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.

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?

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…

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…

[Operator Instructions] Our first question comes from Craig Ellis with B. Riley Securities.

I wanted to start off just by clarifying the gross margin line item in the fourth quarter and then understanding how those dynamics played out through 2024. So Greg, can you just quantify the specific factors that were at play that caused gross margin to decrease so significantly? And then just help us understand the arc of those -- of how those come out of the model as we look through 2024?

I'll let Greg chime in at the back end. But I think given the magnitude of the [miss], I think I'd like to kind of walk you through it. I think, first of all, we elected to sell some inventory at cost. As we looked at our inventory in months of supply, we had some inventory that we were able to go ahead and sell. Have we built that, that piece would have generated about, say, $1 million of kind of incremental profit off the bottom. And so as that side of our business, really the depth of the component side has been down, this quarter’s mix was primarily kind of a much lower level of weldments than we had seen before. So that mix offset by the gas panel mix was the largest driver. So as we look forward, I think in the gross margin that we've talked about, we see the mix staying relatively stable and coming out of this. And as you kind of look into next year, all of the key initiatives that we've been driving around internal supply and developing new products that we can integrate into our gas panels are going to help us recover some of this stuff. We also will see some normalization of some of the inventory reserves that have been bigger than we've seen in the past as well. And what I would like you guys to leave with and I'm sure this question will come up again is as we kind of recover the $225 million or higher, which is what we maybe see late in the fourth quarter or around the fourth quarter, that's kind of our outlook, at this time, we think we can get it back up to around 17%. So from 13 to 17, you're going to see increases as we kind of go through the calendar year. Hope that answered your question?

Yes. And then I wanted to follow up on your comments on the new gas panel product. And I like the fact that you've got that much higher content there, and that's going to be a gross margin tailwind, Jeff. As you start to ship that later this year, can you just help us understand how the mix of that newer product will feather in with all the existing product that's part of current customer programs right now? Said differently, how abruptly can that ramp to significant majority of gas panel mix?

As we're working through these qualifications, the first three applications that we won are essentially, I'll call them market share gains. They are applications we haven't had before and going forward. So as we kind of look later in the year, I would say this year, we're probably going to see kind of low single digits of revenue start to happen. It's really in 2025 that these qualifications start to layer on and get qualified at multiple customers that will start to see the inflection. Having said that, Craig, a lot of the internal components that are in the gas panel that's fully configured with about 75% of our content, we can work on the -- I'll call them the legacy gas panels. The gas panels today, there's a lot of components we can still get qualified on. There's valves, fittings, substrates, things like that, that are adding content, and that's the internal supply that I referred to. So it's going to start to happen during the year. We've already won the qualifications. They're moving a little slower because of kind of our inventory position and some of our on-order position. But we're going to see that as a piece that helps us in Q1, specifically and going forward. And those are measured in kind of tens of millions of dollars, too. So you'll see those first before we get to the fully integrated gas panels affect our gross margin in 2024.

Our next question is from Brian Chin with Stifel.

Maybe first just to kind of go back to the gross margin, just maybe the things out -- maybe a little bit -- gain a little clarity here. We are modeling, say, like 14% for Q4 and the non-GAAP is 10.4. If the revenue upside was kind of zeroed out gross margin, that's still only maybe like 30 basis points. And so there's still several hundred basis points there to kind of understand. So is there a way you can reconcile sort of higher inventory reserves, worse mix, other elements there that kind of to get us to the delta?

I think when you look at the mix, and its product and customer mix, I would say that was probably somewhere around two thirds of the challenge. Obviously, the gas panel business, the build to print is, as I said on the prepared remarks, our lowest margin versus our higher margin products that the mix didn't -- we didn't achieve the mix we set out at the beginning of the quarter. So the pass through, think of that as kind of 50 basis points, 1 million. I think I did the math right. And then the other kind of headwinds between 13% and 14% where we ended last quarter and where we wanted to be this quarter is really a little bit higher E&O than we expected, but really the slower ramp of some of the internal supply parts, which will recover again in Q1. So that adds enough granularity and color for [Multiple Speakers]…

Yes, it does. Maybe kind of an add-on to that but also maybe my second question. In terms of the rationale for kind of doing that pass through, was that -- I mean, this is sort of a prioritization of cash flow over P&L for that given quarter, that's kind of a follow-up to that. But then kind of tied into that. When I look at your customers' balance sheet and you can definitely see their inventory is moving in the right direction, they still have maybe two quarters plus worth of inventory. But when you drill down into what the excess is of your products, either gas panels and finished goods and machine components and raw materials inventory. How severe is that excess? And is that part of what gives you confidence that this destock will basically be over in first half?

