Ichor - Earnings Call - Q3 2020

Transcript

Speaker 0

Good afternoon, and thank you for joining today's third quarter twenty twenty conference call. As you read our earnings press release and as you listen to this conference call, recognize that both contain forward looking statements within the meaning of the federal securities laws. These forward looking statements, including those made about the impact of COVID-nineteen on our operations, 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 release, those described in our annual report on Form 10 ks for fiscal year twenty nineteen and Form 10 Q for fiscal Q2 twenty twenty on file with the SEC and those described in subsequent filings with the SEC. As noted in those aforementioned filings, we remind you that the COVID-nineteen pandemic continues to create significant uncertainty in our industry, limiting our ability to provide longer term forward looking statements.

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 Andresen, our CEO and Larry Sparks, our CFO. Jeff will begin with an update on our business and a review of our results and outlook, and then Larry will provide additional details of our third quarter results and fourth quarter guidance.

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

Speaker 1

Thank you, Claire. Welcome to our Q3 earnings call. I trust and hope that all of you and your families are staying healthy and safe. Today, reported another strong quarter of results with Q3 coming in above the midpoint of both revenue and earnings guidance. Revenues were $228,000,000 up 3% from Q2 and our sixth straight quarter of sequential revenue growth.

Gross margin increased 60 basis points, operating margin increased 90 basis points and earnings per share grew 15% over the second quarter. We also had a strong cash flow quarter with free cash flow of $21,000,000 for the third quarter. Our results for the third quarter demonstrate our continued execution of our stated objectives, to outgrow the industry and grow earnings faster than revenues. Year to date in 2020, revenues are up 55% and EPS is up over 120 over the first nine months of twenty nineteen. The global wafer fab equipment, or WFE, market continues to be strong as we near the 2020, with full year growth expected to be up around 15% from 2019.

We continue to see strong levels of demand from our customers and at the midpoint of our Q4 guidance, we anticipate a seventh consecutive quarter of sequential revenue growth and we also expect continued sequential increases in gross margin, operating margin and earnings per share. At the midpoint of Q4 guidance, our revenue growth this year will be 45%, approximately three times the overall industry growth and our EPS increase for the full year will be about double the rate of our revenue growth. I continue to be amazed by our employees and the supply chain partners who are working closely together to deliver such strong performance and even record sales year for ICOR in 2020. I want to thank our employees and partners for their incredible contributions as we keep our business operating at such high levels as we navigate the challenges caused by COVID-nineteen. In my prepared remarks today, I would like to focus primarily on how we are outgrowing the market and our strategies to continue to outperform industry growth.

Prior we'll talk about our strategies to drive continued gross margin improvement along with close control of operating expenses to deliver significant leverage to the bottom line and continued free cash flow momentum as we move into 2021. First, regarding the impact of COVID on our operating environment, our operational capabilities and supply chain have largely recovered from the significant constraints experienced earlier this year, but we remain vigilant in continuing to take all appropriate actions to protect our people and safely maintain business operations globally. While our revenues are not currently hampered by COVID related constraints, we still see some unfavorable impacts on gross margin, which Larry discussed in his remarks. Turning to the demand environment. Just as we anticipated three months ago on our Q2 call in August, we continued strong levels of customer demand through the 2020 with sequential increases in revenue during each fiscal quarter of the year.

This is consistent with the forecast for a stronger second half as we indicated in August. Importantly, our current visibility continues to indicate strong levels of demand from each of our largest customers into 2021. Industry expectations for WFE growth are currently in the five to 10% range. Our revenue outperformance in 2020 is a result of several factors including market share gains, the relative strength of etch and deposition as a mix of memory spending improves this year over 2019, and the continued ramp of EUV two. As it relates to market share gains, we are benefiting from continued market growth on top of last year's gains, which exited 2019 at the 100,000,000 run rate and are growing with the market in 2020.

We also have incremental market share gains this year in gas delivery, weldments, and precision machining and add to our revenue growth outperformance during 2020. In the area of etch and deposition, which are the markets within WFE where we have the greatest fluid delivery opportunity, we believe these segments are outgrowing overall WFE this year due to the beginning of a recovery in memory spending. Factor is also evidenced in the consensus estimates for new semiconductor system sales, both of which are outpacing overall WFE growth this calendar year. In the area of EUV, our revenue growth continues to reflect the steady ramp of expected systems being delivered in both 2020 and 2021 with EUV unit shipment growth outpacing overall lithography spending. With these being the primary drivers for outperformance in 2020, we believe we have the strategies in place to continue to outgrow the industry in 2021 and beyond.

