Maurice Carson - President & CFO Tom Rohrs - Chairman & CEO.

Timothy Arcuri - Cowen and Company Amit Daryanani - RBC Capital Markets Edwin Mok - Needham & Company Patrick Ho - Stifel Tom Diffely - DA Davidson.

Good day ladies and gentlemen, and thank you patience, you’ve joined the Ichor System’s Q1 2017 Earnings Conference Call. [Operator Instructions] I’d would now like to turn the call over to your host the President and CFO of Ichor Systems, Mr. Maurice Carson. Sir, you may begin..

Thank you Ateef. Good afternoon, I want to thank everybody for joining this conference call which will be available for replay telephonically and on Ichor’s website shortly after we conclude this afternoon. To listen to the webcast replay please visit Ichor’s Investor Relations webpage where you will find the complete instruction.

Let’s get the safe harbor done. 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 and Federal Securities Laws.

These forward-looking statements are subject to certain a number of risks and uncertainties meaning of which are beyond our control and which could cause actual results to differ materially from such statements.

These risks and uncertainties including those that are spelled out in our earnings press releases or prospectus or annual report on Form 10-K which have all been filed with the SEC and those described in our quarterly report on Form 10-Q which will be filed.

You should also consider all forward-looking statements in light of these and other risks and uncertainties. Additionally I need to mention that we will be providing certain non-GAAP financial measures during the conference call and in our earnings press release.

Our earnings press release contains a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures. We will not be providing guidance for the second half of 2017 during the call today. With me now is Chairman of Ichor Systems and CEO, Tom Rohrs.

Tom Rohrs will give you an overview of the results and some industry context and then I’ll go with the financials. After the prepared remarks we will open the lines for questions.

Tom?.

Thank you, Maurice and thank you all for joining us today for our Q1 2017 conference call. The first quarter of 2017 was an excellent quarter for Ichor Systems. We’re extremely pleased with our performance as we continued the high growth rates which we saw in 2016.

The strong demand for semiconductor capital equipment continues to outpace most forecasts and we continue to grow at a faster rate than the industry. This is largely because our products are focused on the etch and deposition processes which are the fastest growing segments of the way for FAB equipment markets.

In Q1 we grew our revenues by over a 100% from Q1 of 2016 and we grew our year-over-year profits by over 220%, this is consistent with our stated goal of growing profits faster than revenues. And faster adjusted net profit margin of almost 10% was our all-time best and very close to the long term model we announced during our IPO road show.

At the midpoint of our Q2 guidance the first half revenue growth was 80% plus without pacing both our peers and our customers. Since our last call wafer fab equipment spending forecast have improved towards $38 billion for this year.

More importantly the forecast for second half shipments have strengthened this time improved spending plans 3D NAND and foundry. This has led to one of our customers revising our outlook from a front half weighted year to a more balanced year. This will benefit our shipment profile as well.

It is important to note that in Q1 we completed our first quarter as a public company with flawless financial execution and leveraged this performance into a very successful secondary offering at the end of April. Our performance is a result of consistent focus on what we do well.

We believe we’re differentiated by our skill set in fluid mechanics and we’ve expressed this expertise in leading gas and liquid delivery systems today and breakthrough ideas for the future.

These gas and liquid delivery systems are used in the deposition tools at three of our customers, the etch tools that are two largest customers, the CMP tools that’s one of our largest customers and lithography tools as the fourth major customer.

These processes are differentially benefitting from the semiconductors industry towards 3D NAND, multiple patterning and FinFETS. Our customers are growing faster than the wafer fab equipment market because they’re the leaders in etch deposition and CMP.

Year-over-year we’re growing faster than our customers because etch deposition and CMP processes are intensive users of our gas and liquid delivery systems. This is a great trend for our business and at this point we’re not seeing a slowdown in this trend. We’ve another major benefit to our strategic focus.

