Ichor Holdings, Ltd. (ICHR) Earnings Call Transcript & Summary

Good morning. Welcome to the 28th Annual Needham Growth Conference. My name is Charles Shi. I'm the semi-cap analyst at Needham. Joining me here is Ichor. Thrilled to have Phil Barros, the new CEO of Ichor. Welcome to joining the Needham Growth Conference. I believe, first time?

Yes, first time.

Yes. And Greg Swyt, CFO. Greg, you've been here for a few times, but once again, a pleasure to have you here.

Thank you.

We also have Claire McAdams, who is responsible for the IR function for Ichor. Maybe let's start with this. You guys have some slides, and especially, we think it's important for Phil to have a presentation first to allow investment community to get a little bit more familiar with Phil. And then we transition into fireside chat. How about that? All right. Phil, please get started.

Well, while he's doing that, I'll do the legal portion of it. So our discussion today will include forward-looking references to future financial performance and other forward-looking events. Please refer to our SEC filings with regards to risks associated with forward-looking statements. And as they continue that, what I'll do is just give a brief update or introduction of myself. So obviously, as Charles mentioned, I'm the new CEO of Ichor.

There you go.

While I might be the new CEO, I am not new to Ichor. I've been with Ichor for now, actually, this week will be my 22nd anniversary. So I'm on my 23rd year with Ichor. I've worn all the hats. I know the company like the back of my hand. I know the business like the back of my hand. This is a very niche market, I would say that gas and chemical delivery for semiconductor manufacturing. There's very few subject matter experts out there, and I would be considered one of those subject matter experts, I believe. If you talk to our customers, our customers would say that they come to me for some of their most challenging issues. So that's where I fit into the scheme. If you look at Ichor into the future and if you look at our market into the future, my technical experience is more important now than ever. Our customers are now removing one molecule at a time. We're moving into the angstrom era and our customers need strong technical partners like myself to help them move beyond and execute the angstrom era. So that's why I believe me being a technical CEO, a product-driven, technology-focused CEO, is more important now more than ever. So how familiar are all of you with Ichor and what we do? I see no hands, so I'm just going to go ahead and tell you what we do. So we build systems and components that go into the equipment that make microchips. We are mission-critical to the semiconductor industry, and we've been so for over 25 years. As we move into 2026, we have 3 primary areas of focus. First and foremost is our cost transformation. What this means to me is building a more cost competitive Ichor. We have a lot of consolidation that we'll be doing in the first half of the year and into the second half of the year. But most of that is good hygiene. I wouldn't think of this as a retraction. What I would think of this as good hygiene because we are going to need the capacity as we move into 2026, into the next segment of this, which is our secular headwinds -- or tailwinds, excuse me. Tailwinds. We believe etch and dep is going to outgrow WFE as a whole. The technology trends that we're seeing in our market are really going to drive etch and dep to outperform WFE as a whole. And we need to be ready for that ramp, and we are going to be ready for that ramp. And this is our time to capitalize on that ramp. And last and not least, this is kind of near and dear to my heart, is creating a differentiated Ichor. We are moving from a manufacturing company to a product company, into ultimately a technology company. It's our vision to help our customers solve their most difficult challenges. And it's our products and our technology that will lead us to help do that. So as I talk about cost transformation, there's really 3 main levers we're looking at here. First and foremost is what we call global footprint realignment. And what that is, is taking some of our underutilized assets and capitalizing on some of our recent investments in Malaysia and Mexico. So we have a lot of capacity we added in Mexico and Malaysia, and we have a lot of products that we need to move down to Mexico and Malaysia as we move through the year. If you followed the Ichor story at all over the past year, you understood that one of our biggest challenges was ramping up headcount, right? Ramping up headcount, in particular, in our Minnesota facility. This realignment of footprint will help us put that in the past because we will have more than one site for every product we make. This will allow us to have multiple sites where we can build up our own internal content and no longer be captured by one particular job market like we were in the past. Cost management. We've done a lot of work releasing new products over the last few years. We need to get those products to the cost targets we have. We have the plans, we know how to get there. We just need to execute to get to the cost targets we set forth. That's a laser focus for 2026. And I already talked about faster ramps, and I know this doesn't