First and foremost is our strategy to focus on fluid delivery for semiconductor process tools, which is a growing market driven by the key technology transitions underway. In NAN, the industry is investing in the technology that will take them from 96 layers to 128 layers and beyond that to two fifty six layer devices. At each step in the process, there is more etch and deposition capital intensity. Same with DRAM. As we go from 1Y to 1Z, then one alpha and one beta.

Same for logic, where the transitions to seven, five, and three nanometer require more complex geometries and more precise control fluid delivery. There's also an increase in the number of gases used for technology advancements in both logic as well as DRAM. In each case as these geometries become more complex, the impact of defects is magnified requiring faster etch rates and more precise control of the processes. The key takeaway as it relates to ICOR is that these advanced technology nodes require more delivery fluid delivery content per system, particularly for logic and dRNM. Beyond that position, we expect EUV system shipments to continue to increase for the foreseeable future with steady increases in our EUV gas delivery sales run rate each year.

What we have witnessed so far is that each of these key technology transitions across all three device types is driving increased opportunity for etch deposition in EUV as well as our content on those tools. We are also driving a number of initiatives to expand our geographic footprint and overall share of our served market by achieving increased levels of customer penetration in Asia. While the largest served market for gas delivery is with our US customers, the largest served market for chemical delivery is with customers in Japan and South Korea. We continue to work with our Korean customer that is evaluating our liquid delivery module. And in Japan, we are actively in discussions with several of the largest OEMs that are in the early stages and are in the early stages of engagement.

Both of these strategies should position us well for first revenues in chemical delivery in Asia starting in 2021, which brings me to a review of the progress that we are making against our new customer qualification objectives for the year. Gas delivery, we're continuing to see incremental outsourcing of gas panels and subassemblies. Have made good progress in qualifying new products in our precision machining business and continue to work closely with our customers on gaining additional share in weldments as we leverage our global footprint. Each of these qualifications are contributing to our incremental market share gains in 2020. Finally, we continue to make progress on our strategy to leverage our engineering abilities and IP portfolio to develop new proprietary products to drive longer term expansion of our share of our served markets as well as to drive the operating model towards increased levels of profitability.

We continue to invest in this area and are making good progress in the development of our proprietary next generation gas delivery solution and expect to have our initial beta units delivered in the next three to four months. In summary, the team has done a phenomenal job managing through the operational challenges of 2020 and we are well on track to deliver a record revenue year far outpacing industry growth with earnings growing at about twice the rate of revenue growth. The midpoint of our fourth quarter revenue guidance indicates our expectation for continued sequential growth above Q3 and year over year growth of 23% versus Q4 of last year. While still wider than pre COVID levels, we continue to tighten the expected revenue range as we gain more clarity around our supply chain and operational capabilities. We are also driving continued incremental improvements in gross margin and operating margin as we look ahead towards another expected growth year in 2021.

We are steadfastly focused on making meaningful progress toward our target model in a continued very healthy business environment, which brings us to Larry's discussion of our financial performance and further details on our outlook. Larry?

Speaker 2

Thanks, Jeff. First, I would like to remind you that the P and 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, non recurring charges and discrete tax items and adjustments. There is a very helpful schedule summarizing our GAAP and non GAAP financial results, including the individual line items for non GAAP operating expenses such as R and D and SG and A in the Investors section of our website for reference during this conference call. Third quarter revenues were $228,000,000 up 3% from Q2 and up 47% from the same period last year.

We have experienced no additional COVID related restrictions on our manufacturing sites and as a result, we came in above the midpoint of revenue guidance due to continued strong levels of customer demand and excellent execution in a challenging operational environment. In spite of these challenges, we reported our sixth straight quarter of sequential revenue growth. We also achieved sequential growth in gross margin, operating margin and earnings per share. Gross margin for the quarter was 14.6%, up 60 basis points from Q2. We continue to face COVID-nineteen related headwinds, which impacted gross margin by about 100 basis points in both Q1 and Q2 and by about 50 basis points in Q3.