We’re very focused and efficient in our operating expenses and grow our expenses dramatically slower than our revenues have grown. This has allowed us to achieve growth in net income faster than growth in revenues. And again, we expect this will continue to drive our profitable growth.

The first quarter showed continued progress in the liquid delivery sector of our business, as we’ve said this produce launch should outgrow the gas delivery products as we continue to invest in our plastics capability and prepare for the introduction of our proprietary liquid delivery module design.

We’re scheduled to release this product in the second half of this year and we will see strong growth into 2018 with accretive gross margins. I should also mention that we’re seeing increased business beyond our two largest customers.

One of these customers asked us to redesign their gas delivery system for better performance and lower cost, our success has led them to award us the gas panels on two of their platforms which had previously been in-sourced. And the work of our design teams is also critical in our win for the next generation lithography platform.

The industry has become more and more collaborative especially with regard to engineering. Our customer partnerships have been built over the years on strong operational performance. In addition to this operational performance these partnerships are now benefitting from true value added technical coloration.

We see this as an important differentiator for Ichor into the future as well as the catalyst to drive our gross margins. Finally, as our cash balance will grow we expect to look at potential acquisitions which would add to our capabilities and would also be accretive to our gross margins.

We’re excited about the future of the waver fab equipment business. We’re optimistic that our ability to add value to our customers will position us well as the key contributor to the growth of this industry. And now, I’ll turn the discussion over to our President and CFO, Maurice Carson..

Thank you, Tom. I’m going to go through some of the details from the financials over the next couple of minutes. Unless otherwise noted, I’ll be referencing non-GAAP financials and Q1 versus Q4 numbers. Revenue grew quarter-on-quarter by 13%. Please note that Q4 was a 14 week quarter while Q1 was 13 weeks.

On a normalized basis the growth rate was above 20%, there was no significant shift in product or customer mix during the quarter. Gross margin was down slightly in Q1, 16.2% compared to 16.3%. Overall margins for our large customers were up slightly, the margins for our new customers were down due to some startup costs and initial product bills.

This is consistent with the normal process of bringing on new customers and new products. Operating expenses were up little over $600,000 over half of this increase related to public company costs which we forecasted to you last quarter. And the balance is some recruiting costs, consulting costs, along with accounting fees for the yearend audit.

The booked tax rate was a little over 3.6%, our cash tax rate for the quarter was near to zero. Net income was 9.8% of revenue yet another quarter where we demonstrated significant operating leverage. CapEx was around $2.3 million as we completed our capacity expansion projects in Singapore, Malaysia and Portland.

Although invoices are still open, all of these three projects are currently be used for production today and support significantly higher revenue levels. We anticipate that we will embark on one additional capacity expansion project this year. I’ll now go over a couple of key items from the balance sheet.

Accounts receivable was up significantly as we had a higher proportion of our shipments in the last three weeks of the quarter. Keep in mind that in general we run in the mid 20s in TSO, last we were below 20 this we’re above 25 although we expect to get back to our normal run rate next quarter.

Both inventory and accounts payable were up as we ramp through the quarter. We’re confident that we’ve the right inventory to support the increased demand in Q2 shipments. Between capital expenditures and working capital, we’ve used our balance sheet to prepare ourselves for continued industry growth.

We continue to forecast our tax rate, our pro forma tax rate to be around 5%. In general the cash tax rate will be less than half of that. Investors should keep in mind that this tax structure is in place to at least 2019. Sorry I’m going to get technically, I’m going to get accounting for a minute because this is important for your models.

Share count will be up in Q2 using the normal treasury stock method the impact of dilutive options varies for share price. Our great stock price performance since last quarter has caused the share count used for our forecast to be up also. With that we’re ready to take questions. Operator please open the line..

[Operator Instructions] Our first question comes from the line of Timothy Arcuri of Cowen and Company. Your line is open..

Thank you very much.

