Earnings call transcript: Ichor Holdings Q1 2025 earnings miss sends stock down

Ichor Holdings Ltd (ICHR) reported its first-quarter 2025 earnings, revealing a notable miss on both earnings per share (EPS) and revenue forecasts. The company posted an EPS of $0.12, falling short of the anticipated $0.24. Revenue came in at $244.47 million, slightly under the expected $244.95 million. Following the announcement, Ichor’s stock dropped 14.83% in premarket trading, reflecting investor concerns over the earnings shortfall and lower-than-expected gross margins. According to InvestingPro data, analysts maintain a bullish outlook with price targets ranging from $23 to $50, suggesting significant potential upside despite recent challenges. The stock currently trades near its Fair Value, based on comprehensive analysis available in the InvestingPro Research Report.

Key Takeaways

• Ichor Holdings missed both EPS and revenue forecasts for Q1 2025.
• The company’s stock fell 14.83% in premarket trading.
• Gross margin was 12.4%, below the forecasted 14.5%.
• Sequential revenue growth was 5%, with a year-over-year increase of 21%.
• Ichor plans to expand its global operations, including a new facility in Malaysia.

Company Performance

Ichor Holdings demonstrated robust revenue growth of 21% year-over-year and a 5% increase sequentially. Despite these gains, the company’s performance was marred by a significant miss on EPS and a gross margin that fell short of expectations. The company continues to focus on internal component sourcing and has achieved key customer qualifications, which are expected to drive future growth.

Financial Highlights

• Revenue: $244.47 million, up 21% year-over-year
• Earnings per share: $0.12, below the $0.24 forecast
• Gross Margin: 12.4%, below the 14.5% forecast
• Cash and Equivalents: $109 million
• Free Cash Flow: $500,000
• Operating Expenses: $23.7 million

Earnings vs. Forecast

Ichor’s actual EPS of $0.12 was significantly below the forecasted $0.24, marking a substantial miss. Revenue also fell short by $0.48 million. This performance contrasts with the company’s historical trend of meeting or exceeding expectations, raising concerns about operational efficiencies and market conditions.

Market Reaction

Following the earnings announcement, Ichor’s stock experienced a significant decline, dropping 14.83% in premarket trading. This reaction suggests investor dissatisfaction with the earnings miss and lower-than-expected gross margins. The stock’s current price of $17.75 is near its 52-week low of $15.84, indicating potential challenges ahead. InvestingPro data shows the stock’s beta of 1.84 and a steep six-month decline of 35.92%, highlighting its high volatility. InvestingPro subscribers have access to 12 additional ProTips and comprehensive technical analysis to navigate such market conditions effectively.

Outlook & Guidance

For the second quarter, Ichor has provided revenue guidance between $225 million and $245 million, with gross margins expected to range from 12.5% to 14%. The company anticipates relatively even-weighted performance across the year, with incremental improvements in gross margins each quarter.

Executive Commentary

CEO Jeff Andreesen stated, "Our strategy is working, the qualifications are continuing, and the impact will materialize as we progress forward." He emphasized the company’s ongoing focus on internal component sourcing and customer support for the qualification process.

Risks and Challenges

• Continued pressure on gross margins below expectations
• Tariffs and export controls creating uncertainty
• Potential geopolitical factors impacting the semiconductor equipment market
• "Growing pains" in internal component sourcing
• Market saturation in core segments like NAND and DRAM

Q&A

During the earnings call, analysts questioned the impact of tariffs and export controls on Ichor’s operations. The company acknowledged these challenges but remained optimistic about its strategic initiatives and customer support for component qualifications.

Full transcript - Ichor Holdings Ltd (ICHR) Q1 2025:

Conference Operator: Good day, ladies and gentlemen, and welcome to Ichor’s First Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to introduce your host for today’s call, Claire McAdams, Investor Relations for Ichor.

Please go ahead.

Claire McAdams, Investor Relations, Ichor: Thank you, operator. Good afternoon, and thank you for joining today’s first quarter twenty twenty five 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 ks for fiscal year twenty twenty four 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 Andreesen, our CEO and Greg White, 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 Andreesen. Jeff?

Jeff Andreesen, CEO, Ichor: Thank you, Claire, and welcome, everyone, to our Q1 earnings call. Thanks for joining us today. First quarter revenues came in right around the midpoint of our expectations, reflecting that the overall customer demand environment has remained relatively consistent since our last earnings call. To date, there has been little change to the expectation that 2025 will be a modest growth year for wafer fab equipment, or WFE, and our Q1 revenues were up 5% sequentially from Q4 and grew 21% over the same period last year. Given our visibility today, we continue to expect our revenue growth this year will outperform overall WFE growth in 2025.