While the heightened freight and material sourcing costs have largely normalized since the first half, we still face higher costs associated with ensuring the health and safety of our global workforce. We continue to make progress on our ongoing cost reduction programs in order to drive further incremental improvements to our gross margins in a continued healthy customer demand environment and expect about a 50 basis point improvement in gross margin for the fourth quarter. Operating expenses came in a little lower than expected at $14,200,000 down slightly from our first half run rate primarily due to a shift in the timing of certain R and D program spending into Q4. Operating margin improved 90 basis points in the quarter and operating income was up 15% over Q2. The 15 sequential increase in operating income was at the higher end of our expectations and was partially offset at the bottom line by unfavorable foreign exchange impacts and a higher income tax rate versus forecast.

Our effective tax rate of 12.8% for the third quarter reflects a catch up in our year to date tax rate, which is closer to 12% versus our prior expectations of around 11%. The increase is primarily due to a higher mix of U. S. Profits in our 2020 forecast. Our planning rate for tax over the next couple of years continues to be in the range of 10% to 13%.

The higher tax rate as well as the unfavorable exchange rate impacted EPS by about $02 per share. Nonetheless, we reported $0.62 in earnings for the third quarter above the midpoint of our guidance. Year to date growth in earnings per share has continued to double the rate of our revenue growth. Now I will turn to the balance sheet. As expected, we reported a strong quarter of cash flow generation in Q3 with $21,000,000 of free cash flow contributing to the $22,000,000 increase in our cash balance over Q2.

Our expectation is to continue positive free cash flow generation in Q4. We ended the quarter with $79,000,000 of cash compared to $57,000,000 last quarter. Our debt balance of $2.00 $4,000,000 is down $2,200,000 from Q2, reflecting the quarterly paydown of our term debt. We generated approximately $19,000,000 of cash from the P and L and $23,000,000 in cash flow from operations. Base sales outstanding were essentially unchanged from Q2 at forty two days, while inventory turns increased slightly to 5.4.

Now I will turn to our fourth quarter guidance. With revenue guidance in the range of $220,000,000 to $245,000,000 our earnings guidance is $0.59 to $0.77 per share. The midpoint of the EPS range reflects an incremental improvement to gross margin of around 50 basis points and about a $400,000 increase in operating expenses compared to Q3, primarily due to higher variable compensation and R and D program expenses mentioned earlier. We are forecasting ongoing interest expense of $2,000,000 per quarter and our tax rate for Q4 to be about 12.5%. We are assuming approximately 23,500,000.0 diluted shares outstanding for the fourth quarter.

Given that we are operating in a dynamic and rapidly changing environment with continued COVID related restrictions and constraints in place, we expect to face some level of gross margin headwinds for the foreseeable future. That being said, we anticipate additional sequential improvements in gross margin as we move into 2021. Our key financial objective is to drive operational leverage and strong flow through by combining revenue outperformance with continued increases in gross margin toward our target model. We expect to continue to drive gross margin higher through incremental cost reduction programs, growing our share within higher margin component markets and increasing our content of proprietary IP within our products. Operator, we are ready to take questions.

Please open the line.

Speaker 3

Our first question comes from Craig Ellis with B. Riley Securities. Craig, you may ask your question.

Speaker 4

Thanks for taking the question, and congratulations on the nice results and outlook, guys. Deb, I just wanted to start by following up on some of your comments on the current environment. So it seems like three months ago when you got crystal ball out, it was pretty accurate for the second half of the year. I'm wondering if you can provide us any commentary on what you see as you look beyond the fourth quarter in the early calendar '21.

Speaker 1

That's a good question and thank you for your kind words. Yes, I would say based on what we're seeing today and through the outlook that we have, we see a continued strong quarter as we enter 2021. I mean, obviously it's too early to give specific guidance, but we do see a strong demand environment moving into the at least into the first half of next year.

Speaker 4

That's helpful. And then, Larry, you wrapped up your comments talking about some of the things that were going to drive gross margin higher in calendar twenty one cost reduction, ongoing market share gains, and then increased IP quotient in sales. Can you just help us understand the degree to which those can be at play as you go through the year? Some of them are first half weighted than back half weighted or how do we think about their potential impact to gross margin in calendar twenty twenty one?

