Ichor - Earnings Call - Q4 2019
February 5, 2020
Transcript
Speaker 0
Good afternoon and thank you for joining today's Fourth Quarter twenty nineteen Conference Call. As you read our earnings press release and as you listen to this conference call, please recognize that both contain forward looking statements within the meaning of the federal securities laws. These forward looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in our earnings press release, those described in our annual report on Form 10 ks for fiscal year twenty eighteen 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 Jeff Andresen, our CEO and Larry Sparks, our CFO. Jeff will begin with a recap of our results, strategy and outlook, and then Larry will provide additional details of our fourth quarter results and first quarter guidance. After the prepared remarks, we will open the line for questions. I'll now turn over the call to Jeff Andreessen.
Jeff?
Speaker 1
Thank you, Claire. Welcome to our Q4 earnings call. Today, are pleased to report strong revenue growth, profitability and cash flow generation ahead of expectations for the quarter. Total sales of $189,000,000 were up 23% from the third quarter with incremental improvement across all aspects of our business. Earnings per share of $0.48 were up 60% from the third quarter.
We generated $28,000,000 of free cash flow in the quarter and ended the year with over $60,000,000 in total cash. For the full year 2019, we generated $45,000,000 of free cash flow and reduced our net debt position by over $40,000,000 During Q4, we saw strong increases in demand among each of our largest customers and across all of our businesses. Gas delivery systems ramped significantly in the quarter, and we also saw strong growth across chemical delivery, weldments and precision machining. We also achieved a stronger level of revenues from our market share gains compared to what we expected going into the quarter. We ended the year with $70,000,000 of incremental revenues from the share gains we've discussed across each of our product lines.
The beginning of the recovery in industry spending, which we reported on last quarter, accelerated in Q4 and has strengthened into 2020, which is evident in our results and outlook. The industry upturn started late in 2019, beginning with an increase in foundry and logic spending and the initial signs of a recovery in flash memory. Recent industry reports indicate continued strength in foundry and logic into 2020 along with improving conditions in memory. In January, we provided a preliminary outlook for the first quarter sales well ahead of expectations. Today, outlook has strengthened toward the upper end of that range.
With Q1 revenue currently expected to be in the range of $220,000,000 to $235,000,000 our outlook reflects significant sequential and year over year outperformance compared to the overall industry spending environment. Our earnings guidance also demonstrates growth and profitability significantly outpacing our growth in revenues. Now I'd like to review the drivers for this outperformance and why we expect the trend will continue through the year. We believe there are multiple factors driving our relative outperformance this year compared to the overall industry. The first is share gains.
We came into 2019 with a range of incremental revenues expected for the year from our market share gains. And each quarter, we updated you on our progress. As expected, these incremental revenues ramped as we progressed through the year, and our Q4 run rate reached an annualized level of around $100,000,000 These tailwinds add alone at least $30,000,000 of business on a like for like basis in 2020. We will also benefit from the continued ramp of EUV lithography with year over year growth in shipments expected for both 2020 and 2021. Furthermore, we expect additional share gains in each area of our business that will contribute to our 2020 revenue growth story.
In gas delivery, we see opportunities to increase our share with our largest customers, and we also see opportunity to gain share within our relatively underserved customer base in Asia. In weldments, we continue to work on additional qualifications across our customer base. In precision machining, we expect to finalize our qualifications this quarter and begin to see first revenues next quarter. Another factor driving our relative outperformance in 2020 will be success in penetrating new customers, especially those in Asia, in the area of chemical delivery. The largest growth driver for our chemical delivery business remains our proprietary liquid delivery module, or LDM.
The largest opportunity for this business is with customers in Asia who serve the vast majority of the served market for wet processes. In Japan, we are still in the early innings of penetrating new customers, but our partnership is working well, very well, as we are quoting several applications already. Our goal is to have first beta units delivered this year that will position us for a meaningful contribution from this region starting in 2021. In South Korea, we are pleased to report that we recently shipped our first LDM beta unit to the region's largest OEM. This is an exciting milestone achievement for the company and for our strategy to expand our footprint in Korea.