quite sound like it sits on a cost transformation slide. But what I'll say here is if you followed the Ichor story, our biggest margin detriment and the reason we haven't met our margin has been our ability to ramp up our new product. And they talked about the global footprint realignment and making sure we have more than one site where we can build every component, that will help with these faster ramps. Okay. I don't think I need to sit up here and explain to you that the semiconductor market is a growth market. If you looked at anything in the stock market in the recent couple of weeks, you would know that there's a pretty big hot trend on semiconductor stocks. But what I do want to tell you is the fundamental technology shifts that are occurring in our industry are going to drive etch and dep to outgrow WFE. This is because as our customers now scale at a 3D level, with 3D NAND, gate-all-around and eventually 3D DRAM, etch and dep capital intensity goes up and EUV capital intensity comes down. And when etch and dep goes up, that's good for Ichor because those are the gas-specific processes, gas-heavy processes that we participate in most. So we are highly levered to this segment and we believe this to grow faster than WFE as a whole. Now this slide really highlights my vision for Ichor now and into the future. Traditionally, we are a manufacturing company where we integrated systems for our customers. We help them design them, most often, but we put them together, quite frankly. We've been in a transition to a product company. And as we exit 2026, we will be 1 of only 2 suppliers who can deliver the level of vertical content that we can. There will be 2 of us out there that can do what we do. And I see a place in the future where our customers are going to need to lean on us more, and it's going to be those companies with the most vertical content that are best capable of serving that market. That market is called active process control. That is where I want Ichor to go. But before we get there, we need to complete our vertical integration strategy. Traditionally, we purchased 90% of the components that go into the systems we build. We made 10% of those, which were weldments. As we exited 2025, we are now capable of building 35% of the components that go into the systems with Ichor branded products. So these are parts that have Ichor IP built into them. As we exit 2026, our target of 75%, long-term stated target of 75% vertical content capability will be met. We will be capable of meeting our 75% target of vertical content with Ichor branded products. So this is a big, big milestone for Ichor. Now we talk about our vertical integration model as really a margin play the most. But what we don't talk a lot about is how the vertical integration has helped us grow our market. If you compare 2015 to 2025, we have 10x or tenfold grown the size of our market. And this is by expanding our capabilities, by delivering new products and through strategic acquisition. We've grown our market from $2.5 billion from right before we went public to where we are today at $25 billion as we entered 2026. And it's these new areas, as you can see, we have very little share in. We have a lot of opportunity to grow. As I said before, I'm going to be a growth-oriented CEO. My goal is to grow Ichor faster than the market. My goal is to grow in each of these orange buckets. And one of the verticals we don't talk a lot about is our non-semi business. Our non-semi business is growing to be a more significant part of our business. And as we exited '25, for the first time ever, our fifth largest customer is not a semi company. Our fifth largest customer is SpaceX. Our fifth largest customer is a growing business that we are going to grow with. And aerospace and defense is an area where we plan on growing to outgrow our served available -- served market. So to sum up my words today, I said a lot of words, to sum that up, I would say we have 5 key levers to grow margin and to grow revenue. First and foremost is we need to build a strong foundation to build everything off of. We need to realign our footprint with a target of 35% reduction in our overall footprint. Once again, not a retraction. This is downsizing our underutilized assets because we're going to need our capacity as we move forward. Next is cost management. We have a 15% target to get the cost out of the products that we make. We have the road maps, now it's time for us to execute. We believe that there's a strong tailwind in our market and we believe the submarket that we participate in most, etch and deposition, is going to outgrow WFE, and we will continue to do so. Next, once again, near and dear to my heart, is a differentiated Ichor. That's completing our journey to a product company by delivering 75% of the content, being able to deliver 75% of the content that goes into the systems that we build with Ichor branded products and Ichor technology. And last but definitely not least, we talked about how we've expanded our market. We now need to spend our sales efforts on executing that new growing market. So that's where we're going to spend our time and our sales efforts in terms of growing our serviceable market. So with that, I'll hand it over to Greg and he can talk us through some of our financial strategies.