Speaker 2

I think some of the things we've talked about, clearly, the cost reduction programs continue quarter by quarter. Just general operating cost reductions, areas of material savings. There's some logistics savings activities. So those will show up in the first half. We also mentioned last time our plastics business with the shutdown in our Union City facility and have a rightsizing cost structure there.

We expect in the first half of next year that we'll see some of that benefit. We continue to gain share in the weldments and precision machining areas. In precision machining in particular, those do take a little bit longer as we have a longer qualification cycle. So we'd expect those to to go throughout the year. And the last thing around the proprietary IP, that's a longer play, a multiyear play.

Jeff's talked about some of the penetration that we're we're working with some of the beta sites and other things. But I think to see a in in gross margin, you'll see that second half of of of next year and particularly in in the years to follow after that.

Speaker 4

Got it. Then Michael just sneak Go ahead.

Speaker 1

I was just going to say is we're very, very focused on this for obvious reasons, but we do continue to see improving gross margin. We have plans in place to continue to drive this back up.

Speaker 4

Yeah. Good. And nice progress certainly in the back half here. If I could just follow-up the gross margin question with an expense question, Larry. I would expect most companies would be facing higher FICA and maybe just fringe costs in the first calendar quarter.

But beyond that, is there anything we should be aware of as we think beyond the fourth quarter with operating expense?

Speaker 2

I think there's a there's a few things. Smaller effect of insurance, as you can imagine in this environment, the the insurance industry is sort of giving us some pretty sizable increase outlook. The other thing is on our r and d programs, as we penetrate some of these customers, we would expect to be spending a little bit more in r and d for some of the beta units and other investments there. But in general, I think, we also have, next year, as as you're probably aware, we have to be SOX compliant. That drives costs both inside the company and then with our external auditors, we would expect that they will charge us more to certify that.

I'm I'm expecting that, and, you know, we'll be sizing that over the next couple months here.

Speaker 1

Yeah. Of course, they will.

Speaker 4

Guys, thanks for the help, and keep up the good work and the good operations.

Speaker 5

Thank you. Our

Speaker 3

next question is from Sydney Ho with Deutsche Bank. Please state your question.

Speaker 6

Thank you for taking my questions. I have two questions. The first one is if I if I kinda look at your third quarter, it's a solid quarter. It is a little bit if I look at other suppliers and supply chain, they have some more upside to the midpoint of the guidance. So my question here is, how would you describe the linearity of the quarter versus your expectations?

Did you see anything in the latter part of the quarter that would suggest some slowdown? And do you think your main customers have caught up with inventory and your revenue now really reflects a more steady state demand profile?

Speaker 1

Sydney, it's Jeff. I'll try to answer it. One is I think as company came out of Q2 and into Q3, we were all at various degrees of recovery. So when you say a little bit more upside, it's hard to judge that. What I would tell you is that the demand environment and the profile of the quarter was, I'd say, slightly more linear than we've seen, but it's still not perfectly linear and it's, you know, so we didn't have any softening at the end of the quarter for sure and we continued with a pretty strong, more linear outlook as we go into Q4.

So the demand environment is is still very good.

Speaker 6

Okay. Great.

Speaker 1

Your last part of the question was around inventory. And so I would say with with the gas delivery side of the business, there's not much in the way of any inventory build. Those are very customized products and they generally, you know, cycle to to their customers probably somewhere around two to four weeks once we deliver it. So very little inventory between the two. And I would say that we're we're seeing a very small amount of inventory build on the component side of the business, but it's very, very small still.

Speaker 6

Okay. Great. Maybe my follow-up question is on your share gain opportunities, particularly in Korea and Japan. Can you walk us through what's happening in Korea due to some qualifications in Japan? You're talking to a number of new customers.

But when you say meaningful contribution in 2021 for both of these, I'm just trying to see the profile. Is it going to be Korea going to be early than Japan? Is it going to be first half versus second half? Is it one customer, sort of multiple customers? How do you think about the 2021 kind of revenue ramp for these two countries?