So I got the first question Maurice, can you give us a little more specifics in terms of what is assumed for the share count in June?.

Yes, they will up approximately, the assumption is 400,000 shares to 26 million shares that’s the assumption in the model..

Great, alright, thank you. And then Tom, I think you said in the prepared remarks, you said that you didn’t want to give guidance for the full year. But, so your customers if I take an aggregate they sound a little more financial a little, maybe not as much as they were, but certainly shipments down 15% to 20% something like that often have.

And you guys tend to whip around a bit more than them when things were good for them or even better for you and vice versa.

So, if that’s the right sort of like baseline shipments for your customers, would it be fair to assume that you would be down more than that more than 15 to 20 half and half?.

Yes. You’re right in that we won’t be commenting on the second half and therefore I wouldn’t answer your question directly. I do believe that and as you know, one of our large customers in first quarter had a kind of 45, 55 slot around how the house would be loaded. And they mitigated that this quarter to say a much more balanced year.

We’re seeing that in terms of our numbers, so I would go with just saying it’s going to be a much more balanced year..

Okay. And then maybe one last question. Maurice if I look at the gross margin drop through since September, since you had all of the Ajax in there, the drop through to gross margins was about 18% as revenues gone up about $50 million on a quarterly basis.

So the drop through is sort of just right at the long term model for absolute gross margin, so you’re hitting up margin target, but I would have thought that the gross margin drop through would have been a little better than it’s been.

Is that just related to the new customers you’re being on and can you talk about that?.

Yes. You’re exactly right. The Ajax models are absolutely accretive, but they’re offset a little bit by the lower margin on the new customers and I should comment that we feel good about the new customers and we’re happy to put some upfront costs into bringing those guys on. But, the Ajax I can tell you today is absolutely accretive to the margin..

Okay, awesome, thank you so much..

Thank you, Tim..

Thank you. Our next question comes from [Sydney Hall], Deutsche Bank, your question please..

Thanks and congrats on the quarter and the guide. Your competitor has talked about supply constraint was the factor for the growth recently this quarter or next quarter. Curious if you were in anyway shape or form negatively impacted by the same reason or whether the share loss came from internal manufacturing sources to your customers.

I understand you’ve been growing capacity quite rapidly since last quarter on the call, but wonder if there was new capacity is already ready for production?.

Okay, so this is Maurice. I’m going to answer part of that question for you. So yes, it is already for production and it is being used for production today.

I’ll say that our competitors are correct that the supply chain using that term most broadly has been impacted, and as struggled to keep up at certain parts of the quarter and that has affected all of the industry not just the competitor and us.

But we feel and I don’t know exactly but we feel that those are showing to come together specifically around some of the key suppliers but in general that those suppliers are catching up to the demand profile that’s there today..

Would you venture to guess how much revenue would have been more if there were no supply constraints?.

No, I really wouldn’t be able to venture that certainly because there is so many puts and takes among all those suppliers that it would really be hard to answer that question..

Okay. My second question is on the chemical business, you talked about the market side and your market share in the past. And if my math is right, it looks like it’s a pretty good opportunity grow from say $15 million a year to $200 million a year and over next couple of years.

You mentioned this would take time but in your prepared remarks you also talked about new products coming in second half.

My question is, are there any way that you can accelerate this growth or is it just not realistic because design cycles are long, I’m thinking about along the line of increasing R&D or maybe organic growth?.

So, I think the answer to your question is absolutely yes. And obviously that’s exactly what we did in 2016 with the acquisition of Ajax which moved us into a prime position on CMP platform. And though similar kinds of acquisitions are definitely possibly although I’m not going say we’re pursing anyone of them right now.

In addition we continue to work on the engineering side so the growth was strongly accelerated in 2016, the growth will be accelerated again as some of these engineering designs come into the market in the back half of this year. There is always the possibility that another acquisition could be another step function growth in this particular play.