Thanks, Phil. So as Phil's led up to this discussion here, how does all of this reflect in our gross margin strategy? Outgrowing the industry, Phil talked about our technology and capturing additional market share with the size of our SAM, growing that. Leveraging, we're very close to etch and dep and continue to capture and, through our vertical integration, grow more of that. And then new products, we've talked about the IP and Phil talked about the flow controller and the IP that we're going to get through the content there. And then our non-semi. Phil mentioned about that. That has very strong margins. And as we grow that, that will also be accretive to our overall consolidated gross margins. And then finally, M&A is always on our strategy. While in '26 we're focusing on the operational execution of our facility plans and all of that, M&A will always be part of our strategy and we'll be strategic on that. All of that leads to driving our gross margin. Higher-margin components, Phil talked about how the more we get more of that share, those components bring higher margin for Ichor. The IP brings more margin because we can get more value for that IP. The cost reductions and the footprint rationalization, those are operational strategies that will -- once we complete that and get our factories rightsized and get our facilities set up and optimized, that will bring incremental margin as well. And then as I mentioned, the non-semi business, as we grow more of that share, that will bring accretive margin to Ichor. This morning, we did a pre-announcement on our Q4 results that we have -- that we will be slightly above the midpoint that we guided to for this -- for Q4, so we did that pre-announcement. And we also announced that we will see some additional incremental improvement in our revenue entering Q4. And then while we haven't given guidance yet because we will do that in a couple of weeks, we do expect to see some sequential improvement in our overall operating margins.

It was Q1...

Q1, sorry. Yes. So we've talked about all the things that we're doing and how that will benefit in improved gross margin. And this just gives you that walk from where we are today to where we expect to be when we get to a normalized run rate at $250 million. We have some things that we are in process right now that's going to take 1 to 2 quarters to see the benefit of those. But when we get to this $250 million run rate and we have those operational strategies in place, we do expect to be in the 15% gross margin profile. And you'll see how those things are levered up to get us to that 15%. And again, this is when we get to a normalized run rate. We've been talking about a long-term strategy that, when we hit our target models, and when we've talked about Phil's strategy to get higher content, to get our non-semi business and to get that 75% content on the gas panels, and when we get to what we've been stating is to that $350 million quarterly run rate, all these things that we're executing on should get us to this 20% gross margin profile. That strategy is still in place. We are starting to execute on this year. And as we enter into the -- probably that '27, '28, fiscal '27, '28, we should be well on our way to achieving this 20% gross margin. As well as we look at operating expenses, we are very controlled on that, and we will start to lever up that operating expenses without having to add a significant amount of incremental cost into our operating expense profile. All of that leads to achieving our long-term strategy. And this just gets you to that once we've achieved that 15% gross margin, the next step is really the strategies around gaining market share, increasing further content in our vertical integration and then the non-semi business continuing to expand as well. So these are the levers and the strategies that we're starting to put in place that will help us achieve that 20% targeted gross margin profile. And then I'll let Phil wrap up our overall investment summary.

Yes, I think we covered most of this throughout the presentation. But I would say we have a good solid balance sheet that we can lever as we move forward. We're positioned well to capture the WFE ramp as that ramp continues. We're building a differentiated business, really driven by IP within the products that we make and driving more and more IP into the business. As we talked about before, we have a major initiative to go after that expanded SAM. So that's where we're going to be heavily focused. As Greg mentioned today, those will all be accretive to margin because those are all higher IP levered parts. And then obviously, we're going to be driving discipline within our operations to make sure that we have, like I said before, more than one site making parts and making sure that we're able to meet the ramps that our customers are requiring of us. So with that said, I will hand it back to Charles for.

Yes. Great presentation, Phil and Greg. I think I want to start maybe going back to your pre-announcement this morning. So going back 90 days, I think the message was first half of the year of 2026 was probably flattish. Maybe second half, you're going to see the pickup, but it looks like for March quarter, you are seeing some pickup already. So versus 90 days ago, what's the change?

There's a lot of change. I don't want to forecast too much here. Obviously, we're in the second week of the quarter. So we're going to be a little conservative with how much we come out with. What I would say is we normally have good visibility to 60 -- or I'm sorry, 6 months of forecast. Anything out there past that, I would say, is your guess is as good as mine. But what I would say is we're seeing pull forward of some of the demand that we expected in the second half of next year, and that's what's really showing the strength as we walk into the quarter. If you were to take the analysis of our pre-announcement, which was $240 million at the low end, that would be the low end of guidance if I had to give it today. But once again, we're still digesting the information as we go through the quarter.