Speaker 1

Thanks. Yeah. I I would think based on what I see today, would say if we win the you know, win in a position, it'll be in Korea first since we've been working on that the longest. We're in the midst of an evaluation there on their process tool, and that could be meaningful in the in the fact that that particular customer has a fairly good position in claims business. I'd say in Japan, it's a little bit slower.

COVID restrictions are very tight in Japan. In other words, our partner still can't do face to face meetings, but that's starting to relax a bit. But I'd say the dialogue has continued. It's just a little more difficult just to, you know, position a a first data tool. But we have several ongoing discussions with probably three or four Japanese OEMs.

And we'd we'd hope that we get one of those designs and get a beta out there. Then that'll give us a little more clarity. But certainly, earliest I would see in Japan in the 2021.

Speaker 7

Great. Thank you. Thank you. You bet.

Speaker 3

Thank you. Our next question is from Krish Sankar with Cowen and Co. Please state your question.

Speaker 8

Yeah. Hi. Thanks for taking my question. Jeff, I had a couple of them. First one is, know, when I look at you and some of your peers too, over the last five years, you guys outperformed and w w fees up and underperformed and w fees down.

You said that next year w fee could be up five to 10. Without looking for any guidance, let's say it is true that WFE will be up five to 10. Is this fair to assume you could outperform in that environment?

Speaker 1

Yeah. I mean, that would be you know, if you ask me, we have put strategies in place. Some of the share gains we have going on this year will affect next year. We have long term plans in in place. So, yes, I would expect that we could outperform WFE again next year, particularly because we're gonna see a memory recovery.

And so based on what we can see and we have a Korean operation, we get pretty good visibility into Korea. We're starting to see the the momentum building on the memory side. And memory is very etch and depth centric, and that's very good for for us as well as our customers. So they have very good positions in three d NAND as those investments increase in DRAM. So again, it'll be driven a little bit by what we're actually doing from share gains and other programs as well as just the recovery of memory and the effect that has on DEPA and etch and our customers.

Speaker 8

Got it. That's very helpful. So looks like it's a billion dollar revenue year next year, hopefully. I have two other questions for you. One is, you know, when I look at your guidance and, you know, I'm not saying you're peaking on any such thing, but if you compare it to the prior peak, you're kinda getting to similar revenue levels, but, arguably, there's still a long runway left for memory.

So going back to, like, 2018, when you're running at, like, north of $250,000,000 in revenues on a quarterly basis, to now, is there a way you can quantify how much incremental share gain you've got or how much has been, you know, know, the market improving, the easy driving? Is there anything you can, like, help quantify what is driven above market growth over the last two years? And then I've got a follow-up.

Speaker 1

Yeah. Wouldn't say I'll quantify it specifically, but we did say that we we exited 2019 with about a $100,000,000 run rate and share gains. If you think the up 15%, then that's now going to about $115,000,000 and what we pushed through the P and L in 2019 was say 70,000,000 So that's a big chunk of the growth going forward. We have share gains. We haven't quantified this year that will have full effect going into next year.

EUV has been a very I would say that customer is pretty transparent. So you guys know the ramp of EUV and our revenues have probably grown alongside that and possibly a little bit higher just as the content has increased from generation to generation as well. So yes, I think we're positioned. Kind of the chemical side of our business in Asia is the next is another next kind of step function that with a few qualifications can have meaningful revenue into 2021 as well.

Speaker 8

Got it. Got it. And then just a final question, Jeff. Is there a way you can on the EV side, is there a way you can quantify what your dollar opportunity per EV system is?

Speaker 1

We can, but we we don't do that for obviously competitive reasons. It's a significantly larger unit. It's very specific to the tool, and so it's it's it's multiples of the of the typical gas panel. So We don't generally quantify that.

Speaker 8

Thank you, Jeff. Thank you very much. You bet.

Speaker 3

Thank you. Our next question comes from Quinn Bolton with Needham and Co.

Speaker 5

Great. Just wanted to follow-up on the share gain opportunity. You've said for a while now that you've got the precision machine parts was going to take a little bit longer and it sounds like that's proving out to be the case. But wondering, as you sit here today, are you starting to see better traction on the machine parts side of the business or do you think those share gains and the revenue opportunity is still ahead of the company?