Meanwhile, we continue to work closely with our initial customer in The U. S. On qualifying our LDM at additional chip manufacturers. Our proprietary LDM product is just one example of our strategy to increase the engineering and IP content for Ichor order 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 are also very excited about the potential for our next generation gas panel.
We continue to make good progress in the development of this novel and proprietary gas delivery solution. We have fully integrated our acquisition of a flow control technology and engineering group, and we will continue to invest in this area in 2020 as we drive for having beta units available by midyear. The addition of this technology combined with our expanded manufacturing capabilities will serve to expand our value add and margins as this next generation gas panel is adopted. The next driver for our relative outperformance will be evident in our increasing gross margins and operational leverage. In the early stages of the industry recovery during the 2019, we faced some gross margin headwinds, starting with the higher per unit overhead costs.
Margins started to improve from Q3 to Q4, but not as much as anticipated due to costs associated with enabling the steep increase in output. These included factors such as increased overtime, hiring costs and expediting fees. Looking forward, we expect gross margin improvement of about 100 basis points in Q1 and continued improvement thereafter. We believe these improvements along with continued control of our operating expenses will drive strong operational leverage through the year. Consistent with our stated objective to grow profits faster than revenue, we expect to more than double the growth in earnings compared to revenue as we look at our Q1 expectations compared to the same period last year.
We also expect this performance to be evident in our year over year increase in profitability for 2020. Before turning the call over to Larry for additional details on our fourth quarter results and our first quarter outlook, I want to offer a few comments on my recent transition to CEO. With the industry entering a strong period of growth in 2020, along with the positive trajectory of our strategic initiatives to expand our offering of differentiated and proprietary technologies and to expand our share of our served markets, it is a very exciting time to be leading Ichor. I'd like to acknowledge the tremendous support and mentorship I've received from Tom Rohrs, who has transitioned to Executive Chairman. Tom and I will continue to work closely together on executing our strategies to solidify Ichor's position as a premier company in the semiconductor equipment industry.
Larry?
Speaker 2
Thanks, Jeff. First, I'd 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. I'd also like to note that a very helpful schedule which summarizes 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 can be found in the Investors section of our website for reference during this conference call. Fourth quarter revenue of $189,400,000 increased 23% from the third quarter and was up 34% from the 2018.
This was our third straight quarter of sequential revenue growth. Gross margin in the fourth quarter was 13.8%, an increase from Q3, but still negatively impacted by the overtime expediting fees and hiring costs associated with the steep ramp in output as Jeff described earlier. With operating expenses increasing 6% to support new product development and ramp execution, operating margin improved 130 basis points over Q3 to 7.1%. Our interest expense in the fourth quarter declined as expected to about $2,500,000 Our tax rate for the quarter was 0.2% due to our geographical mix of revenue being higher in Singapore where we have a tax holiday. Our planning rate for the tax over the next couple of years continues to be in the range of 10% to 13.
Fourth quarter net income of $10,900,000 was equal to 5.8% of revenue and $0.48 per share. Now I will turn to the balance sheet. Cash increased to $60,600,000 at year end as a result of strong free cash flow generation during the fourth quarter. Days sales outstanding were forty one days, an improvement compared to forty five days in Q3, but higher than average, reflecting the rapid ramp in revenues late in the quarter. Inventory levels increased 20% in the fourth quarter to support the strong increase in business levels, while inventory turns further improved to 5.6.
Now I will turn to our first quarter guidance. Our forecast is for revenue in the range of $220,000,000 to $235,000,000 which is up 16% to 24 percent from Q4. At the midpoint, our Q1 revenue outlook indicates 20% growth sequentially and year over year sales growth of 65% compared to the 2019. Our earnings guidance of $0.64 to $0.74 per share reflects strong operational leverage during this rebound in industry spending. With revenues 60% to 70% higher than the year ago period, earnings per share are expected to be up in the range of 150 to 200%.
