Good day ladies and gentlemen, and welcome to the Ichor Systems First Quarter 2019 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. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Claire McAdams, Investor Relations for Ichor. Please go ahead..

Thank you, Operator. Good afternoon, and thank you for joining today's first quarter 2019 conference call, which will be available for replay telephonically and on Ichor's website shortly after we conclude this afternoon.

As you read our earnings press release and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of the federal securities laws.

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

These risks and uncertainties include those spelled out in our earnings press release, those described in our annual report on Form 10-K for fiscal 2018 on file with the SEC 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, and our earnings press release contains a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures.

On the call with me today are Ichor's Chairman and CEO, Tom Rohrs; and our President and Chief Financial Officer, Jeff Andreson. Tom will begin with the review of our results and outlook, and then Jeff will provide further detail regarding our growth initiatives, first quarter results and second quarter guidance.

After the prepared remarks, we will open the line for questions. I'll now turn over the call to Tom Rohrs.

Tom?.

Thank you, Claire, and welcome to our first quarter conference call. Ichor continues to operate with strength and profitability in the current industry downturn. The first quarter came in above where we expected with revenues above the midpoint of guidance at $138 million.

This represents a decline of 2.5% from the fourth quarter, better than what most of our peers and customers are reporting. We think this indicates two things. First, that our market share gains are helping to offset the weak spending environment, and second, that the inventory corrections are largely behind us as we enter Q2.

Our results also demonstrate that our customers are not pursuing a strategy to reduce their outsourcing during a period of weak industry spending. During the first quarter, we continued to make progress executing on our strategies to grow our share within our served markets.

This gives us increased confidence that our revenue levels will be meaningfully stronger in the second half of the year compared to the first. Our first quarter earnings were $0.25 per share, $0.02 shy of the midpoint, but still demonstrating solid profitability at these revenue levels.

I feel that we’ve done well adjusting to weakening business conditions as we executed right sized strategies over the last two quarters. Today we have balanced our resources between the current level of business and the increased sales we expect in the second half.

With our reduced operating expenses and variable manufacturing cost structure, we will be in a position to demonstrate on our financial and operating leverage as our revenue rebounds in the second half. As we look forward to the second quarter, we expect a similar level of revenues as the first quarter.

We believe this reflects continued favorable trends in our results compared to the overall soft wafer fab equipment spending environment.

For example, while we believe that the bulk of downward revisions and industry spending are behind us, recent industry reports indicate continued modest sequential declines of about 5% or so in new OEM system deliveries for process tools in the second quarter.

For Ichor, in particular, we are witnessing a one quarter drop in sales to our lithography customer before their revenues pick up significantly in the second half. Offsetting these two quarter-over-quarter headwinds are the gains we're making and winning incremental business in each of our served markets.

We remain on track to achieve incremental revenues for market share gains this year of about $75 million to $80 million as we said last quarter. Our gain to date contributed incrementally -- excuse me, our gains to date contributed incremental revenues in the single digits for the first quarter.

We expect to move into double digits for the second quarter and accelerate from there. Consistent with our comments last quarter, we continue to expect our incremental revenues from market share gains will be strongly weighted to the second half of the year. Jeff will discuss our progress during his prepared remarks.

With this trajectory, we really don't need to see much of recovery in WFE spending in order to see meaningful growth in sales and significant operating leverage as we progress through the back half of the year.

Therefore, despite a weak environment for process tools through the remainder of 2019, we are confident in our meaningfully stronger second half driven not only by share gains, but also by our position in EUV lithography where we will see volumes bounce back to record levels starting in Q3.

On top of this, we could begin to see a modest replenishment of inventories in our components business later in the year in preparation for improving demand for etch and deposition tools heading into 2020.

While we continue to remain cautious, given current business conditions, these factors all contribute to our optimism that our revenue run rate as we exit this year should be a positive indicator for a much stronger period of financial performance ahead. So as we navigate through a challenging business environment in 2019, our strategy is unchanged.

We are a semiconductor equipment supplier concentrated on fluid delivery technology. We believe that through the cycle, semiconductor business will continue to grow faster than most other industrial businesses and that we are very well-positioned with our key customer accounts.

We also have several strategic footholds that will help drive increasing share of our served markets, which in a stronger spending year add up to $400 billion of total opportunity for Ichor.