On the gross margin side, first of all, let me say that we fully acknowledge that our track record guiding expected improvements in gross margin has been impacted by excursions one too many times at this point. In evaluating our results for the first quarter, we too found it challenging to fully understand why our increasing momentum in integrating internally sourced components has not resulted in more meaningful improvement to our gross margin profile, the best way to capture the lower than expected flow through in our Q1 gross margin performance is best summed up as growing pain. Once our internal supply is fully up to speed, we will see the benefits of the new product wins through the P and L. Our strategy is working, the qualifications are continuing, and the impact will materialize as we progress forward. In Q1, our strategy did not materialize into the margin flow through we anticipated, essentially because we ended up purchasing far more external supply than we had forecasted.

So why did that happen? As internally sourced products become a more significant portion of our bill of material, we must improve our processes for the management of the inventory levels needed prior to inserting these components into our manufacturing pipeline. In the first quarter, the impact of the slower inventory build in the fourth quarter, combined with other machine components ramping at the same time, resulted in the need to buy more external supply in order to fulfill our gas panel deliveries in the early part of the quarter. Why this resulted in low 20s gross margin flow through, well below expectations, is because our strategy is to share a portion of the component cost savings with our customers and therefore when we purchase more external supply instead of using our own components, the expected flow through didn’t materialize. This impact accounts for about two thirds of our gross margin in Q1.

Most of the remainder of the gross margin impacts came in our non semi business where we were awarded a new contract in the commercial space market that began shipments in the quarter. As we move from pilot to production, it was determined that a redesign of some aspects of the park was required, and this resulted in a push out of revenue as well as incurring higher costs than expected with these initial deliveries. And lastly, during the quarter, we made the decision to exit our refurbishment business in Scotland as the demand for product we were licensed to refurbish declined to a level too low to sustain the operation and exiting this business had a slight impact on both revenue and gross margin in Q1. As we look ahead, we have identified what has made an accurate prediction of our gross margin such a challenge over the last several quarters. And as we build in the processes that better gauge both the pricing and the cost sides of the equation, we are confident you will see a longer term trend developing in how we demonstrate progress towards our gross margin targets.

Which brings me to an update on our progress in qualifying our proprietary products, which are chiefly comprised of certain components used in our existing gas panel business as well as our next generation gas panel. We achieved a significant number of new component qualifications in 2024, and we expect these qualifications to convert into more meaningful internal supply within our gas panel business as we progress through 2025. As stated previously, the increased use of our proprietary, internally sourced components is a key driver to our strategies for gross margin expansion. While 2024 marked a successful year for qualification, our work continued. As stated before, three of our major process tool customers have already qualified our substrate, which are incorporated into our gas bin.

Today, we are pleased to announce a fourth customer will incorporate our substrates into their next generation products as they transition to service mount technology. This same customer will also be incorporating our valve products upon successful qualification later this year. Last quarter, we announced the second customer qualification for our valve product line. We expect to complete valve qualifications for a third customer this summer as well as the fourth substrate customer just missed anticipated by year end. For fittings, we announced two customer qualifications in 2024, and a third customer qualification remains in the final stages today.

We likewise are progressing on a fourth qualification for our fittings product line used in our weldment business, which we expect to achieve later in the second half. The key takeaway of our component qualification progress is that by the end of twenty twenty five, we expect to have all four of our largest customers qualified on all three of our major product families, valves, fittings, and substrates, which will mark a significant milestone for our business. Additionally, we have several exciting new products under development scheduled for later release this year, enabling us to expand our share of the addressable market of our components. Now I’d like to discuss the outlook we are providing today, given the complexities of recent tariff announcements. In general, today we are affected by the steel and aluminum Section two thirty two tariffs for certain inbound material to The U.

S. Our Mexico machining business falls under the USMCA exemption as of today. We are working with our suppliers and customers to mitigate and or pass on the cost of these tariffs, but there could be some transitory impacts on our gross margin as we work through the processes and customer discussions to incorporate the additional costs of tariffs and their relative impact on total supply chain costs. The final decisions on the semiconductor export controls tariffs are expected to be issued early this summer. Obviously, there is a large range of outcomes, but we will not speculate on the outcome today.