Our earnings guidance reflects improved operating profitability as a result of the increased revenue volume and higher gross margin. As Jeff described, we see gross margin improving by about 100 basis points in Q1 as we return to the more typical gross margin flow through, historically in the 20% range. We also expect to achieve continued gross margin improvement through 2020. We expect to see about a 10% sequential increase in non GAAP operating expenses in Q1 over the $12,600,000 level in Q4, largely as a result of the typical seasonal increases related to U. S.
Employee taxes and audit fees as well as an increase in variable compensation spending as a result of increased levels of profitability. Together, these are expected to add a little over $1,000,000 of operating expense compared to the fourth quarter. We expect operating expenses to fluctuate around this roughly $14,000,000 level for the remainder of 2020 given the increased amount of engineering spending related to continued development of proprietary products and technologies. Also reflected in the first quarter EPS guidance range are interest expenses in the range of $2,300,000 to $2,400,000 a tax rate of around 10% and approximately 23,500,000.0 diluted shares outstanding for the quarter. Operator, we are ready to take questions.
Please open the line.
Speaker 3
The first set of questions come from the line of Mitch Steves of RBC Capital Markets. Please proceed with your question.
Speaker 4
Hey guys, thanks for taking my question. Obviously a great guide there. I'm just trying to get an understanding for 2020. I realize you guys can't give annual guidance. We got top customer talk about WFE being up, call it, 23% or so for fiscal year 2020 and then you guys are going gain some share in some markets.
So is there any kind of qualitative view you guys can give us on what the full year should look like as you consider you're going to come off looks like a 65% growth quarter in March? Just trying to understand the seasonality in the revenue line.
Speaker 1
Yes, Mitch, good question. We figured it would come out fairly quickly. Yes, obviously our largest customer came out and had a very strong outlook for WFE next year. Also indicated that they believe given the strength in foundry and logic in the front half of the year that maybe the back half of the year might be maybe relatively front half loaded, I guess. I mean, obviously it's pretty difficult for us to see through to the second half of the year.
We understand what others have said. But maybe I'll just offer a few areas. So one is, you know, we see a relatively strong Q2. So don't see a Q1 to Q2 fall off or anything like that. So we see the front half as relatively strong.
In the back half of the year, we talked about on our call is we still think that we're seeing the initial waves of memory spending improving. We can see that through our Korean operation obviously directly. I think as that continues into the second half, that will have a large impact on the second half. Given our largest customers' outlook, think they have some confidence that that will continue through because we're seeing the initial wave of that today. We also benefit from EUV and then our third largest customer obviously is ASML.
They're seeing kind of the year kind of progress quarter over quarter growth. That helps a little bit with the back half of the year. Plus our share gains that we will expect to get will probably be a little more back end loaded. Whereas the ones we have this year, they're already in our run rate largely as we go. So hard to really give you an absolute, but our largest customer, which is over half of our businesses, indicated that it might be slightly front end half loaded.
Does that help?
Speaker 4
Yeah, it's helpful. I I don't want to put words in your mouth. So qualitatively it sounds like if Lam is right, you guys should probably do a little bit better because you guys are benefiting from EV. Am I getting the message correct? I'm making the assumption that Lam's number is correct.
Yeah, I think that
Speaker 1
with the EUV ramping kind of through the years, you're correctly reading that. Then the share gains take a while to build up. And then similar to this year, they'll be obviously larger in the second half of the year than the first half of the year for new share gains.
Speaker 4
Okay. And then just my second one. So obviously AMAT and Lam have been something like 88% of revenue for you guys. And now you're talking about kind of new wins outside of these two players. Is there any sort of order of magnitude you can give us for 2021 or any sort of I guess further outnumber and how much the new customers should take up as a percentage of revenue?
Is it material enough to call out say 5% to 10%? Or is it really just going to be a small kicker for you guys in 2021?
Speaker 1
Yes. That's a good question, very difficult to quantify. Think if we had won some positions in Korea or through our Japanese, we could give you a little more color. But we're in the very, very early innings. Obviously, it can be quite material if we win one of the large Japanese OEMs that have some of the web processing tools.