Got it. So there is a little bit of a pull forward from the second half of this year. I think you said next year. This year.

Yes, this year.

Yes. But hopefully, that doesn't change your original projection it's going to be a second half weighted year. No change to that at all?

Our visibility today shows a strong second half. But once again, I caution that, as I should, with the fact that our forecast is really good for the first 6 months. We're showing growth in the second half, but I don't want to commit to that at this point until we have a time to digest it. To be quite frank, over the last 4 weeks, we've seen a lot of movement. And we're still digesting that movement, and we're trying to figure out what actually our customers are going to be targeting as they go forward.

Got it. Okay. Maybe we can ask you a little bit more about the movement over the last 4 weeks a little bit more later. But maybe zoom out a little bit, I want to talk to you about -- you talked the dep and etch, right? And 2 of your top customers, they are -- one has a strong position in DRAM, one has -- the other has a strong position in NAND. I think both are strong in memory, right? Memory pricing has been surging, right?

On both sides, yes.

Yes, on both sides. In terms of that part of the market, do you think some of the movement you talked about over the last 4 weeks is more about memory? Or can you tell from the orders you're getting -- from the forecast you're getting or maybe that's logic, that's something we were not that -- maybe we didn't pay enough attention to?

Well, I would say all 3, but -- short answer. I'm obviously not going to forecast for my customers, so I'm not going to give their guidance for them. But what I would say is we are seeing strengthening in memory. As you can see, the memory pricing is increasing. That's normally a good indication that equipment is going to be purchased. So we're seeing the same thing you're talking about. What I would say, in particular, we're seeing a heavy move towards dep and etch in those particular markets. As we know, we talked about before, etch and dep is where we participate most, and we're seeing good adoption or good momentum in that direction.

Okay. Got it. Maybe let me talk -- let's talk about the lithography a little bit. We know you're bullish on dep and etch, where things are going there. But lithography EUV is still a, well, meaningful amount of your business even today, right? But over the last few quarters, that part of the business does seem to have a little bit of challenges given the inventory actions that customers are taking and maybe some of the end market demand trajectory that wasn't very favorable. Do you see any change to that part of the business? Do you expect maybe we can finally pick up some growth in the lithography business this year?

Yes. What I would say is -- and we've been a long partner with ASML -- I'm sorry, with the large lithography company. We've been a long partner with them. We helped them design their lab tools back in 2009, so we have good visibility and good relationship with that business. With that said, I would say, year-on-year, that's the one segment that I would call flat. But I wouldn't call it flat because of their performance. They do have an inventory position that they're sitting on, on the products that we build. So I do not expect that to be a growth segment for Ichor this year. But I would not once again put that on their performance. What I would do is put that on the fact that they have an inventory position.

Got it. So normally, I remember like from the time you deliver the parts, the products to that particular customer to the time they deliver the systems to their customers, there's quite a 6-month-ish lead time. Is that still the right thing for us to think about?

Yes. I would say that the -- first of all, their lead times are long, right? They have mirrors that take 8 months to polish. So their lead times are very long. We're typically 6 months ahead of their schedule. So I would say if we were to see any meaningful movement in this year, we would start to see that in the first half or start to see triggers in the first half, and we're not seeing that yet. That doesn't mean it's not going to come in the second half. And we still have, I would say, maybe 6 months to see that. But in terms of year-on-year, I would say that it's pretty much flat. From our perspective, once again, this is not an indication of how they're performing. They are sitting on an inventory position. I would say coming out of the last ramp, what they did is they built a -- kept the supply chain running because they didn't think that the down cycle that they were going to see was as long as it ended up being. So they built up a significant inventory position, try to keep the supply chain wet and building parts. So they're still digesting that inventory. I would say there's still some time before we would actually match up to what they're seeing.

Got it. We have seen some similar dynamics with your #1, #2, especially #1 customers, right, over the last couple of years as well. There are lots of inventory digestion. But hopefully, we're now at a point that they have to reorder lots of stuff.

I am hoping for that as well, my friend.