As we look at our revenue guidance for the second quarter of between $225,000,000 and $245,000,000 this is about $10,000,000 lower than what our visibility indicated a quarter ago. The lower forecast is not attributable to one particular change in demand, but rather several small factors. For example, one customer forecast was recently affected when a domestic device manufacturer began to slow their WFE purchases in advance of understanding the broader implications of various tariff policies. At the same time, the delivery timelines within lithography and advanced packaging have seen some shifting to the right, while silicon carbide applications have weakened further. This appears to be affecting each of our OEM customers differently, depending on customer and end market exposure, and there’s absolutely no question that our primary markets of leading edge foundry and high bandwidth memory as well as technology upgrades for NAND continue to move forward on schedule.

We have not further handicapped our Q2 revenue guidance to account for additional adverse demand impact that could result from the tariff policy, other than what our customers have already incorporated into our visibility. Our visibility is somewhat shorter in duration than where we were on our last earnings call, meaning at this time we have a good feel for the first half but less confidence in exactly how the second half will shake out. At this time, we think our business in 2025 should be relatively even weighted first half to second half, but I will remind everyone that this is the visibility we have today. Before turning the call over to Greg, a few last comments about gross margin. First, I want to provide a bit more context as to the level of proprietary content we expect to achieve this year.

As a reminder, prior to stepping up our R and D investment and launching our new product, about 90% of the bill of materials for our gas panels was sourced externally. In 2024, we were able to shrink that by about 5%. In 2025, we believe we can make further progress towards reducing external supply down to approximately 75% of the bill of materials. This is meaningful progress, but there is still much more progress to

Unidentified Speaker: be made.

Jeff Andreesen, CEO, Ichor: The most leverage will eventually come from increasing penetration of our next generation gas panel, which has roughly 30% external parts and 70% internal. These gas panels incorporate our proprietary flow control technology. Many of the next generation gas panels delivered to date are currently undergoing qualification with end device manufacturers. These qualifications are particularly important as they represent the first end user qualifications for our proprietary flow control technology, which constitutes the largest portion of our bill of materials and carries the longest qualification cycle, another critical milestone for I Corps. It is not realistic to think we will be able to move 100% of our gas panels to the Ichor proprietary version, but we expect to continue to make incremental progress.

The most immediate and significant impact you should see to our gross margin profile will be as we move from the roughly 15% proprietary content in 2024 towards around the 25% level in 2025. In Q1, we didn’t achieve the flow through we anticipated due to purchasing far more external supplies than forecast. But as our processes improve and we work through these growing pains, we still expect to show incremental improvements to gross margin through each quarter of the year even on similar revenue levels. In February, we were confident that our gross margins for the full year would exceed 60%. Today we are backing off that absolute number, which is currently prudent in response to the tariff uncertainties as well as the impact of the Q1 miss.

With that said, we currently expect our second half gross margin will be in the 15% to 16% range. With that, I’ll turn it over to Greg to recap our Q1 results and provide further details around our financial outlook. Greg?

Greg White, CFO, Ichor: Thanks, Jeff. To begin, I would like to emphasize that the P and L metrics discussed today are non GAAP measures. These measures exclude the impact of share based compensation, amortization of acquired intangible assets, non recurring charges and discrete tax items and adjustments. There is a useful financial supplement available on the Investors section of our website 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. First quarter revenues were $244,500,000 near the midpoint of guidance and up 5% from Q4.

The gross margin for the quarter was 12.4%, an increase of 40 basis points from Q4, but below our forecast of 14.5. As Jeff discussed, the gross margins were negatively affected by several factors, primarily the slower transition from externally supplied products to our internally manufactured products, as well as higher costs associated with the redesign efforts of our commercial space contract and the decision to exit our refurbishment business in Scotland. Operating expenses came in at $23,700,000 in line with our expectations. Operating income for Q1 was $6,600,000 Our net interest expense was $1,600,000 and our non GAAP net income tax expense was below our forecast at $600,000 The resulting EPS was $0.12 per share. Turning to the balance sheet.

Our cash and equivalents totaled $109,000,000 at the end of the quarter, up slightly from year end. We generated $19,000,000 in cash flow from operations and after deducting $18,500,000 in capital expenditures, our free cash flow was $500,000 Our planned CapEx investments for 2025 are expected to be above our historical average of 2% of revenue as we execute our global expansion of our machining and non semi business capabilities. We estimate our 2025 CapEx will be closer to 4% of revenue and be front half weighted. Our total debt at quarter end was $127,000,000 and our net debt coverage ratio has now improved to just 1.5 times, well below any potential threshold for covenants. Now I’ll discuss our guidance for the second quarter of twenty twenty five.