As I said in my prepared remarks, we're really happy with our partnership in Japan. So having said that, it takes quite a lot of revenue to kind of surpass the 10% level. So I think if you look back over the last couple of years, you'll see that the percentage of our two largest customers has come down a bit. And that's really with the growth of our third largest customer. And we also support ASM to some degree as well.
I think what will turn the needle is success in Japan and then in Korea where we'll see that kind of other category grow a bit. But it's hard to quantify now, Mitch.
Speaker 4
Got it. Perfect. Thank you.
Speaker 3
Our next set of questions come from the line of Sidney Ho of Deutsche Bank. Please proceed with your question.
Speaker 5
Great. Thank you. And I have my congratulations to a strong quarter end guide. In terms of Q1 guide, clearly things have gone better since a month ago that you when you gave that initial guidance. But you gave the guidance prior to the coronavirus becoming a bigger concern.
Curious how you think about how do you size that risk and in what ways you may get impacted directly or indirectly? And operationally, are you making any changes to accommodate that?
Speaker 1
Good question. So the coronavirus is a very fluid situation right now. Obviously, we've we've had some we don't have an employee base in China, just to let you know. The first thing we did as a company was to ensure that we protected our employees and we put some travel restrictions on. And anybody that's traveled to China, we've asked them to stay home for a week and things like that.
Our employee base is protected. I think right now as we look at it, they've extended the Chinese New Year by a week. We plan for Chinese New Year for a full week. So we front load our material receipts to keep the factories flowing. We have three or four suppliers that impacted by this.
But right now, it's hard for us to quantify it. I would say we have a larger revenue range this quarter. So to some degree, we can accommodate some delay in shipments. Having said that, we aren't seeing any demand reduction from our customers. Customers.
So they will take everything that we can build obviously in these kind of ramps. At this stage, it's hard for us to tell you or size it. If we get new news, obviously, and it's material, we would let you know.
Speaker 5
Great. And maybe, as my follow-up, I just wanna follow-up with the previous question. You talked about, you expect the business to be relatively strong in q two. Not sure if you mean revenues will be higher or flat. But if I if I look at the strength that you're seeing in the first quarter and even second quarter, will all that strength show up in your customers' tool shipment in the next one to two quarters?
Or will some of that goodness kinda show up later in the year?
Speaker 1
Well, I I don't wanna be too specific about customers. But what I will I'll I'll so I'll answer that by talking about our lead time. I would suspect that we ship gas panels somewhere between four and six weeks before our tool ships. So certainly some of what we see can hit in a quarter that will obviously materialize in our customers next quarter. With EUV, for example, it's almost six month lead time.
And then, you know, in our component side of the business, it's probably somewhere in that level of four to six weeks too.
Speaker 5
Okay. Maybe if I can squeeze in one more. On the gross margin line, you talked about some of the headwinds in your prepared remarks and also in the past. And it's great to see you expect an improvement in Q1 by about 100 basis points and continued improvement throughout the year. But based on your improving mix, how should we think about a normalized level of gross margin at the current revenue level?
Maybe put that in context relative to last time you were at the similar revenue level. That would be great. Thanks.
Speaker 2
I'll take that. So I think there's a few things that we have done this year. One is we've added capacity that's coming online in 'nineteen that's still obviously not fully utilized. So that impacts us a little bit. The second thing is our plastics business is still not at the levels of revenue and margins that it was in say 2018.
So we're still that business is very linked to memory and to specific customers and product mixes. So we're seeing still that's lagging behind the gas and other businesses that have ramped in the last couple of quarters, which is one reason why we feel confident that we can say our margins will be improving through 'twenty because we do see as memory comes back, that business should improve as well. The last thing that we mentioned in the prepared remarks, which I'll just reiterate here is, we are doing whatever it takes to get products to customers, which is including higher levels of overtime that we expected, included bonus programs around the holiday season on top of just normal holiday pay type things. We have recruiters. We've been using outsourced labor companies.