But I definitely don’t want to give you the impression that we’re in the process of doing any of that this minute..

Okay, great, thank you very much..

Thank you, Sydney..

Thank you. Our next question comes from Amit Daryanani of RBC Capital Markets, your line is open..

Thanks a lot and congratulations on the great quarter guys. Two questions of me as well, I guess, first off could you just touch on your working capital metrics, I think operating cash flow was negative largely inventory in AR spiked up.

How should we think about as we get into the June quarter, does cash will become positive or would that be more of a back half event you think?.

It’s a great question. We had a long discussion about that ourselves. So, we anticipate that this situation reverses itself in this quarter in Q2 and will not take to the end of the year. And we actually anticipate significant operating cash flow out of Q2. So from both AR and inventory..

Perfect that’s helpful. You just talked about the new customer ramps, could you just talk about what was the – two parts really, what was the financial impact of the investors in these ramps ahead of the revenue to happen, did have impact with your profit level in the March of somewhat.

And then how these programs ramp up in the back of do you assume, is what you think about what’s the revenue contribution you could have at least, new customers, new programs?.

So, as we talked about the impact on the financials, I think it’s important to note that this is not a negative earning situation, it’s just a lower gross margin percentage. These customers are actually bringing in positive gross margin dollars just not at the rate as the rest of the business.

And that’s why I mentioned earlier, we feel good about the whole impact even though it does affect our percentage slightly.

The revenue impact we never really given a lot of guidance on, but I think that we’ve talked about our total business is growing so much that you won’t see a change in the percentage of these new customers, but in absolute dollars the total number could approach doubling..

Perfect. Finally, just to clarify one thing if you don’t mind.

When you guys talk about balanced growth in the back half is that a customer specific statement for that one customer that you talked about or is that a broad Ichor revenue statement you’re making?.

I’d say it’s a broad statement when we look around obviously this one major customer that already publicly announced their earnings, there will be another one, that will be announcing I believe next week and I'm not going to try to predict what they're going to say, however, I think it's a reasonably broad statement covering all of our Ichor business..

Okay, that’s it from me. Thanks guys..

Thank you. Our next question comes from Edwin Mok of Needham & Company. Your line is open..

Great. Thanks for taking my questions. So first just a really quick really quick follow-up on the last question you had, does the gross margin impact on the news customer.

Is there a way you can quantify in terms of how many basis points impact on your gross margin?.

No. I mean I think first question together, but it’s only when we were talking 10 or 20 basis points. So we're not talking a big number but it's the explanation for why we would stay flat or go up slightly..

Okay, great.

Just in terms of magnitude, at least give us clue and think about it and then I think I try to talk about a quarter being more back unloaded in terms of shipment and you mentioned someone else asked question about supply chain and that might have an impact there, is there way you can talk about how this is trending in the near term in terms or [older] shipment trend? Is it similar back end loaded this year or we call more normalized now, anyway you can call talk about either your order pattern or shipment pattern in this quarter?.

The back end loaded part of the quarter was really impacted by the supply chain constraints and as those started to free up at the back half of the quarter, we shipped a lot more to the backend loaded. We do not see that as an ongoing trend that we will continue to be back end loaded but the demand which Tom can speak.

So the demand is relatively evenly loaded, it’s the entire supply chain that caused to be backend loaded..

Yes, and I just want to make sure that we're clear on this, our quarters tend to be almost perfectly linear and so when we say backend loaded, we're not talking about a situation where some company is, and certainly some companies I worked at myself which shipped 50% of their business in the last month and they'd call that backend loaded.

We're not anywhere near that it's just that we weren't perfectly linear and when you move from being perfectly linear to someone non-linear that gives rise to some AR differences et cetera.

So I just wanted to put that into some context for you and to be blunt some of that was obviously waiting on shortages to be cleared which they were and our customers is and as you can tell from their quarterly announcement that at least one of them had no trouble shipping and lot of their stuff right on time.