Over the last four years, we have outperformed the wafer fab equipment 12% annual growth rate with our own annual growth rate of about 25% and we fully expect that as we execute on our opportunities for share gains we will continue to grow faster than the WFE market looking forward.

Before turning the call over to Jeff, I'd like to highlight his promotion to President. This promotion recognizes Jeff's significant contributions to the successive Ichor over the past year and a half.

Jeff's leadership capabilities and financial and operational expertise will be key factors in leading the company through this next important phase of growth within our served markets with a focus on continued improvements in operational execution and financial results.

My focus as Chairman and CEO is on executing the company's strategic initiatives for growth. In his new role, Jeff now has responsibility for managing all operating aspects of the business, including sales and marketing, R&D and operations. He will continue to serve as Chief Financial Officer of the company until a new CFO is appointed.

As such, I will have Jeff provide an update of some key highlights of our progress made in the first quarter on our business initiatives before he concludes our prepared remarks with the financial details of our first quarter results and our Q2 guidance.

Jeff?.

Jeff Andreson:.

As Tom mentioned, with the bulk of the downward revisions than expected 2019 industry spending behind us, we were on track to achieve the $75 million to $80 million of incremental revenues we're targeting this year from market share gains.

We're very pleased with the progress made to date and in the first quarter specifically we recognize revenue related to share wins in gas delivery systems, weldments chemical delivery systems and components and precision meeting -- machining. I should note here that the same Tom mentioned earlier is [indiscernible].

In our gas delivery business, we’ve won incremental share at two of our largest customers. The first one came in the fourth quarter and began shipping in Q1, and the second win was awarded in the first quarter with first shipments occurring in late Q1.

In our weldments business, we have been qualified on several waves of parts with a new customer and are in process on several more. These phases of qualifications represent well over half of what we're chasing for the year. We now have completed our expansion in Malaysia for both weldments and chemical delivery for plastics products.

Our expansion in this low cost region will allow us to compete more effectively in other segments of the broader chemical delivery market. And our precision machining business disqualification has a longer cycle time than the weldment side of our business.

While we are seeing some modest revenue for new wins, the first meaningful revenues are expected in the second half of the year. In our chemical or liquid delivery business, we've picked up some additional share that is incremental to our proprietary liquid delivery module with revenue expected to begin in the second quarter.

The largest growth driver for our chemical delivery business remains a proprietary liquid delivery module. We have begun our revenue ramp and we expect to see more meaningful levels of LDM revenues in the second half.

We continue to make solid strides in our geographic expansion strategy while our IAN Engineering business continues to be negatively impacted by the lower level of memory spending this year.

During the first quarter, we completed an extension of our existing supply agreement with our largest customer in Korea and we're using the slow period to double down on our efforts to penetrate additional Korean OEMs. We're in the early innings, but we continue to see a large opportunity in Korea.

In Japan, we continue to make progress on a partnership agreement that will enable us to market our LDM product directly to OEMs in Japan. On the R&D front, we are developing an innovative new gas delivery platform and are in the initial stages of discussions with our customers.

This platform will bring both technology and cost improvements to our customers. To summarize, we’re making solid progress across the board on our incremental revenue initiatives with revenues from these share gains strengthening into the second half.

These combined with the backend loaded year for our third largest customer position us well for a stronger second half and into 2020. I look forward to updating you each quarter on our progress. And now I'll discuss our financial performance and second quarter outlook.

First, I'd like to remind you that the P&L metrics discussed today are non-GAAP measures unless I identify the measure as GAAP based. These measures exclude the impact of share-based compensation expense, amortization of acquired intangible assets, nonrecurring charges and discrete tax items and adjustments.

I would also like to note that schedule would summarizes our GAAP and non-GAAP financial results as well as key balance sheet and cash flow metrics and revenue by geographic region can be found on the Investors section of our website.

First quarter revenues of $138 million were down 2.5% from the fourth quarter and down 47% from the record quarter one year ago. Our first quarter gross margin of 14.9% declined from the fourth quarter, primarily due to less favorable product mix as well as slightly decreased volume.

Operating expenses of $11.7 million increased from the fourth quarter, and while we had forecast a modest increase driven by the timing of payments for employer taxes and variable compensation, OpEx was slightly higher than forecast due to a lower level of customer funded NRE.