We're pretty much doing you know, the difficulty that we have now in the just general hiring marketplace with the strength of the unemployment in some of our key factory areas, We've had to go do some things that do drive up our cost, we'll still see some of that in Q1. But I think as we mentioned, we expect by Q2, Q3 Q3 this will sort of work its way out and we'll be in a kind of normal trajectory.
Speaker 1
And then, Sydney, I might just add. You mentioned strengthening mix. When we come into these kind of ramps, it's really the gas panel side of the business that ramps and out ramps the component side. And you know our gas panel is kind of versus the average our gross margin products is lower. So that has a little bit too.
Once that kind of levels out and then we get some inventory replenishment by our customers and growth in the component side of the business, that will be helpful as well as we go through the year. Right now, you can assume there's almost little to none of inventory build. In other words, what we're building is going into tools and on. So there's not a replenishment to any material degree at our customers customers for the component side of the business inventory.
Speaker 5
Great. Thanks and congrats.
Speaker 6
Thank you.
Speaker 3
Our next set of questions come from the line of Craig Ellis of B. Riley and Company. Please proceed with your question.
Speaker 7
Yes. Thanks for taking the questions and congratulations on the strength in the business and executing to such strong revenues. Jeff, I wanted to ask a follow-up question to some of your prepared remarks. You gave us a nice long list of factors that were going to drive relative outperformance in calendar 'twenty. I won't repeat them all, but the question is really on their magnitude.
Was your intention as you started with the $30,000,000 that you mentioned from last year's share gain down through things like next gen gas panel betas that could hit mid year. Are those in order of magnitude or should we think about them in a different way than that?
Speaker 1
Yes. I wouldn't want you to walk away thinking I listed them in order of magnitude. Last year, because we were in 2019, we were in a downturn versus 2018. We thought it was very important to provide you guys with more clarity on our market share wins. And so we updated you every single quarter just because it was quite material to this year.
This year we will have another round of market share wins. Some of what I talked about in my prepared remarks really is setting the stage for some 2021. And a lot of that is in liquid delivery that I talked about. Anything that we do in Japan will be 2021. More than likely, The Korea will be either late this year or into 2021.
So not all of what I talked about will affect 2020 exactly. But it needs to get in place to drive yet again more share gains as we go into 2021.
Speaker 7
That's helpful. And then just following up the points on both Japan and Korea. Can you just help us understand what the steps are after you're working and shipping in beta? How can things play out from there? What milestones would you be watching?
And how quickly could they evolve?
Speaker 1
Yeah. I think you think of a fast qualification of six to nine months, and a more typical one is probably nine months, twelve months, fourteen months, something like that. So you could think of it as a year lead time. They have to run these if they transition to liquid delivery from something they've built and designed themselves, then we have long qualification. And then there'll be qualifications by customer.
And so obviously we're qualified at one customer. We're looking to proliferate that at our US OEM that's adopted this and that's taken longer than we had expected to. So I'd say think of it in nine to twelve month bucket.
Speaker 7
Great. That's helpful. And then lastly, you mentioned as one of the growth drivers an expansion in EUV shipments year on year. We can certainly see that from that European supplier. The question is, should we think about Ichor's revenue wrapping fairly linearly with any of the unit action that we see?
Or is there a change in content or materials or work coming that would cause there to be variability either way?
Speaker 1
You know, one, these are pretty complex units that we build, much more complex than a process tool gas panel. So their lead time to build is a lot longer. So I would say we're slightly back end loaded to map to our customers' need. But anything we generally ship in the last six months is going to be in the first six months of the next calendar year or fiscal year for us, for our customers. Because we deliver about five months before they can deliver a tool.
So we do see kind of ratable increases, but we don't see any step functions during the year.
Speaker 7
That's helpful. Thanks, guys.
Speaker 3
Our next set of questions come from the line of Karl Ackerman of Cowen and Company. Please proceed with your question.
Speaker 8
Hey, good afternoon, Larry and Jeff. Two questions, please. Of the $30,000,000 like for like increase from the programs you called out in 2020 relative to 'nineteen, is the LDM the largest component of that? I ask so and we just might have a better understanding what the opportunity might be if you were to expand your LDM module to that South Korean customer and presumably customer in Taiwan in late twenty twenty and 2021.