With anticipated revenues in the range of $225,000,000 to $245,000,000 we expect our Q2 gross margins will improve to a range of 12.5% to 14%. We expect Q2 operating expenses to be approximately $23,500,000 or roughly flat to Q1. We expect our OpEx run rate will moderate somewhat in the second half of the year, leading us to expect our year over year increase in operating expenses to be somewhat lower than communicated previously and in the range of a 4% to 6% increase compared to 2024. Net interest expense for Q2 is expected to be approximately $1,500,000 For modeling purposes, you should model net interest expense for the full year of 2025 to be approximately $6,000,000 We expect to record a tax expense in Q2 of $800,000 For the full year, we are forecasting a non GAAP effective tax rate of 12.5%. Finally, our EPS guidance range for Q2 of $0.10 to $0.22 reflects a share count of 34,400,000.0 shares.

Operator, we are ready to take questions. Please open the line.

Conference Operator: Thank you. We will now be conducting a question and answer session. And our first question comes from Brian Chin with Stifel. Please proceed with your question.

Brian Chin, Analyst, Stifel: Good afternoon. Let me just ask a few questions. Maybe the first one on the change in the revenue outlook for the year. Understanding kind of what you said, Jeff, about a couple of different factors sort of adding up there. If you try to isolate this on the four buckets of NAND, DRAM, advanced logic and mature semi, which of these do you think is incrementally more cautious relative to your thinking ninety days ago for 2Q and maybe even second half visibility?

Jeff Andreesen, CEO, Ichor: Yes. I would actually think of it a little bit differently, and I’ll come back to the segments. But I think the way you guys should think about this is etch and deposition for us are generally the same kind of outlook as we came in. I would say we’re softer in our lithography business today, but more than half of this is coming out of our decision to exit Scotland. Softer non semi business that we see not ramping as fast in the first half, which affects the whole year, and then silicon carbide.

And so that’s much, much softer almost to the point where it’s most of it is shipped into 2026. So from a DEF and Etch, it’s stable. And if you kind of look at the flat half over half, it’s really about $30,000,000 And I would say more than half of that is kind of what I would call kind of outside of our core debt and hedge business. So it’s largely stayed the same, but like we said, we have these pockets that have softened up. So if that helps.

What I would tell you from a segment point of view is we see the same visibility from what we can tell that the NAND investment is continuing, the DRAM is drawn around AI and others and foundry logic is relatively stable, maybe with the exception of one North America OEM that’s kind of rationalizing their CapEx.

Brian Chin, Analyst, Stifel: Got it. Okay. And then maybe sort of weave in one question follow-up around gross margins and then the tariff, which is, I know, not fully quantifiable at this moment. But in terms of the execution in Q1 on the gross margin internalization of some of those components, out of 100%, how out of what you expected to execute, what percent did you actually execute on in terms of the internal sourcing? And then I know we’re months into the second quarter, but how much progress have you already seen here to start the quarter to give you confidence that it’s sort of back on a better trajectory?

Jeff Andreesen, CEO, Ichor: Yes. I would say, I’m just trying to think. I mean, shortfall, some of it started last quarter and materialized into this quarter. And by the early part of the quarter, we knew we would have to buy some external supply because we couldn’t get caught up versus what we exited last quarter, we were trying to. So I’d probably say we got, believe it or not, maybe 75% or 80% of what we wanted out of there.

Of the new stuff, weldments, fine. That’s always that’s been 10% of the gas box and that didn’t have any hiccups in the quarter. So I think we still see some external purchases into our second quarter which we’ve incorporated into our outlook. I think the headcount we need to kind of ramp this and doing it is starting to turn the corner. And we have much better alignment between.

Keep in mind some of these parts that we manufacture, these are tens of thousands of parts of precision machine parts. So we had some disconnect between what we were able to get out of the factory and what we needed to buy. So I think from a confidence, think there is some there is still a little bit of a headwind that we’ve incorporated into the next quarter. And then we kind of talked about the second half of the year being in that 15%, sixteen %. You’re starting to see the flow through even on flat revenue levels increasing again.

So you as I said on the call, I think the strategy is working. We’re still kind of growing, staying and executing to get all of this aligned through our factories. We have three large integration sites

Unidentified Speaker: in the world.

Brian Chin, Analyst, Stifel: Got it. And I’d just close out. I imagine when you have to sort of resource or increase a source to some of your suppliers, maybe it’s not in the best terms in terms of that short window. But it sounds like overall, qualifications

Krish Sankar, Analyst, TD Cowen: and

Brian Chin, Analyst, Stifel: the cut ins are kind of progressing as you expected, just sort of your ability to catch up in an efficient way with that.