All right. Maybe switching gear a little bit to the gross margin. I think a lot of folks in this audience know that you guys are in a very good position in the industry, in the supply chain. But over the last couple of years, a few quarters, maybe not in the last couple of years, but the last few quarters, gross margin has been a little bit of a challenge for Ichor. Maybe can you talk about a little bit more about that internal content. The vertical integration story you mentioned, I believe you said, exiting 2025, is it 35% covered by internal content?

Let me clarify there. It's 35% capable.

35% capable. I'm going to ask you to clarify again what does that mean, capable. And then exiting this year, the target number is 75%. Can you kind of unpack a little bit what -- how do you get that 40 points improvement in this year alone? And please do clarify capable, what that means.

Okay. Thank you. I'll use this chart to kind of explain that, if that will. So everything in blue are products that we have released. Everything in blue represents around 35% of the BOM content. So we have released products that cover around 35% of what we build. As we exit this year, we will have our high-volume flow control released, some of our specialty valves and the filter product line. That will get us to the 75% capable. Now I don't want to sit up here and promise that every customer is going to be 100% Ichor. That's almost impossible. You have legacy platforms that have been out there for a long time, that are going to take time to convert. So with that said, if you look at the 35% capable last year, just to give you an indication of kind of what that looks like as a business, we did about 24% last year on that 35%. So that kind of bridged that gap a little bit. If you look at the BOM cost of a typical system, 40% of the BOM cost is flow controller. The flow controller is by far the most expensive part and, by far, the most critical part, but also the most important part of the system. And getting our high-volume product out there is going to enable us to capture that 40% of the BOM cost. Mind you, it's going to take some time to get adoption. I would say the year '26 will be a qualification year, '27 will be a year where we start to see meaningful revenue. Do I think it's ever going to be at that 40% level? Probably not, but that we will be capable of doing that. The good thing with flow controllers is it's a large market. It's a very significant market. And if you know our history at all, we were a flow control business at one point in time. Our biggest customer was not ourselves. So we sold those flow controllers to other contract manufacturers or other gas box builders. So I believe once we get spec-ed in, once we have flow control as a meaningful part of our business, we'll be able to expand that share beyond Ichor spend. So I would say that, that's the real opportunity there.

Got it. Got it. So if I recap what you just said, that 40 points jump is mostly from flow controllers.

Mostly.

Mostly from flow controllers. And going from 35% capable to 75% capable, that's largely under your control because that's your product, right? That's your product. But for customers to -- adoption to go from 24%, that's what you said, right, as of the end of last year to maybe approaching that 75%, you think is going to take some time. It looks like based on what you said, maybe '27 next year, you see a little bit more meaningful revenue. It feels like it's counted in years to get there. Are you able to give us a little bit more, like more quantitative, where do you think you can get to, like end of this year, end of next year?

If I was to guess a number today, and once again, this is a guess, I would say we'll be in the mid-30s in terms of vertical content this year. As we talked about in the earlier part of the presentation, we are doing some site consolidation. So there's a little bit of unnatural acts that will happen in the first half of the year, which will affect that as a large scale. But I would say a good target would be mid-30s.

Got it. Okay. So I guess maybe there's one more question, right, as maybe a follow-up to one of the PowerPoint, but along the same line of questioning I've done so far. I think the ultimate vision you have about Ichor is to be in that active process control, right?

Yes.

There's a zero company there. You want to be there. But I mean, the first part, integration, integration plus passive components, then you add flow control on top, that's a natural progression. But what does active process control mean for you?

So I'm going to be purposely big, and I apologize for that because I don't want my competitor, who's here today, to understand what I'm going to do.

Understood.

Okay. But let me just put it this way. Our customers and their customers are now adding and removing one molecule at a time. And this is hard. This is very, very difficult. They are going to need suppliers that have strong technical capabilities to help them meet those goals. And having this level of vertical integration enables us to have the technology and the products and the bench strength and the technology to help them get there. So I foresee a future, in the not-too-distant future, where this is going to be a critical part of their business. And I believe our capabilities in terms of technology and product will put us in a unique position to capitalize on that. Okay?

All right. I'm definitely looking forward to more specifics as we continue to talk.

Because I can't give away all my secrets, Charles.