Operating margin of 6.4% represented 110 basis point decrease from the fourth quarter of 2018 as a result of the slightly lower gross margin, an increase in operating expenses in a relatively flat revenue environment. Our interest expense in the first quarter was $2.8 million.

Our tax rate for the quarter was 7%, the lower rate is primarily a result of a one-time adjustment as well as a slightly lower tax rate compared to forecast. First quarter net income of $5.6 million was equal to 4% of revenue. Earnings per share was $0.25. Now I will turn to the balance sheet.

Cash of $31.6 million decreased $12.2 million from year-end reflecting a reduction in debt of $7.4 million, capital expenditures of $4.9 million and the $1.6 million in early quarter share repurchases discussed on our last earnings call.

Free cash flow was a use of $5.2 million in the first quarter and was negatively impacted by the backend loaded shipment profile for the quarter, which also increased a day sales outstanding to 36 days from 26 days in the fourth quarter. Inventory decreased 6% from the fourth quarter, down $7 million to $114 million at quarter end.

Now let's turn to our second quarter guidance. Our forecast is for revenues in the range of $133 million to $143 million, which is flat plus or minus 4% from Q1.

Our revenue guidance is better than forecast for new system shipment, new systems for process tools in the second quarter demonstrating that our market share gains have an increased contribution to sales compared to Q1.

Our earnings guidance of $0.20 to $0.26 per share reflects similar operating profitability compared to the first quarter, but with a higher tax rate of 11% compared to 7% in Q1. We expect improvements in gross and operating margins to commence in the second half of the year. Operator, we're ready to take questions. Please open the line..

Thank you. [Operator Instructions] And our first question comes from Sidney Ho with Deutsche Bank. You may proceed..

Thanks for taking my questions. My first question is you talked about increased confidence in the second half '19 will be meaningfully strong into the first half. Do you mind getting us a range to what you’re thinking, just to be a little more color.

Are you expecting the core business to be kind of flat -- such a thing in core business to be flat half over half, meaning the incremental revenue is going to come from the share gains and the new opportunities?.

Yes, basically that's exactly right, Sidney. We expect plus or minus the core revenue to be flat. I think we -- last quarter we used the term bumping along the bottom and we still feel like we're bumping along the bottom.

And I think you probably noted that I think this past quarter Lam's Q2 guidance was to be down about 4% for the company and that translates into about down about 6% for new systems. We don't know what exactly would Applied is going to do, but the bottom line is that there's not a lot of up -- we don’t see a lot of growth out there at this point.

So bumping along the bottom is a good way to describe it. There are a couple of exceptions to that. One is, I think you know and most people know that ASML was expecting a strong second half. We had a good year with ASML last year in the first quarter, and I mentioned that the revenue for ASML in the second quarter is down quite a bit for us.

If you had listen to their earnings, they talked about actually making some improvements in their first release of the EUV tool and that will start to be produced in the second half. So we will see a bumping in ASML revenue, but the core process tools we think will be bouncing along the bottom and then the majority of the share gains.

Again, we targeted that at $75 million to $80 million, the majority of that revenue will show up in the second half with the third quarter being significantly larger than the second quarter and then the fourth quarter being significantly larger than the third.

So you can kind of draw yourself when you ramp and get an idea of what that might look like..

Great. That’s helpful. My follow-up question is, previously you talked about you expect customer inventory levels to normalize by the end of Q1..

Yes..

And comment [indiscernible] I think is, Jeff that actually happened..

Yes..

I’m curious if you think inventory are normalized at your largest customers as well as the other customers? I’m asking because it seems like the data points are still very mix out there. And maybe just a follow-up to that as you look into your bookings, can you talk about the linearity of Q1 and maybe into April.

Was there any noticeable pickup in any of the end markets? Thanks..

Yes. So we believe that overall the inventory corrections have about run their course, which is excellent news.

And by the way that's not to say it's run its course in every product and every product line in every customer because obviously all of those customers have a number of different products and they carry different levels of inventory depending upon the product, depending upon where they think things are going for them on a very individual basis.

And so we're not talking about a clean sweep where everything happens at once.

It's some get better than others get better than others get better, but in general, we're seeing a situation where a lot of those inventory corrections have taken place which means that again if Lam's shipments are going to be down 3% or 4%, theoretically our shipments should be down 3% or 4% as well and not more than that because of taking in out of inventory.

Now we told you our second quarter shipments are going to be flat.