Jeff Andreesen, CEO, Ichor: Yes. I’d almost yes, Brian, that’s a good point. I mean, I’d almost say that they were they came out of the gate a little stronger than we were ready for. So I think they’re progressing even as well as we thought and maybe a little bit better.

Unidentified Speaker: All right. Thank you. Thank you.

Conference Operator: And our next question comes from the line of Krish Sankar with TD Cowen. Please proceed with your question.

Jeff Andreesen, CEO, Ichor: Yes. Hi. Thanks for taking

Krish Sankar, Analyst, TD Cowen: my question. I have two of them, Jeff. First one, just to clarify the gross margin, mentioned it’s growing pains. Are you seeing any of your customers trying to push down the tariff cost onto their suppliers like you? Or that has not been a factor yet?

Jeff Andreesen, CEO, Ichor: I would say we’re fortunate enough in my earlier comments that our factory in Mexico is exempt through the USMCA exemption. I’d say the ninety day exemption for semiconductors and CapEx has gotten most of ours covered. I think the area that we’re most exposed at today is this Section two thirty two, which is really around steel. It really is our weldment business that ships back to The US. And so we’re still working on that process to push that through pricing and things like that.

So we like we said, we might see some transitory. We’re hoping that we can get all of this stuff worked out between our customers and ourselves. I think our customers truly understand what’s happened here. I think there’s a pretty good collaboration at this point to help them and help us through this. So I think it’s moving in the right direction.

Krish Sankar, Analyst, TD Cowen: Got you. And for some of your other customer, is there can you like ship stuff from your Malaysia facility to mitigate the effect of tariffs? Or it doesn’t work that way because all of your big customers are in The US? Or you also have facilities overseas?

Jeff Andreesen, CEO, Ichor: Yeah. All of our customers have facilities overseas. I would say we have kind of a natural hedge that we could affect depending on how the tariffs work out and pass throughs, the cost of billing in The US versus Malaysia, they might be closer than you think between tariffs and no tariffs. But until there’s kind of final agreements country by country, obviously, we have one large customer that manufactures almost all of their systems now offshore. We can support them fully.

And then one customer that probably builds well, I won’t say what percentage, but a very large proportion that we service out of Singapore. So I think and our fourth largest customer is largely a Singapore based operation too. So a little bit less of an impact for them.

Krish Sankar, Analyst, TD Cowen: Got it. Got it. And then final question, Jeff, I understand there are so many moving parts the tariffs and the macro, but it kind of implied second half similar to first half, which is still a pretty healthy growth year over year of like 13% versus the WFE for the full year. In the past, I remember your visibility has been about four to five months. So I’m just kind of curious, we look into that, is it fair to view where is the strength to you in calendar Q2 and your conviction on calendar Q3 coming from?

Is it NAND upgrades? Is it leading edge? Any color on that?

Jeff Andreesen, CEO, Ichor: Yeah. I I I mean, we we obviously, we don’t get all the sell through, but I would say, man, still pretty strong. I’d say, obviously, we we can see DRAM strength. I’d say we could see that into the third quarter. I’d say our lithography business is probably troughing in the second quarter.

So that will kind of start we believe kind of start growing in the second half. Obviously, we have four large customers with kind of different outlooks. And so what I would tell you is we’re very closely mirrored to all of our process tool customers and what they’re seeing out there. We do build ahead of when they revenue and things like that. But yes, we still see the strength in Q2 around the DEF and Edge side which is really driven by the investments in foundry, logic, NAND upgrades and DRAM.

Krish Sankar, Analyst, TD Cowen: Thanks a lot, Jeff. Thank you.

Jeff Andreesen, CEO, Ichor: You bet, Chris.

Conference Operator: Thank you. And our next question comes from Charles Hsieh with Needham and Company. Please proceed with your question.

Jeff Andreesen, CEO, Ichor: Hi, good

Unidentified Speaker: afternoon, Jeff, Greg. The obviously, I think that you will get this question a lot if you haven’t. Your largest customer is guiding to a softer second half of the year. Obviously, we don’t know if they just want to be conservative or that’s the true outlook they are seeing. But sounds like you’re now for I mean, anticipating maybe second half will be flattish half over half.

What do you think would be the disconnect between what you see and what the what’s the largest customer is publicly guiding everyone to in terms of the second half? Thank you.