Understood. Understood. So maybe switch gear to gross margin, Greg. I think you have that chart showing how you want to get there. That 20% gross margin under $350 million, I believe that's the revenue run rate.

Yes, $350 million to $400 million. Yes.

$350 million per quarter run rate. I think there's one thing you said in the prepared remarks that market share gain should be one of the contributors. I mean, other than stuff we're familiar with, volume should be a driver, internal content should be a driver. Expansion of the non-semi business, margin accretive, should be a driver. What does market share gain there means to you?

You can take that.

I'll take that one. Sorry. Yes, each of these orange buckets, as you can see, we're underpenetrated, right? So as I talked about before, as we release components, there's market outside of Ichor for those components. Critical machining, we have a significant market there where we can go gain additional share and some subassemblies that go into the tool that's outside of the core gas and chemical delivery. But by the way, within our same customer base. These aren't new customers that we need to go capture and figure out who they are. We know who they are. It's just about taking the products we have now and selling them wider within that customer. Then obviously, we talked about the non-semi business. We are laser-focused on aerospace and defense. The real reason there is if I look at aerospace and defense, it's a lot of the same engineering and technical capabilities that we use in the semi space is going to be required in the non-semi space. So that's why we're really focused on that vertical.

Great. Maybe for the -- I'll ask the last question, and then maybe hopefully there's time for question from the audience. I think this is probably the best way to finish this fireside chat. Phil, I think given your recent appointment as the CEO, well, you gave a presentation here, very detailed strategy. And what can we expect for you to do, let's say, differently compared with your predecessors? And what will you keep the same?

Okay. It's a good question. First, I don't want to compare myself to my predecessor because he's a good friend and he was a mentor to me at one point. But what I would say is I'm going to bring a more technology-focused, more product-focused, more engineering-focused effort. I mean how we built this business to begin with is by solving our customers' high-value problems. And that's how I believe we need to unlock value going forward. And to me, that's the difference I'll bring to the table. And having a heavy focus on product and expanding our market and being a growth-driven CEO, those are the major areas where I see myself different. Obviously, we have some work to do on our operational discipline. We're going to continue to execute on that. And beyond that, what I would say is it's about doing what we say we're going to do. And I think you've got a little hint of that this morning with the pre-announcement, hopefully, that we plan on being a more predictable business going forward.

Great. Any questions from the audience? We probably have time for one, maybe 2. Yes, please.

Can you talk a little bit more about the non-semi part of the defense and aerospace? Is that your only customer or could you shed some light on what your exposure is in that business?

So the question is about the non-semi business. The investor would like to have more color. And any additional customers in that part of the business other than SpaceX?

Yes. What I would say is they have 3 main customers within that vertical -- we have 3 main customers within that vertical. SpaceX, I would say, is the largest of the 3. So obviously, they're our fifth largest customer and the largest of the 3. But we are gaining share and continue to gain share in other markets or other customers within there. As I said, they're all within the either commercial space or aerospace and defense markets.

You can see from the pictorial that we have a -- the aerospace side is the rockets with SpaceX, and then the drone there is another customer that we have contracts with that we're doing machining work for various components on drones.

Yes?

How should we be thinking about the attach rate to dep and etch levers? We have seen strength across, let's say, like blend research. Was there excess customer inventories that need to be dealt with? And then how we should be thinking about the attach rate to dep and etch market levers going forward?

Yes. Now let me repeat the question. The question are twofold. Number one, what's the attach rate -- your business attach rate to your 2 leading customers, dep and etch customers? And number two, what was the other part?

Looking back, was there excess component...

Excess inventory, where they are in the inventory cycle.

I don't know their exact inventory number, to be exact. But what I will say is I think we're closely matching what they're seeing at this point. So I would suspect that their inventory is largely burned down, at least in our space. So with that said, I would say that we will mirror kind of what they do, in particular, in etch and deposition. In terms of attach rate, if you look at our 2 largest customers, which are publicly -- public information, most of that business, and I would say 90% of that business, is etch and dep. I'd say the remaining 10% is more wet clean and things of that sort. So 90% of our published numbers on our 2 biggest customers are etch and dep related.

All right. Thanks, Phil and Greg, and for the insights. And I hope everyone enjoy the rest of the conference.

Yes. Thank you.