They’re not going to be down 3% or 4%, and we also told you that we expect ASML actually to be down quite a bit as they do their improvements on their product, and therefore that's why this -- the market share gains are so important as they bring those downward headwinds back to a flat level for us in Q2..

Thank you very much..

You're welcome..

And then, Sidney, you had a question about bookings, just keep in mind our bookings are a couple of weeks long. So it's a -- it's not a strong indicator of a huge backlog or anything, that’s their visibility on the business kind of remains about what it was last year ….

Okay. [multiple speakers]..

… in the last quarter, sorry..

Yes..

Thank you..

And our next question comes with -- from Tom Diffely with DA Davidson. You may proceed..

Yes, good afternoon.

I guess, first one you talked about the $75 million to $80 million of incremental, is that a dollar amount? Is that a run rate that you expect by the end of the year?.

That’s a dollar amount, meaning that the run rate at the end of the year will be at a higher level than that, obviously. So it's kind of Tom said, it's ramping through the year and we talked about it being in single digits and then in double-digit.

So you can infer from that that will be a pretty heavily weighted to the back half and then will exit that the fourth quarter at a much higher level than what the ramp was through the year..

Okay.

And then when you look at the new business that you’re adding, is there a meaningful difference in the margin structure between gas panel work and weldments and precision machining?.

Yes, I mean, some of the share gain obviously is gas panels, but I would say that in the weldments and the precision machining and even later in the year with the LDM, they're all at higher margins than you're seeing in the business today.

And probably in general, we’ve talked about our weldments being around the 20s, the low 20s and the precision machining around the low 30s or so, and LDM somewhere -- will be somewhere in between those. So that will be incrementally accretive for us..

Okay, great.

And then when you look at the different segments out there, I mean, memory and logic foundry, is there a meaningful content difference that you have on the different system types sort of different end markets that they’re serving?.

No. So it's well known that our three largest customers are Lam, Applied and then ASML quite a bit lower than Lam and Applied as Lam is obviously tilted towards memory and I believe most people would argue that Applied has a little more tilted towards logic or foundry. And then of course with ASML they used kind of across the board.

So with all that added in, I would say just because the industry might have a skew towards logic -- excuse me, towards memory over logic and foundry, we would probably follow the industry segmentation pretty closely..

Okay, good. And then finally you talked about an opportunity in Korea.

Do you have to ramp the facility there or do you have to buy local company or how do you penetrate that market?.

We are -- we did an acquisition basically a year-ago at this time called the IAN Engineering. It came with a footprint. It has a clean room. I would say that for us to significantly grow that business, we will have to do a level of investment in there to increase the capacity..

Okay. Thanks for your time..

You bet..

And our next question comes from Karl Ackerman with Cowen. You may proceed..

Hi. Thank you, gentlemen. I had two. If I can just go back a previous question, I appreciate all the color on your opportunity to expand from UV [ph] adoption and the $75 million of incremental design wins this year as well as some [indiscernible] prospects of targeting the equipment suppliers in Japan and Korea.

Going back to the previous question, when should we expect to see meaningful revenue from equipment subsidiary in Japan and Korea? Is that something of a 2019 event or more of a 2020 event?.

Well, Japan is certainly a 2020 event. The -- I think if you recall what we had said, we're actually moving very close now to have an agreement, but we are now in the second quarter of this year. And while we knew this was going to take a reasonable amount of time, we're kind of right on schedule.

So we believe we will start seeing some amount of revenue in the beginning of 2020 as we start doing different kind of qualification units in such. Korea we are seeing revenue now and so the question is more is what is meaningful. I think you need to recall that the company we bought, we basically bought for $4 million up front and then an earn out.

So it's not a terribly large-company, although the revenues that we achieved -- that will be double-digit revenues as we move forward.

We were a little bit -- well, to be blunt, we, kind of the timing wasn't very good on that acquisition in that as just correctly said, we bought them about a year-ago and it's just maybe a year-ago May or June when people began talking about Samsung dropping their spending on memory pretty dramatically.

And so the revenue took a hit as we reported, I think on a couple of calls. And it is not at the level we had first thought, but there's ongoing revenue stream there, it is the customer, there are couple of large customers in Korea including over a $1 billion of revenue customers, they’re our main customer and we continue to get revenue from them.

And finally we continue to work with our smaller potential customers there as well..

