more complex. We have a very complex model that we look at and use various things to look at demand and historical activities. So there isn't a normal number that we could point to, but as we manage that inventory and we start turning it, then we should see the reserves come back to what we would expect to be normal, not some predetermined amount, but what we expected to be from ongoing run rate standpoint. Not sure I answered that, but, it is a complex model, and there isn't really a normal number that we could point you to.

Thanks, Greg. That's all my questions.

Next question, Craig EllisB. RileySecurities. Please go ahead.

Yeah. Thanks for taking the questions, guys. I'll just follow-up on, a little bit of Charles' line of inquiry. Can you help us understand the relative magnitude of the mix and the inventory reserve items that impacted the calendar third quarter's gross margin and somewhat relatedly. Am I interpreting your comments correctly, Greg, in inferring that reserving issue should exhaust itself by the end of the fourth quarter, could some of carry into, calendar 2024?

So, hi, Craig. The excursion we saw you know, from what we had guided to about half of the miss was tied to the to the inventory reserve that we took and then the rest of it is really product mix and some other, some minor changes in the factory, but half of the miss that we guided to was driven by the reserves and as I said earlier, we don't expect it to be at that same levelof reserve in Q4. So we do expect it to pop back, as we manage through that bubble of the inventory.

Yeah and I think, hey, Craig, its Jeff, just to follow on. I think that's why we offered some color on even in a similar quarter in Q1 that we think we would be back to that flow through at 25%. So in Q1, it should more normalize. I should say it's never. It always has some flexibility or variability in it, but, I think we can get back and if you do the flow through based on Q2, you'll see it be kind of in the low fifteen again.

Got it. That's really helpful, and I've missed that comment on one queue. So thanks for clarifying that Jeff and then, Jeff, I wanted to follow-up, on a comment that you made, in the early part of the Q&A when you talked about some share gain potential, that you had coming into the model. That would be beneficial in calendar 2024. Can you talk a little bit more about that? Then, you know, when do we expect it to start?How material could it be through the year, etc?

Yeah. If you look into 2024, it's I I'd say it's difficult to size, but it's, like, I'll size it in the tens of millions, and it kind of in a full run rate. There's a couple of things that I can point to, obviously, we've been working to add machine content. We're getting it qualified, but between our inventories and other in the channel, we have to work through that before they go in, but I think you'll start to see some of that margin accretion, which is why we talked about the 25% flow through going into Q1. We get a full year of the silicon carbide gas delivery systems that we're delivering to our, initial customer in that space that are going to, actually, you get the full year where, in fact, we had about half a year.So it's going to more than double, and you'll start to see that runway kind of increase a little bit and those are some areas where seeing some new wins in weldments, but we're still working off some of the inventory in the channel.

Nice to see that.Thanks so much.

Next question, Krish Sankar, TD Cowen.

Yeah hi, thanks for taking the question. First one, Jeff, I just wanted to ask you a question. I understand demand weakness it's kind of well understood. So, that's kind of a negative thing. If you look at your customers, all the semi-cap OEM customers are shipping a lot to China and, obviously, they can charge a higher ASP even though it's mature notes.Do you get any benefits from that, or is it neutral, or is it even negative for Ichor? Because if mature notes, so the gas boxes are smaller, if it's lower ASP product you're selling. I'm just trying to get your thoughts on how China impacts you because it's clearly a huge benefit for your customers, but doesn't seem like it's impacting you as much?

Well, I think if it's a new tool that ships into China, the 300 mm, we benefit just like any other tool that goes into China. What we don't benefit is we don't sell anything directly to any China OEMs, process tool manufacturers like Anora or anything like that. We don't participate in that level. I would say our participation at the 200 mm level is a little bit lower then it is at 300 mm. Some of that is still done in house and so I don't know that it's a huge headwind for us, but it's obviously not a, we benefit as though our customers do. Anything that they ship into China at 300 mm will get a piece of if that's market share that we're, a part of.

Got it. And then I have 2 other quick questions. Number 1, you kind of mentioned your revenues hanging around these levels in the first half of next year. Do you really need to see an NAND inflection for these revenues to grow or are you banking on anything?