Speaker 1

No, 2020 includes some share gains that we've gotten out of our, we call our precision machine side of the business. They're not insignificant. There are qualifications that are deep in the cycle as we speak today that can be multiple million dollar as we go forward. Probably those will be late, earliest in late Q4, but they'll be kind of a 2021, largely impact 2021 versus 2020. And we continue.

And then so on the weldment side of the business, basically just leveraging our operational capabilities in the market for all the opportunities that come up, drive for incremental market share gains, which we've done pretty well on again this year.

Speaker 5

I'm sure I'm not going get you to size it, just order of magnitude, do you think that the revenue opportunity for precision machining is that accelerating in 2021 or is that opportunity just growing in line with WFE then?

Speaker 1

Oh, should outpace WFE. As we win these positions, they'll layer on. And again, you guys know, our precision machining generally is in the flow of gas, so it's pretty sticky demand. So once you win it, it stays with you for a long, long time and it's very customized by process tools. No, that could have that's part of the strategy that Larry talked about.

We want that mix to outgrow just the growth of the overall industry and that's where we get the margin accretion to.

Speaker 5

Great. Second question, sounds obviously, I think you're seeing and your customers have already seen some strength in the NAND side of the business. From your comments, it sounds like you've got pretty good visibility for the memory to continue to be healthy into the 2020. But just wondering, do you think that that's sort of now reached sort of a steady not a steady state, but sort of more a stable level where it will continue into recurring levels into the first half? Does the momentum appear to be growing as you look at the quarterly run rate in the '21 versus '20, the '20?

Speaker 1

Yeah. I think we've seen very good growth from 2020 to 2021. And I would say based on what we're seeing just out of our Korean operation that we see a similar and slightly positive growth in that side of the business as we go into 2021. In particular that application is, as I said before, is pretty man centric. That's good to see that spending start again as well.

We do see DRAM investments both in the fourth quarter and going into the first quarter of next year in that particular region where we get pretty good visibility. So I think you've seen the pricing environment stabilize and that usually triggers the recovery in memory. And I think we'll see a good strong year in memory next year. Whether I can pick the peak, probably not close enough to it. You'd have to kind of ask our customers who are close enough

Speaker 8

to it.

Speaker 5

Got it. And the last one for Larry. Larry, cash flow has been pretty strong over the last couple of quarters. I think you're sitting on nearly $80,000,000 in cash. And it sounds like you project cash to go up again in the fourth quarter.

How should we think about that cash? Do you take the opportunity to get a little bit more aggressive with paying down debt now that the COVID is hopefully at least stabilizing and keep that cash on the balance sheet just given uncertainty or perhaps fund M and A? How should we be thinking about cash as we head into 'twenty one?

Speaker 2

I think in general, we're keeping our flexibility. We put in the shelf. We have some flexibility on our revolver. I think in general, our thought is to hold on to it for the time being. And the interest rate on that borrowing is down in the 4% range overall.

So I think we want to maintain our flexibility. We want to be ready if there's M and A opportunities that we can execute on and then just continue to focus on operational execution. And at some point, we see an excess cash position, we might do something different. But I think now we're sort of keeping it steady state and we're pretty comfortable with where we are on our debt position and we're comfortable with the fact that we've been able now to generate some pretty good cash flow and look to do that again in Q4.

Speaker 5

Great. Okay. Thank you.

Speaker 3

Our next question is from Mitch Steves with RBC Capital Markets. Please state your question.

Speaker 7

Hey, thanks. I had a few. But I wanted to start on the gross margin line first. Just looking at the guide, you're talking about a 50 basis points improvement from September to December. But prior to this, when you're kind of at like the two forty range on revenue, I mean, gross margins were up at like 16% plus.

So I'm curious as to if that 15.1% implied guide includes 100 basis point impact from COVID, if you're going to start to see some improvements there, any sort of information would be helpful.

Speaker 2

No. We've talked about the fifteen one. We still have around a 50 basis point headwind due to COVID between PPE and the we have to hire more people. We're obviously changing our shift stat strategies and and other things. So that that'll continue, I think, until there's a vaccine or a significant change in in protocol around social distancing and the things we have to do there.

So that's that's still a headwind. Until the COVID situation changes, we sort of expect that to continue at least at least to the 2021. The other things that we've had that have impacted us, we've talked about these before. One is we gained a fair amount of share in gas panels at our number two customer. And that's changed our mix.