I think you got a couple of parts. So first, this decision that we made specifically was around parts where we saw the usage, the months of on hand to be well out beyond a year. And so we took advantage of that to generate cash pay down. And it did have a P&L hit, we would have had wait a while before we could consume that. So that was a little bit around time, value and money and our ability to pay down some debt and the fact that it would have taken us a while. So the second part of your question is really around what's our confidence that will be through kind of our customers burn down. I think it obviously varies by, I'll call it, kind of business segment within ours. I think, in general, gas panels, they're done, right? Like most of this is going to be in the weldments and machine components side. I think it will carry to some degree through even this year. Our inventories are [two way] or about half our peak year inventory turns. So we're clearly carrying excess inventory that we're looking forward to ensure that we can burn it down. So we see a path for how we get back to more normalized turns, but it may take just a little bit beyond the end of this year to get there.

Our next question is from Charles Shi with Needham & Company.

First off, congratulations on winning the Applied Materials Supplier award. I have a question, Jeff, about the '24 revenue progression, the way you kind of described almost feel like you're going to be run rating around $200 million for two quarters? I mean, until June and December, you think you can approach that $250 million, that's quite a bit of a step-up. Are you expecting September to be somewhere in between? Because the reason why I asked this is your one of your two largest customers, Lam Research, recently talked about more of a moderate -- I mean, a modest, actually not moderate, modest recovery, but actually a little bit stronger close to the year. And almost feel like in Q3, they are expecting not so much of an uptick. Are you seeing a little bit of the earlier uptick in Q3? And I mean, it's kind of embedded in the way you described about a year. Any color for that?

Let me -- it's a good question, Charles, because maybe my comments during our -- at the beginning, we talked about specifically, we're looking forward to getting back to those kind of $250 million, $300 million. So this is really looking into 2025. Q4, I don't think is going to get to $250 million, just to be clear, that wasn't the intent of what I was trying to get across. I think it's going to be a little in that kind of $225 million to $230 million range, maybe as our visibility today. And then Q3, it will be somewhere in between. Keep in mind that we have -- because we're still kind of working through the inventory reduction, we're going to see a different profile as those are our longer lead time parts. So those will kind of lead any kind of gas panel and further kind of growth. But again, I think 2025, I think the confidence with us and with our customers is that's going to be a pretty good growth year. So I would expect that some of that has to occur in the back half of our year to support the beginning of their years and their revenue. So I hope that kind of helps you kind of position where we kind of see our year going.

Maybe the other question I have would be, I mean, between the two largest customers, I think that the prior person ahead of me asked about the Lam Research still carrying a good amount of inventory. Applied Materials, it looks like their inventory level seems to be relatively okay. Do you see a differential in terms of your revenue coming from Lam versus Applied that this year as your revenue to Applied are slightly better than them? The reason why I asked this is I really just want to figure out where the upside of your revenue from the two largest customers is more likely to come from which customers?

Probably some stuff I can't specifically answer at a customer level. But certainly, our two largest customers had different profiles. And I would say largely around where they were positioned primarily in the memory market. I mean, we do know our largest customer at a very, very high level of market share in the 3D NAND. That recovery is something when that comes back then you would actually probably see that side of our business accelerate faster than foundry logic. Having said that, foundry logic, we view and is remaining fairly strong into next year. We don't see a massive drop-off in China shipments, and we're not getting any of those signals from our customer base as well. So beyond that, I don't want to get too specific around customer profiles.

Our next question comes from the line of Krish Sankar with TD Cowen & Company.

This is Robert Mertens on the line on behalf of Krish. I guess just the first one is, if you had any additional color on the expectations for the component business this year. I know inventory levels have seemed to be a headwind. But if you’ve seen any change over the last few months? And then on top of that, just sort of what the tailwinds from design win ramping would look like this year or if that's more of a calendar '25 story?