Well, that's that is a great question, Krish. A NAND inflection would be fantastic. I mean, obviously, I think, as you know, our customer base well, NAND for us is a reflection of what our customers are seeing and NAND is down as much as 75%. So any inflection there is tremendously helpful and would drive kind of the memory spend. I would say, this year, we're going to be 75% FoundryLogic. So obviously, it would definitely help. I would say, we don't see that inflection in the next two quarters in the first half of 2024. We don't see any indication of that yet.

Got it. And then the final, just a clarification. On the silicon carbide side, do you still have only one customer or you have more than one?

We have one customer in that space. We haven't set who it is, but, they we're on multiple platforms there now and as they continue to iterate, we were the call it the tool or record there. We talked about the market being $60 million and I would say that this this one customer has got a reasonably good share of that market, but there's still 3 or 4 other players that can address this market over time. We see this market as kind of doubling in the next 4 or 5 years. So it's an area of focus for us and this is, what I would say is, these are deposition tools.

So Thanks a lot, Jeff.

Our next question comes from Brian Chin, Stifel.

Hi there, good afternoon. Thanks for letting us ask a few questions. Maybe, Jeff, first question. With EUV, litho delivery sort of flattening out plus or minus next year, have you already seen an adjustment from your customer? And are there are there any inventory headwinds to consider moving forward?

I don't think there's any inventory headwinds, with our EUV customer. I think that, what I've said in the past, they're very transparent. We don't really see a deviation from what there's telling, the external world. The only thing I would remind you of is we deliver about 5 months before they can deliver a tool. So anything in the first half of the year, we've already addressed in our back half of the year shipment for them. So and they're remaining relatively flat. I think as you know, that customer is expected to press 10% of our revenue this year.

Okay. Thank youand you gave a bit of an update in terms of the evaluations and qualifications of some of the new gas panels with Ichor significant content and I didn't catch all of the discussion, but it seems like there's, additional evaluations going out in the field and so maybe you know, more activity than you might have imagined in sort of first revenue kind of steer towards the latter stages of next year. Is that the right way to characterize it? Can you also maybe if you didn't already go over sort of like the number of customers, maybe the number of platforms again that that you're involved with.

Yeah. So the first three qualifications are, again, they're all deposition applications, 3 different, applications. We haven't said how many customers in specifics we're working on, but its 3 or 4 that are pretty active right now. So, this initial, wave of evaluation units, most of those customer evaluation. So we've delivered gas panels that might go in their application lab get tested, get qualified, and then they go out with their new products and platforms with our gas panels on them and then next 5 months or so, we're going to have about 5 full tools go out that we would expect to be at customer evaluation,so at the device manufacturers, those take 6 to 9 months and so that's how the first wave would be kind of the back half of 2024 and we're working with several other customers along the way but they have not yet finished their internal qualification. It's hard to set a timeline, but, obviously, probably, qualifications complete at some point for some of those of 2024 and then 2025 would be the production tool roll out.

Got it. Maybe one last one, maybe for Greg, and kind of tying some of this together, but you know, thinking about some of those hopefully successful qualifications, thinking about some of the content that you're designing into existing gas panels and I understand how kind of it'll stage in some of that revenue, at parts of last year, but maybe 2024 in the in the 2025, did it start to make sense that you could have gross margin flow through somewhat, somewhere north of 25% when you think about sort of the accretion, some of those revenue opportunities provide?

Hi, Brian. Yes. In regards to that, you know, as those gas boxes and those new content start to move their way through the revenue stream, we do expect that we should benefit in our margin, and that those specific margin profile should see a better than 25% flow through and as that takes more percentage of the revenue, we should see a better benefit on the overall margin, going into 2025.

Yes. I mean, Brian, I think we've talked about in the past. We need this level of content to, to get us into the 20% kind of corporate wide gross margins and you don't need like a $100 million of this given the fact that the margins are much more like our machining margins with the shift from kind of 90% procured to 75% internally manufactured.So part of our roadmap to get into 20% gross margin, in our business model.

Great thank you.

There are no further questions. I would like to turn the floor over to Jeff Andreson for closing comments.

Thank you for joining us on our call this quarter. I'd like to thank our employees, suppliers, and customers for their ongoing dedication and support as we continue to navigate this highly dynamic business environment. Our upcoming investor activities include the New York City Summit on December 12 and the Needham Growth Conference in January. We also look forward to our Q4 conference call scheduled for early February. Operator that concludes our call.

[Operator Closing Remarks].