That’s helpful. Going back to Sidney's question, I think you mentioned that the core business will be flat in 2019..

Yes..

But, I guess, if I recall correctly, I think they’re more levered toward memory spending than logic and foundry.

And so how do we take about the demand or capital intensity of your gas and chemical modules as the memory producers shift from Greenfield investments to conversions in 2019 and perhaps 2020?.

Yes, a couple of things. First of all, when we said this year will be flat, we mean flat from where it began. Wafer fab equipment as you know is down 20% or so year-over-year and the wafer fab equipment associated with memory is down more than that.

So I didn't want to imply that we were flat year-over-year as far as wafer fab equipment and starting from the first quarter and moving through the year we don't see a big recovery at this point in time where as we had thought earlier in the year there might be some recovery in the second half in the core business.

So I wanted to be clear about that and I also think that will become clear too. I believe that'll be the case. And if so, we will probably see people lowering their total wafer fab equipment numbers for the whole year because most of that original downside number for WFE included some ramp, some increase in the core business in the back half.

So having said that, back to the memory and foundry and logic front, our connect rate, if you will, on those tools and the spending per tool is about the same. There's not a huge difference. And so we're not too worried if memory is high and say logic is low and we're not too worried if it's vice versa.

We are just happy if someone is buying tools and putting in more process equipment, and we’re also not too concerned whether it's a Greenfield or whether it's technology improvements or add-ons to the current factory. All of it on a tool basis is more or less the same for us..

Very helpful, Tom. One last one, if I may, and I will cede the floor. Now that the market has softened, do you think valuations were bolt-on deals half were ceded or are they prohibitively elevated? And secondarily, how do we think about just the level of buybacks given somewhere the stock is today? Thank you..

So on the buyback side, we bought back about $90 million of shares last year at a price -- overall average price of just about $20. And so from a economics perspective, that's reasonably successful. And that in terms of what -- what we see this year right now buybacks are not on the top of our list of things to do.

With regard to the deals that we see, that's kind of a tough one because everyone is a little bit different. And we've seen all of the deals that have been consummated in the recent times by people in the industry, and to be honest we’ve passed on them.

When we look at a deal and the financial capabilities, if you will, of the company, we like to see a deal where the P/E ratio of the company is at or below our P/E ratio. And while in M&A a lot of people like to talked about EBITDA for a lot of good reasons and everyone in the private equity field talks about EBITDA.

We tend to talk about P/E ratios because that's what we deal with and you guys are very interested in earnings per share and I have to be honest in 4.5 years of being a public company, no one's ever really asked me on an earnings call how is my EBITDA doing? So we tend to look at things from a P/E perspective event.

If people are paying 20x P/E or people are asking 20x P/E and somebody else is willing to pay 20x, say 2018 P/E knowing this is a depressed year from 2018, that’s a deal we would pass on..

Thanks for the color. I appreciate it..

And our next question comes from Patrick Ho with Stifel. You may proceed..

Thank you very much. Tom or Jeff, in terms of the incremental market opportunities that you’ve talked about the $75 million to $80 million, you’ve talked about in the past it's very broad-based from your fluid delivery systems to weldments to precision machining.

Can you give a little bit of color of where you may have been most surprised, whether you're seeing -- maybe faster gains than you thought and how some of the gains that you’ve made in 2019 can also, I guess, expand or carryover into 2020?.

Yes, so I guess, surprised, I think we're actually tracking quite well. I'd say the one area that’s may be moving faster than we initially thought was weldments.

I think we have a very strong pull there from our customer base on weldments and I would say that even today and even in this quarter we’re seeing additional kind of strengthening in that, that area that will probably be a little more 2020 as you go through qualifying and stuff, but I'd say that the gas panel share wins we had a very good feeling of that, but that actually accelerate a little bit in Q1.

I said we won another piece of share and that executed within the course, that's been a bit more positive that that brought some of this forward a little bit, lessening the back end spike, but it's still going to be very heavily weighted to the back end.

So in essence we're really happy with where we are at and the opportunities we're continuing to work and we're actually seeing more opportunities, I would say, today than we actually initially saw as we entered the year..

Patrick, I would add just the precision machining is probably the late bloomer and the qualifications there are just more strenuous.