As you know, our gas panels in general are below the corporate average in margin. And as we gain that share, that's a little bit of a headwind, not on an absolute dollar perspective, but clearly on a percentage perspective. We also added a lot of capacity between 2018 and now. We've talked historically about having brick and mortar capabilities to go north of $300,000,000 in revenue per quarter. And until we get there, we're sort of ready for the growth, but it does create a little bit of a headwind for us on margins.

And then finally, I think the other thing we've talked a little bit about the plastics business, and we're working on rightsizing the cost structure and working on some products that as well.

Speaker 7

Understood. And then turning over to ASML and kind of the comments you guys made there about EUV ramping up. They've already stated that 2020 some units got pushed to 2021. So I'm curious as to how like what the scale of the ramp is there? I know ASML has always been kind of

Speaker 9

a, let's call it, mid

Speaker 7

to high single customer. Is that going to continue to improve as a percentage of revenue? Or is DRAM going to improve at such a rate that you don't think that ASML will become a bigger customer for you next year?

Speaker 1

Yeah. I it's Jeff. So Mitch, with ASML I'd say they're pretty transparent. But one thing to keep in mind, we build probably about five months before they can deliver. We go in early in the build cycle and the qualification cycle.

So what we're building in the second half pretty much is addressing the front half. I can't be specific obviously for the customer, but we see steady growth going into next year. And so ASML is just think of it as a steady grower, but for it to become a 10% customer it would have to get significantly bigger than it is today. Mainly because as you look at our outlook is you take the midpoint of guidance around $900,000,000 so that's a pretty big number going forward for them to cross. So they'd have to grow quite a lot.

Speaker 4

Okay. And then just last one.

Speaker 7

Just in terms of the DRAM versus NAND side, mean, there's been a clear debate on the NAND side that we're kind of at peak level, making much higher than this. And then DRAM side is starting to see some green shoots or whatever you like to call it in terms of improving demand there. So maybe you could just help us understand what you guys think '21 looks like for you guys in terms of what what end market DRAM or NAND in terms of scale of revenue growth is gonna look like.

Speaker 1

Yes. Just to be clear, we don't get to see all of the applications for the gas panels that we ship. So we're not the perfect one to ask about magnitude of DRAM versus NAND. We get more visibility in Korea because we have an operations there. So we do see both investments in three d NAND picking up and DRAM picking up in that region.

But I'm probably not the best one to call it for the full year next year.

Speaker 7

Okay, understood. Thank you.

Speaker 1

Thanks, Mitch.

Speaker 3

Our next question is from D. A. Davidson. Please proceed with your question.

Speaker 4

Hi. Good afternoon, guys. This is Franco on behalf of Tom today. Thanks for letting us ask a few questions. So I want to touch on that the last topic that you talked about, the DRAM side.

I know that in the past, you've kind of expressed your your desire to gain more exposure to DRAM, you know, particularly as your liquid delivery module gets traction in Asia. Can you perhaps give us sort of an update on, you know, the the progress on this effort?

Speaker 1

So yeah. Sure. But I I just to be a little more specific, it's liquid delivery is not I'm not sure if you inferred that or not, if I misunderstood, but it's not a DRAM application per se. It can address any wet chemistry application so it can go across all of the different applications. Today, we're qualified on one large customer through one of our OEM customers today in The US.

We have a beta in process in Korea with probably the third or fourth largest clean manufacturer. And again, in Japan, as I said on the call, we're kind of in the early innings, but I'm pretty happy with the level of engagement we're having with some of the largest OEMs in Japan through our partner there.

Speaker 4

Okay. No, no, that's helpful. And then I have one for Larry. You talked about the r and d push out. I guess, do you have any details on that, on, you know, what the push out was regarding to?

And then when you look in into 2021, how should we think about your r and d investment?

Speaker 2

Well, I think, well, in general, you know, some of the new programs, there's nothing, there was a specific program push out in r and d. It's just the timing of, when we're bringing in some consultants and some engineering materials. So it's nothing specific around a specific product. I think going into 2021, overall, we expect our OpEx to run sort of what it's been doing, which is about half the growth, about half the rate of the revenue growth. And I think if you look at R and D, we would expect that piece of R and D and that OpEx to at least be that.