So I don't think it would have made any difference in the overall revenues of the business if we had zero supply chain problems what problems there were did cause us to be a little more backend loaded then we were and that's made visible on the receivable number..

Okay, great. Thanks for clarifying that.

And then last question I have, just can’t talk a little about longer term beyond this quarter, this quarter or second half, I think just talk about there's still room for gaining share a large customers and the gas tunnel side business and what chemical deliveries grow [indiscernible] your competitor has been offering more larger scale module, right as part of how they have grown their business, right.

Is any thought on that or any other areas you can felt that you can integrate beyond just the gas tunnel..

So, we talked about this I think a little bit at the last quarter as you're not saying our competitor, we have a lot of respect for what they are doing and we think they're a great company. And it also needs to help you understand that we don't play in a zero sum game.

Sometimes I get the sense that there's a feeling that if one gain share the other loses share so when you look at it that's not the case at all. In fact all you have to do is look at both of our growth rates from last to see this year to this year and you can obviously see it's not a zero sum game. So they are in some businesses we are not in.

A lot of those there are a revolve around, sheet metal frames around, machine shops and at this point in time we don't have any plans to enter into those businesses.

As I said we've developed our strategies more around our capabilities, around fluid mechanics and how that gets expressed into the gas and liquid side, to go from there I think we've also explained to you we do see a very fragmented market in the liquid delivery side and we do see continued opportunities to gain share and again not necessarily at the expense of our unnamed competitor here but rather at the expense of a number of very small people who've names you would maybe never even recognize or you think of.

On the gas side, the biggest opportunities we have for example, I mentioned one of them that, one of our customers we've started to gain share platforms and that's come at not at the expense of any other company but rather they've decided to in-source less.

At one of our major competitors, customers I should say, our opportunities in terms of gas delivery are also not at the expense of any competitor but rather with our customer deciding to end source less and so as customers decide to in-source lessen and give more to us yes we see opportunities there as well.

So all-in-all, we're pretty happy with our opportunities to grow our business and not only through gaining share but also through additional products, all of those through additional customers as we've been exhibiting to you..

Great. That’s all I have, thank you. Thanks for color..

Hey Edwin, thank you..

[Operator Instructions] Our next question comes from the line of Patrick Ho of Stifel. Your line is open..

Thank you very much and Congrats guys on the quarter and outlook. Tom, maybe first off, maybe you could give a little bit of color on this qualitatively, I think you have customers especially your largest customers and particularly one is probably at full capacity in terms of their internal gas delivery systems need.

Can you qualitatively talk about how you are benefiting from, just them being in full capacity and more so in terms of them probably outsourcing any of the high demand that we're seen right now..

So Patrick, we have over the course of the last numbers a number of quarters, have benefited from some of that where they have decided to dedicate their capacity in growth and to capacity to more of their final assembly and test operations and we've been a beneficiary of that and that will at some point, I would imagine level off because I think there is an aspect of what they'll do internally that they will always do internally simply because that's their strategy at this point but your question is exactly right and we have been a beneficiary of that phenomenon and I can see that having somewhat like this through the business as growth continues..

Great, that's helpful and maybe for Maurice, you talked about the liquid delivery introduction in the second half of the year, how do I look at it from a modeling perspective of, we are going to see increased start-up cost.

Is that going to affect gross margins? How do we look at that new product delivery and the potential model impacts in the second half of the year?.

So let me say that most of the startup costs have already been realized on the P&L through the last year through the development cost, to it will certainly ramp into the second half of this year.

However, it will not drive a tonne just as a proportion of the business and most of the margin accretion will come through [indiscernible] in 2018 but we will begin the ramp and we'll be able to see that but it won't drive a big change in gross margin until 2018..

And then just the side on that, I mentioned during my statement that we were successful here because we did a redesign in terms of gas delivery systems to help them with their performance and cost.