Maybe the way I would answer the component side of our business is we're seeing very similar outlooks quarter-over-quarter in the first half for machining. We would expect that starts to go. Weldments will probably run a little longer. They have, I think, a higher level of inventory in the value chain going forward. Our -- kind of the totality of our components business, if you kind of went back to the '21 timeframe, '22, somewhere in there, probably ran somewhere between 20% and 25% of our business, maybe a little closer to 25%. It's kind of running kind of mid to high single digits today. So that's the gap in the mix that we need to recover and that will help us accelerate towards our ultimate goal, which is to get our gross margin up in around 20%. But that probably will occur in 2025 as we kind of compound our new design wins and the gas panel 2.0, the recovery of our component mix. Now your other part of the question is how do we kind of size some of the wins we've already had. And I would probably just say it's kind of tens of millions of dollars of wins, and we expect a pretty significant uptick of those. And it's going to help us continue to drive our gross margin back to that 17% when we get kind of north of 225 by the fourth quarter.

And then maybe just one more. I know you talked through the next-gen gas panels. I just want to make sure I heard correctly that with those evaluation systems and shipments, you were thinking maybe a low single digit millions in the later half of this year and then the more material revenues should be next year. Did I hear that correct?

You did hear that correct. I mean, anything -- we're qualified. And with success at customers, how fast they move if the market starts to accelerate, obviously, that number will improve, I would imagine.

Our next question is from David Duley with Steelhead Securities.

I was wondering if you could elaborate just a little bit more on your silicon carbide opportunity. I think you have one customer now, and is there a possibility to sign up new customers in the next few quarters? And are there other opportunities for you guys outside of epi in silicon carbide.

So the answer is yes. I think there's still opportunity for us in the deposition side, call it, it might not be an epi like thing, but there are other companies out there doing other processes that we've had some initial discussions with very early stage. I think the bigger opportunity is around the implant side of the business. And those discussions are ongoing. I would say we've -- in particular, we won a little bit of weldment business, pretty small, but it's a foot in the door at one of the implant suppliers and we're going to continue to drive that. And I think that's kind of where we would probably see kind of an inflection point beyond our initial customer that's doing the epi silicon carbide.

Do you think you can win further epi customers because there's like, I think, four or five of those guys?

Well, I mean, I think there's kind of three in total that we're kind of looking at. And the answer is it's probably -- this year, if we start -- we're just starting the discussions late last year, we haven't really done any evaluations or gotten deep enough. So it's not out of the question, but it's probably 2025 revenue driver versus 2024. 2024 would have to be similar to our new gas box stuff, it's the beginning of the conversations of what we can do. And when we talk to our customers, they obviously see the breadth of what we can do as a company from gas panels, weldments, machining, and we can manage a lot of their supply chain. And I think that's how we, in essence, quickly won the first application, which is now kind of multiple generations of tools moving forward with our initial customer.

Now I guess the other question I had is -- you talked about a second half ramp in your core business. Are your large OEM customers coming in and talking to you about getting ready for this ramp, or it's just the typical -- I'm just wondering if there's a little bit more than rolling forecast behind the excitement about the second half?

I would say it's maybe less about the rolling forecast and more about the conversations we're having in preparation of the growth that they see kind of coming out of Q4 and into 2025. So I think it's a very consistent message out of our top four customers.

So they're telling you to get ready for a ramp in the back half.

Yes.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Jeff Andreson for closing comments.

Thank you. As Charles kind of noted, today, we won an award from Applied Materials for a supplier excellence award in quality for 2023. This is quite an honor to be recognized by the company and the contributions we have made to our customer over the past year and looking forward to future years. So it's always great to see these awards occur. I want to really thank everybody for joining us on this call this quarter. I'd like to thank our employees, our suppliers, our customers, our shareholders, for their ongoing dedication and support as we continue to navigate this highly dynamic business environment. We look forward to updating you again on our Q1 earnings call scheduled for early May. Operator, that concludes our call.

Thank you. This concludes our call for today. You may disconnect your lines at this time, and we thank you for your participation.