Jeff Andreesen, CEO, Ichor: Yes. Well, it’s a good question. I mean, we did anticipate that we might get this. I would tell you that we’re pretty mirrored with our customers and our customers all have different trajectories front half, second half. What I would tell you is we believe the second quarter is the low point for us in our EUV and lithography products, so that offsets.

Semi will get stronger in the second half. So we have natural kind of offsets for anything that they see in forecast. I won’t comment specifically what we see from them, obviously. But I would tell you, we don’t see any significant disconnect front half to back half from what our customers are talking about in the marketplaces as well. Then the other thing I might point out, Charles, is that and I don’t know the exact percentages, but our largest customer and our second largest customer within a few percentage points.

Okay? And so we have two really pretty large customers.

Unidentified Speaker: Yes. Yes. Got it. Got it. Got it.

I got your point about the second and not being too far behind the number Yes. So, Jeff, maybe maybe another question. I do want to come back to one thing you said, the the the regarding the purchase of externally sourced components. Was this something kinda caught really caught you off the guard, something really surprised you that your customer ended up they want more external stuff? Because I thought that this is something well, your customer has to qualify it even maybe your customer’s customer need to qualify it that the conclusion was made a long time ago.

But why this is happening? And if any additional color you can provide us and because we do wanna know whether this is a temporary step back or or maybe we we have to think this is the the it’s it’s going to be very we need to think about different rate of adoption for your for your internally sourced component. Thank you.

Jeff Andreesen, CEO, Ichor: Yes. Actually, Charles, I think it’s a good question. Hopefully, I can help add a lot of clarity here. One is, I think the demand for our product and qualifications is in line if not a little stronger. Our challenge is lining that up with making sure that it gets delivered on time to our integration sites and that’s where we had the challenges.

So it’s not from a demand point of view, it’s really from the supply point of view. We don’t have customers saying don’t buy our stuff. Once we’re qualified, we have we can go fully and cut it in and use our supply. We can also use external supply, obviously, because we had to do that to fill in our gaps. But we do not have anyone dictating to us what we can or cannot use at this stage.

So these are passive parts, so once they’re qualified we can use them across our product lines. So that’s not the problem. The problem was getting our supply up quick enough to cut in, in advance of we made the decision at a pricing level, we share some of the benefits of insourcing with our customers and maintain a lot of the margin accretion internally. And that had an effect as well is because then we didn’t get our profit on the parts that we built and or we didn’t get to absorb our factory overhead as well. That’s the two primary pieces of the gross margin.

Unidentified Speaker: Got it. Maybe, Jeff, if I may, can I squeeze in one quick question? Maybe this

Krish Sankar, Analyst, TD Cowen: is a

Unidentified Speaker: clarification. On the press release, there’s a you put the footnote to the GAAP to non GAAP to GAAP reconciliation for your operating maybe it’s not operating. So, total expense is about $1,500,000 And the footnote says it represents severance costs associated with the global reduction in force programs. I think I heard you only talking about accessing Scotland, but the footnote sounds like it’s not a restructuring just around Scotland, but somewhere else as well. If you can clarify, that would be great.

Thank you.

Jeff Andreesen, CEO, Ichor: Hey, Charles, this is Greg.

Greg White, CFO, Ichor: I’ll take that. So obviously, we mentioned that we made the decision to exit Scotland. That was the majority of that $1,500,000 severance costs that we took for those individuals impacted. And so that was the majority of it. We did have some smaller reductions in the quarter, but Scotland was by far the majority of that charge as we plan for those individuals to exit.

Unidentified Speaker: Thank you, Greg. Thank you. Thank you, Jeff.

Jeff Andreesen, CEO, Ichor: Thanks, Charles.

Conference Operator: And our next question comes from Craig Ellis with B. Riley Securities.

Charles Hsieh, Analyst, Needham and Company: And at the risk of beating a dead horse, I’ll start with gross margin. So Jeff, you provided a lot of color. I think what I’m missing is I just listened to a pretty full discussion of what’s going on is where exactly the issue arose? Is it the company’s inability to forecast the amount of supply it needs and get that on-site so that it can do some initial work? Is it with the initial work?

And the second part of the question is what new monitoring steps have been put in place and how quickly or how regularly are things being monitored so that you on your dashboard have optics into what’s going on and can confidently steer gross margins to guidance going forward?

Jeff Andreesen, CEO, Ichor: Yes, good question, Craig. So the simple answer is yes. As we were forecasting this business, we had the demand forecasted pretty clearly. The supply inbound coming out of a machining operation is often complicated. We had other products at ramp that we had cut in front of other products.