Some of the margin that Maurice has been talking about is because as they’ve moved outside with their product to us, over the last this first quarter we're actually building a reasonable amount of their old design as just part of the product transfer and so it's really more a function of them transferring from their older design to our newer design and as that happens our margins will improve rather than a kind of a repeatable new product issue..

Great, thank you very much..

Thank you. Our next question comes from Tom Diffely of DA Davidson. Your line is open..

Yes, good afternoon.

Just following up on the last question then are there more opportunities you see in the near term for less insourcing of your customers more these programs that they might be willing to outsource the design work as well as on the platform built?.

Well, we certainly though.

We the one custom I am referring to is probably the third might not probably the fourth largest gas delivery system consumer and they continue to do quite a bit internally and over and we hope that they'll choose to do more of that with us so that clearly are planned and I should also mention in terms of this product development cycle with the liquid delivery side with our liquid delivery module that we're building for the CMP product that is another situation where we are in now a customer phase where the product is being put on shipments to customers, all of the tests et cetera have gone very well.

So we expect that would be starting to ramp again towards the second half of this year and well into ’18 and again that will be helpful to us from a margin perspective and will be in essence of 100% incremental growth for us..

Okay great.

I was curious too, do you have any exposure to some of the close adjacent markets like the flat panel market at this point?.

We do not..

Okay and it seems like the gas panels are somewhat similar that could be an area growth at some point?.

Well, we absolutely understand that and the fact of the matter is at this point we do not at some point, I'm not saying we wouldn't be interested in that I'm just saying we don't do at this point..

Okay and then finally Maurice when you look at the tax rate, obviously it looks below for a couple more years, what's the natural tax rate beyond 2018?.

So we've said in the past that we actually believe this will continue until in 2019 but we have to finish our current program in Singapore and then apply for a new one in 2019 and obviously we're performing very well in Singapore and we anticipate that if for some reason we weren't able to continue the natural tax rate would drop only go up to something like 15% or 16% based on income distribution and NOLs around the world but we model internally that it will continue in the 5% to 7% range even past 2019..

Okay, there would be the other players in Singapore it had no trouble extending they are getting new contracts essentially with this new equipment?.

Any player that has met all of the employment in capital investment like we have..

Great. Okay. Thank you..

[operator Instructions] Our next question is a follow up from [Sydney Hall] of Deutsche Bank. Your line is open..

Just a couple of housekeeping questions, based on your mix of products and new existing customers, how should we think about your gross margin in Q2 at least directionally? I guess I'm also asking how long into the production will these new products or customers become not a margin headwinds..

Okay, so I'm going to answer the second one and we see that by Q4 that there won't be any margin head left for any of the new customers, so we improve every quarter on the way though.

So we'll see less impact in Q2 and less in Q3 and by Q4 there will be none, it will be add or accrete all of our margins and the model that we guided on for our net income, our EPS I'm sorry has no significant changes in gross margin from our normal run rate, so in the same basic area..

Okay great thanks.

The second housekeeping question, in terms of OPEC, Q1 was higher than I forecasted but maybe assess my forecast so I think the delta was mostly related to retreating and consulting, how should we think about that in Q2 and will that at some point falloff in the second half of the year?.

Yes, that’s exactly correct. Some of those were expenses related to that won't continue but we did increase and I actually haven't seen your model lately so but there will be some increased expense in that assumed in the model our guidance for EPS but it's kind of still in the normal range but there will be up slightly again in Q2..

Okay, that’s all I have, thank you..

Thank you, Sydney..

Thank you.

At this time, I would like to turn the call over to Chairman and CEO Tom Rohrs for any closing remarks, sir?.

Thank you very much for all your questions and especially thank you for your interest and Ichor and we look forward to talking to you again next quarter. Goodbye..

Thank you sir and thank you ladies and gentlemen for your participation. That does conclude Ichor Systems call. You may disconnect your line at this time. Have a great day..