It's not just qualifications around the precision measurements that you make the actual part within beating them all, but there are all sorts of special coatings going on inside the precision -- the precision machined parts, especially as they come in contact say with the process critical gases etcetera.

And that just takes a little more work and a little more time on the qualification process to try a myriad of different gases through the passageways, if you will, within a precision machined part..

Great. That's helpful. Maybe as my follow-up question, your model has shown the resiliency you talked about in the past in its ability to deliver profitability. Gross margins have actually held also pretty well right around this 15% level as revenues have declined.

As we look on a going forward basis, is absorption going to be the biggest influence [technical difficulty] gross margins on a going forward basis or are there still issues at product mix and things like that impact gross margins on a going forward basis?.

Yes, I mean, obviously product mix can swing you within a quarter. We have -- we -- if you look within gas, but it could be between chemical and gas and so, but that’s not going to be the biggest swinger for us.

Getting -- once we lever up, we are going to get the fixed cost infrastructure that we have with leverage, we've also done -- we focused a lot on our known -- call it direct labor people in our operations, and they're doing a really good job of driving process improvements and things like that.

And then, largely as we kind of continue to grow these and I think this goes back to one of the earlier questions is the new market share gains are at high -- generally at higher gross margins than that core business today. So that's going to be accretive as well..

Right. Thank you very much..

Thanks, Patrick..

And our next question comes from Quinn Bolton with Needham. You may proceed..

Hi, guys. Jeff, congratulations on the promotion. I apologize if a question has been asked, I got bumped from the conference call about half way through the Q&A.

but just wanted to first ask on the weldments side of the business, your biggest competitor at gas panel recently acquired a weldments business and wondering what you think that that’s [indiscernible] sort of competitive landscape in the weldments business? And then I’ve got a follow-up question. Thanks..

Yes. Of course we are aware of that and we know that company reasonably well. We had spent -- and I had personally spent a reasonable amount of time talking with them previously. There are a couple of things that are important there from our perspective. And it has nothing to do with how other people would view the deal.

So there are couple of things there. One is that in the weldments space what we see now is and what we're taking advantage of this is the idea that customers are beginning to understand that weldments come in a number of different flavors.

And to make it simple, there's orbital [ph] welding which is largely done with the machine and it's [indiscernible] kind of low technical requirements in terms of the labor force and pretty easy to do. And then there is more hands-on it's called TIG welding, but it's the hands-on very, very skilled operators and more difficult to do.

And so our strategy became when we saw the opportunity to add weldment capacity through an acquisition, we decided not to do that. What we decided to do was build capacity for ourselves in Malaysia.

We decided to have it dominated mostly by the low end orbital welding, which would have been the bulk of the capacity we had been -- we would've been purchasing if we chose M&A. We believe, we're able to add about $50 million, if you will, of capacity for about $5 million, $6 million of capital.

And then what we will do is take orbital welding where we can gain share and put it there knowing that the labor costs in Malaysia is probably 25% of what the labor cost is in the United States. So the customers are seeing these low-end weldment things as being a little more price competitive.

We wanted to be in the area where we could compete that way and still make even more margin for our self and we chose to put our money to work in building capacity instead of buying it..

Thanks, Tom. And then the second question, it sounded like in the prepared script you said that you're starting out to ship first delivery of the liquid delivery module to your sort of lead customer and I believe you said that there may be some expansion at business.

Just wondering if you could clarify, is that tool now being shipped to multiple device manufacturers or is the ramp still what the -- sort of with the lead customer? Thank you..

It's still with the lead customer. And I suspect it will be that way through almost the end of the year. In the third and fourth quarter we will start qualifying at new customers, which takes a little bit of time. The good news is the lead customer is a big customer with a big appetite and it could end up being a lot of tools.

And so, normally it's a little strange and that you normally don't go -- the first answer isn't usually with the best player in town, but in this case it is. And so we're happy about that and we're not concerned about it. But to answer your question, it means for the most of this year we will be dealing with one customer..

Thank you, Tom..

And our next question comes from [indiscernible] with RBC. You may proceed..

Hey, guys. Thanks for taking my question. I had two. And the first one is just on as it relates to your two biggest customers. So my understanding is that Lam benefits more from the transitions, from manufacturer layers they’re probably spending earlier.

And so then how do I kind of compare that to your comments now about the back half is going to be similar, even though we heard comments from Lam saying that they’re going to start picking up in 2H..