By the time we realized it, we had to make the decision to buy some external because two thirds of our business is still the gas panel integration business. So we can’t risk deliveries there. So yeah, we kind of didn’t get our I call it the gazintus and gazaltas lined up. But this quarter, what I would tell you is the level of detail of which I’m digging in and others on my team are digging in or trying or ensure alignment to demand. We’re just going to go deeper into the organization.

So if it doesn’t get to us, I mean, we could have done a better job of forecasting is the bottom line. And we probably could have predicted some of this, which would have probably manifested in a similar result but given you guys some visibility to it. When I talked about quarter two, Craig, we also said there’s still some headwinds that we’re working through. They’re much less significant. And so the front half of the year has got a more muted gross margin.

And then for the full year, obviously, we won’t get to the 16% we talked about on the last call just because you can’t make up for lost time and the margin stack.

Charles Hsieh, Analyst, Needham and Company: And then just looking at revenues, Jeff, we’ve got a range for the current quarter. Can you just frame up what’s different from the low end to the high end of the range in terms of what you can see today? What would it take revenues to come in at the low end? What would need to happen for revenues to come in at the high end? Yes.

Jeff Andreesen, CEO, Ichor: The low end, I think, is things just start to shift to the right for whatever reason. Demand horizons start to shift customers want to push things out today but they’re holding pretty well. To get to the high end it’s just customers really shifting from quarter three probably into quarter two and starting to pull some stuff in a little bit. And then we get a tremendous amount of demand moving between quarters and every quarter. So we try and range that kind of up 10, down 10.

But I would say we’re probably not going to get any significant new tariff news until early Q3,

Charles Hsieh, Analyst, Needham and Company: but that could have an effect which we have not incorporated. Got it. And then if I could sneak one in for Greg. Greg, you gave some clear color on 2Q OpEx. As we look at the back half of the year, should we expect it to be fairly steady?

Or how do things trend? Thank you.

Greg White, CFO, Ichor: Hi, Greg. I think we said we would moderate it. So we said last time we were saying 5% to 7%. So 4% to 6%, it will be down slightly, but not materially in the second half as we’ve had some front end loaded costs in Q1, Q2. So you moderate it down a little bit, but not significantly.

Craig Ellis, Analyst, B. Riley Securities: Thanks, Kash.

Jeff Andreesen, CEO, Ichor: Thanks, Craig.

Conference Operator: And our next question comes from Tom Diffely with D. A. Davidson. Please proceed with your question.

Craig Ellis, Analyst, B. Riley Securities: Yes. Good afternoon. Thank you. So Jeff, was curious, has your view of the required manpower or the actual yields of the internal source changed at all? And has your long term view of the incremental margins from this project changed at all?

Jeff Andreesen, CEO, Ichor: I’ll answer the easy question. The incremental margin in the long run has not changed. I think we still have to get down what I’d call the learning curve. I think the resources, the machinists are coming along pretty well. But keep in mind, we also need assembly people and things like that.

And so a lot of this is centralized around our Minnesota operations. And so the headcount is coming in pretty well. And then that helps us offset some of the higher cost external resources that we use to start this ramp.

Craig Ellis, Analyst, B. Riley Securities: And is the long term plan to regionalize this where you do this in every region or is it going to be a global operation?

Jeff Andreesen, CEO, Ichor: We will and I think if you look our CapEx was pretty healthy in Q1. That’s all largely around our kind of global expansion for what we see coming, which the largest piece is going to be a machining operation in Malaysia. So we are going to globalize it and build certain things in certain places. That strategy may in fact actually help a little bit if tariffs stick around permanently and things like that. So facility is kind of a 2026 start up.

Craig Ellis, Analyst, B. Riley Securities: Okay, great. And then just as a follow-up, Greg, maybe is there some way you can quantify the steel aluminum tariff impact on you?

Greg White, CFO, Ichor: So to quantify it, Tom, we’ve looked at what we think it’s going to be. So right now, it’s about 15% of our inbound. It’s really coming from Asia. Yeah. US.

US inbound. Right? So Malaysia is kind of the largest piece of it. But the steel side right now is let’s see. What did we say?

It’s yeah. And the $2.32 tariff. So that’s the steel. Right? So it’s it’s not significant, Tom, at this point, because we’ve worked through ways to mitigate that through finding suppliers or diverting it to our not coming into The US.

Also remember, Mexico is exempt from that at this point.

Jeff Andreesen, CEO, Ichor: Yes. And our largest weldment facility is Malaysia, which is it dwarfs any of the capabilities and volumes that we have in US. The US does, I would call, more sophisticated weldments of assembly. And so we have to work that’s the one that’s getting us. Two thirty two does not allow duty drawback, either for our customers or for us if we do it.