I think as we penetrate new products, we're going to be ready to make investments we need to drive these new products successfully into the market and help drive up our margins. So you can think of R and D getting not necessarily the lion's share, but it probably is going to be the biggest percentage grower within that 50% of revenue growth model.

Speaker 4

All right. Thanks, Larry. That's it from us.

Speaker 3

Our next question is from Patrick Ho with Stifel. Please state your question.

Speaker 9

You very much. Jeff, maybe just going back to the mix of your business as you look at the December. Obviously, demand continues to be strong. That's probably going to increase the number of gas delivery systems. But can you talk about a little bit of the mix of weldments and precision machining?

Are they increasing at the same rate? So you're going to see the same, percentages of the business you saw in the September? Or is the mix shifting a little more to some of the other products aside from gas delivery systems?

Speaker 1

Yes. I think Patrick, it's a good question that might take three parts to answer, but I'll give it a shot. So if you look at this year, we're going to do say around $900,000,000 given our Q4 guidance. Our last peak was in the low 800s. We know we've layered on about $115,000,000 or so of market share gains plus the market is growing.

So the gas panel side of

Speaker 2

the

Speaker 1

business is kind of was one of the bigger chunks of that market share gain. So but I would say over the last quarter or so, we were pleased with the performance that we got out of and the growth out of both our precision machining and weldment side of the business. So now that we've kind of won that last big piece and on the gas side, we're going to see the mix now improve for the component side of the business. I can't give you the specific numbers, but that is part of our gross margin accretion plans. It's been part of our strategy to outgrow the market.

And we've done very, very well so far. Much longer qualifications obviously for precision machining measured in months and months and months whereas you can do them much faster on the weldment side. So we do see those weldment wins happening, I'd call it pretty ongoing now. And precision machining, you're trying to qualify maybe a family of parts or something like that. And so those will come with bigger chunks.

So I like where we're at in the progress of both those businesses.

Speaker 9

Great. And maybe just as a follow-up to that, Jeff, the two of us have been in this industry a long time. With the precision machining business, the qualification that you just said take a a longer time. Are there ways for you to, quote, qualify multiple, I guess, components or parts on that side of the business, Or is it usually kind of step by step you have to get disqualified first and then it goes to step b and then, I guess, step c to get other parts qualified?

Speaker 1

No. You can get family of parts qualified provided they're very similar manufacturing. If there's any significant changes in the manufacturing process, you might have to do them differently. But some of the qualifications we're doing now are for, I call them part families. So be many, many part numbers.

Speaker 9

Great. And final question for me for Larry. Inventory turns, still pretty stable, but some of your leading customers have talked about, I guess, of building a little bit of inventory for themselves given the demand environment as well as the uncertainty in the market. Has that impacted your procurement of inventory on your end?

Speaker 2

No, I don't think so. I think we were at 5.4 turns. We're not seeing, I think as Jeff mentioned, a ton of inventory growth. So people may talk about it, but we're not seeing a lot of it. I think in general, we want to stay within our kind of turns range, grow it a little bit more and but we haven't seen any material change in behavior.

Speaker 1

Yes. I mean the customer the inventory that the customers are holding, we're still in a pretty good demand environment. And while we're all feeling good about where we're at, we're still there's not the ability to just build inventory on their side. We are building our consignment level inventory. And so some of even though our inventory went down, there was actual growth there.

So we've done a really pretty good job of becoming more efficient within our manufacturing process as well as supporting our customers' needs for the inventory we put on-site for them.

Speaker 9

Great. Thank you very much.

Speaker 1

All right.

Speaker 3

Ladies and gentlemen, we have reached the end of the question and answer session. And I'd like to turn the call back to Jeff Andresen for closing remarks.

Speaker 1

Thank you for joining us on our call this quarter. I'd like to thank our employees, suppliers and customers for their support and strong execution in this operationally challenging environment, but with very strong growth here in 2020. We look forward to updating you again on our next earnings call in early February. In the meantime, we are scheduled to participate in virtual conferences hosted by Stifel, RBC, UBS, and D. A.

Davidson, as well as a virtual CEO Summit during Q4.