Well, first of all, I hope the comments from Lam that they’re going to start picking up in the second half are absolutely correct because if they do then we will benefit. And I'd be very, very happy to be wrong about that because we would definitely benefit if Lam -- the core business that Lam picks up in the second half.

And I will only tell you that I'm not seeing it yet. And I will kind of keep our eyes peeled and we will probably be amongst the first to actually start seeing it since we have good insights into their build plans etcetera, etcetera. So I hope you're right and I hope Lam has a great second half..

Okay. Got it.

And then in terms of the -- kind of [indiscernible] expectation, I think it's -- I think people are kind of already expecting to be around $40 billion, so can you maybe help me walk through what do you mean by people having to take their numbers down more than that, because I think that most people already have $40 billion or even a bit less, even though they may not be in front there, yet..

Well, I think $40 billion, $40.5 billion or whatever the number is exactly where everyone is today.

And basically when I do the math, if there is no upturn in the second half in terms of the core business -- in other words, if the second half is exactly equal to the first half then, I believe, if you do the math on that scenario, WFE will be down a little bit more than -- it will be a little bit below $40 billion.

Now the wildcards in that are ASML, and once again I hope ASML blows the roof of the numbers in the second half because we will be a beneficiary of that. But in the absence of at least some kind of an uplift in the second half, I think it's going to be hard for WFE they hit $40 billion..

Okay, got it. And then last one for me just in terms of -- I don’t know your numbers [indiscernible] that qualitative is perfectly fine. So when I look at your 10-K, you said that Lam is about a 56% customer for the full-year.

So if I look at March and June, do you -- are you saying that you think that Lam -- or that Lam was less than that in March quarter, in addition to June basically imply guidance?.

No. Now it's -- it wouldn’t be much different actually..

Interesting. Okay. Thank you..

And our next question comes from David Duley With Steelhead. You may proceed..

Thanks for taking my questions. Many of them have been answered. But I wanted to kind of address the first half, second half revenue issue here. You’ve guided the first half revenue to basically two quarters of a $138 million, that’s like $275 million or so for round numbers.

And you’ve talked about this $75 million to $80 million incremental opportunity, and it sounds like $15 million or so is going to happen in the first half. And so that would leave, let's say, $60 million in the second half. I’m trying to check my math. That sounds like your revenue would grow in the second half by 20% or so versus the first half.

Is that the way we should think about the ramp up in these market share gains that you're referring to?.

Well, it's the right way, but you’re a little low on the first half side when I said single digits and in the first quarter and double-digit in the second quarter. That doesn't mean 5 and 10 necessarily, but you're on the right track. And that does exactly -- that’s exactly what it does mean.

So, if you actually said that the first half was 20 or 25, or 15 or any of those numbers, then you subtracted it from 75, that would be the number that we'd be plugging into the second half as incremental revenue..

And correct me if I’m wrong, but I don’t think the ASML revenue is part of the $75 million to $80 million, so wouldn't this be a little bit higher?.

No, there's no part of ASML in that number..

Yes..

Yes, so if they’re sort of [indiscernible], then you should have second half growth that’s more than 20% higher than the first half..

I think, Dave, we are not in overly specific, but you’re a little light in the front, [indiscernible] correctly, but we don’t want to be any more specific, yes..

Okay. And I haven't heard you guys talk about this before, so I just wanted to post [ph] the question.

As far as your overall comp structure, what percentage you think is fixed and what percent do you think is variable?.

Well, I mean, if you take the material content, we are very highly variable. Another words are, I’m not going to give you exact percentages, but it's going to be 80-ish pretty variable and the rest is either fixed infrastructure or the operations that you need to run the business. So -- in broad numbers..

Okay. Thank you..

Okay..

And our next question comes from [indiscernible] Capital Management. You may proceed..

Yes. Hi, guys. The market share gains what might you in the year add at as a per annum rate in this markets again, [indiscernible] trying to get to a ramp, but really the importance in 2020..

Hey, Graeme [ph], I know you’re trying to guess, we are not going to be the [indiscernible] release, specific.

I think what we’re alluding to is, is you kind of know that we’re kind of seeing single-digit to somewhere between 5 and 10, in the first quarter and will be in the double-digits and if you imply that ramp, you will kind of see that it's a pretty strong exiting rate for those new shared gains.