So that’s the one that is the biggest obstacle.

Conference Operator: And our next question comes from Edward Yang with Oppenheimer and Company. Jeff, you mentioned the core dip and edge outlook has not changed. What’s your level of confidence that stays strong? You had a large OEM and process control postponed their Analyst Day. And are there any historical parallels that you could draw on in terms of the current environment relative to the past that could kind of guide you in terms of forecasting?

Jeff Andreesen, CEO, Ichor: It’s not COVID. That went the other direction. I think uncertainty and the fact that people are being a little careful is really around the geopolitical uncertainty of what’s going to happen once they make a final determination for semiconductors and semiconductor capital equipment and then the supply chain below it. I don’t I mean, you’d have to ask the other company why they pushed something out. But today, all I can do is tell you what I’m seeing.

We do not see a demand erosion beyond the pockets that I talked about earlier in the call. We see we still have a clear message that 2026 is going to be a pretty strong year. Don’t stop planning for that. We all have to wait out the final export control and tariff situation before we can make any final determinations on if that’s going to lead to some level of demand reduction. But right now, I think most of us are just dealing with what we can see in front of us.

By early summer, I think we’ll start to hear the next wave around semiconductors and whether they’re going to continue to be exempt. Remember they’re exempt in the one area we were really worried outside The U. S, China. But China is still allowing the flow of equipment.

Conference Operator: Got it. Maybe a longer term question, but with all this tariff and logistics uncertainty, are your customers more open to outsourcing components and subassemblies?

Jeff Andreesen, CEO, Ichor: Footprint. We have some flexibility that can work with them. But you have to go one step deeper, Ed, which is where’s the sourcing of the steel coming into The US. And that’s what’s getting us, is not everything is US. Our non semi business, our IMG business we talk about, they don’t buy anything outside of The US.

We buy most of our base materials in The US. It’s really the tubing and weldments that we’re getting affected on. So those have some ability to flex around over time but you would have to have a clear vision before you start making those moves.

Conference Operator: Okay. Thank you.

Jeff Andreesen, CEO, Ichor: Thanks, Ed.

Conference Operator: And our next question comes from Christian Schwab with Craig Hallum. Please proceed with your question. Thanks. Guys, it wasn’t clear to me the size of the Scotland operations on an annual basis. Can you give us an idea of what the average annual revenue of the Scotland operation was in ’twenty three and ’twenty four?

Jeff Andreesen, CEO, Ichor: Yes. I would say I don’t have it on the top of my head, but I would say ’twenty three was probably twenty ish, little lighter in ’twenty four, got tremendously lighter towards the end of ’twenty four. And then in Q1, it’s just the demand dissipated. It’s they did some legacy tool refurbishments under a license. That license expired.

They were not able to backfill in another business. So I would say on the full year, somewhere close to $10,000,000 kind of came out of our horizon.

Conference Operator: Great. And then it wasn’t clear to me. You gave a lot of numbers around gross margins, but let’s just start with, like, where you started with 90% external components. What does that percentage need to go down to drive your aspirational gross margin target of 19% to 20%?

Jeff Andreesen, CEO, Ichor: I think by the end of twenty twenty five we’ll be at about 25 internal, 75 external. We’d have to get some proportion of the flow controller in there. To tell you the truth, I’d probably be guessing, Christian, exactly how much. But to get there, we would have to have some reasonable level of either the full gas panel, the new gas panel and or whether the flow control, the next generation is really going to be backwards compatible and that’s probably going to be a faster move. But I don’t know if I was to guess 40,000,000 or $50,000,000 of that probably gets us pretty close to the 19%.

Conference Operator: Okay, great. No other question.

Jeff Andreesen, CEO, Ichor: Well thank you. Great.

Conference Operator: Thank you. And with that, there are no further questions at this time. I would now like to turn the floor back to Jeff Anderson for closing remarks.

Jeff Andreesen, CEO, Ichor: I want to thank you for joining us on our call this quarter. I’d like to thank our employees, suppliers, customers and investors for their ongoing dedication and support. Later this month, we will be participating in the B. Riley Conference in LA, the Craig Hallum Conference in Minneapolis and the TD Cowen Conference in New York. After that, we will look forward to our next quarterly update in early August for our Q2 earnings call.

In the meantime, please feel free to reach out to Claire directly if you’d like a follow-up Thank you.

Conference Operator: Thank you. And with that, this does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.