But and I wouldn’t say, it's like a super big hockey stick in the fourth quarter. It's going to -- third quarter is going to grow on top of the second quarter, and then it grow down..

Okay, great. And then just to get a feel for next year, what big picture changes might there be incrementally or maybe detrimentally for next year. Are there any other big -- you mentioned Japan and Korea and ….

Now the big picture change next year is that after -- well, literally by next year it will be 6 quarters of slow down within we fully expect to see a very strong rebound in the - what you have been calling the core business by then wafer fab equipment spending.

And I don’t mean if that means it goes back to $50 billion or not, but that would be very, very big and very, very significant, and I think we fully expect to see that..

Great.

And so you would expect share gains next year as well?.

Well, we would expect the shared gains that we made this year, obviously, and Jeff already said the run rate of those gains coming out of the end of this year, multiplied by 4. It's going to be a lot higher than $75 million.

So we would expect to see them carry through and we've every reason to believe that we will continue to work very hard to have additional share gains on top of that..

Right. Great. Just wanted to ask you a more an usual type question, but how cost increase is going in terms of purchase materials versus your pricing and price increases for [indiscernible] whether its steel or anything else? Thanks..

Yes, I -- we are not really seeing any, steel in particular. It's not going up for us. We are not seeing a bunch of commodity, pricing increases today. And we’ve been reasonably well isolated from the -- are insulated, I should say from the tariff were up till now. So that’s a good thing..

Great. Thank you..

Thanks, Graeme..

Thank you..

And our next question comes from Sidney Ho with Deutsche Bank. You may proceed..

Thanks for taking my follow-up question, only if one. Just want to circle back on this gross margin questions earlier. If I know [indiscernible] last time you were at these revenue levels. Your gross margin was above the 100 basis points higher.

But again with the product mix that now fixing in weldments and precision machining, which I don’t know how big these are.

They are -- these business today, but can you help us bridge the gap between then and now? And a follow-up to that is maybe more forward looking at what revenue level and what kind of mix do you see gross margin going to [indiscernible] low-end of your target range, which I believe is 19% to 20%, is a long-term reach..

Yes, I mean, there's a lot of -- honestly, going back, Sidney, there's a lot of obviously moving pieces do recognize it's a little bit different than pure gas back and those days with sense then, we got a higher content.

We’ve got a few businesses that have been affected kind of more by the fixed overhead rate and that’s in our precision machining, some of our plastics machine and in some of our weldments. And those are kind of the ones that as we lever out of this and grow, you will see the bigger increment.

And we haven't put a revenue target on when we get into the model, but like-for-like we were almost at a $1 billion run rate in the first half of last year. Gross margin was just a hair under that in total less than a margin point or so in that.

When we get back to those similar levels, we're going to have a higher mix of our weldments and precision machining in some of the other market share gains that will help us get there hopefully. So next time if we’re at that kind of $1 billion run rate, we would hope that we would be in that gross margin range..

Yes, I think there are couple of things, if I could add to that. And it's a good question. Normally the last time we were on that level we were headed up.

And it's normally the case that when your business is growing, as you grow through certain revenue levels, your margin is actually going to be higher than when you hit those same levels on the way down.

And the reason is that on the way up you are stressing the organization more so in terms of squeezing more output out of the particular property, a particular asset, a particular tool and you do that with all sorts of crazy amounts of over time etcetera, etcetera, etcetera.

And when all is said done you’re slightly more productive on the way up than you’re on the way down, regardless of how much you try to right size on the way down is just kind of how it is.

But the real analysis behind that is and I think Jeff was saying this, but as we headed up, we did add fixed costs and while the margin on all those items will be higher at certain levels of loading, all of those levels of loading about are now about half of what they had been.

And so when all is said and done, it's not that surprising to us that we would be, say a 100 basis points below and that some of the items that would normally have higher margins aren't quite as high they would be simply because they're the ones with the higher fixed costs. So, Sidney, I think that makes some sense..

Yes, it does. Thank you..

Thanks, Sidney..

Thank you ladies and gentlemen. This now concludes our Q&A portion of today’s conference. I would like to turn the call back over to Tom Rohrs for any closing comments..

Well, thank you very much for joining us on the call this quarter, and once again we look forward to updating you on our second quarter call in August..

Ladies and gentlemen, thank you for attending today’s conference. This does conclude the program, and you may all disconnect. Everyone have a great day..