Speaker 1
Well, won't be specific about it, but I would tell you that it's not LDM that's the largest component of the carryover. I mean, you think about it, we exited about $25,000,000 in share gains versus what we entered the year at. So when you think of the $30 I think a lot of it is some of the gas panel business that we won, weldments, and to a lesser degree some precision machining. And then LDM. So not to quantify them, but LDM is not the biggest portion of the $30,000,000
Speaker 8
Got it. Maybe going back to gross margins for a moment, it's really nice to see a recovery in your business on the top line. But if
Speaker 2
we go
Speaker 8
back to the last up cycle in late 'seventeen and 'eighteen, your implied gross margin guide for the March, while good and improving, still a couple 100 basis points below what we were at like two years ago. Obviously, you've made some acquisitions in the process. But we've also kind of done these $70,000,000 of incremental share gains achieved this year. So, you know, I guess as we think about 2020, first, where are we in the process of fully integrating Cald and Talend if those are not yet completed? Second, if plastics have been margin dilutive, are all of your product businesses sacrosanct where perhaps we might say, okay, let's try and reposition the business toward even more profitable areas like precision machining?
And then third, I guess, what level of revenue would probably give us allow us to be comfortably within our long term gross margin model?
Speaker 1
That was one long one. I'll start and maybe Larry can come in. So one of the things that you're obviously you'll refer back to probably 2018 kind of levels of gross margin. Since then we've added about capacities for about another $100,000,000 So you can think of the capacity that we have in brick and mortars probably takes us into the 1,100,000,000.0 $1,200,000,000 range. So that has a cost to it until you grow into that.
So that's kind of one of the headwinds. Larry talked about the plastics business, which is not growing at anywhere near the rate of the other businesses. And once it does, then we'll see that margin accretion. But to get back to 2018, it like to like, we'll need a higher component of our weldments and precision machining business. And right now in the initial front half of, I'd say, the year, the gas panel business is outgrowing now.
Speaker 8
Understood. I really appreciate that. Maybe last one if I may, just sneak one last one in. Just tax rate, I think you mentioned 10% for Q1. What do we think is the right level for the full year?
Thank you.
Speaker 2
I think 10% is good. We said between the 1014% range. But I think 10% is, for now, is is is pretty good. It depends on the the mix, obviously, of product between Singapore and US space. But I I think 10% is good for now, Carl.
Speaker 3
Our next set of questions come from the line of Patrick Ho of Stifel. Please proceed with your question.
Speaker 9
Thank you very much, and congrats on a nice quarter. Jeff, maybe first off to start with some of the comments you made about the liquid delivery systems and your penetration into both Japan and Korea. As you well know that those are two very insular regions who tend to prefer dealing with local suppliers or even have their own internal supply. I guess what's been the key differentiator that one has allowed you to put in the door? And two, how long do you believe it'll take before they sign on a going forward basis on higher volume buys?
Speaker 1
Yeah. That's a good question. So you're right. I mean, the Japanese market is a difficult one to penetrate, which is why we've taken the tactic of partnering with somebody. It's a very well known company and supplier to the OEMs in Japan.
It's a company called KITS. We recently were in Japan Semicon with them. And so they're making very good progress. And as I said in my prepared remarks, we're now getting requests for, call it quotes, which really is a design. Why there's interest is because it's much more modular, it's much smaller footprint, and it brings actually some improved technology, not to mention much easier maintenance as it's been designed.
So that's the attractive nature, which is bringing forward technology and cost reduction for the customers. First beta unit went out to our largest customer and the largest Korean OEM. And so that went out very recently and hopefully in the next month or so it'll be up and running on a tool. And then as I think I said earlier on one of these questions is you kind of got to think of the qualification of nine to twelve months. And then that's how you get qualified on the tool.
And then they'll go into a qualification at the customer level. Great. That's anyway, Japan and Korea, we'll make hopefully make very good progress this year that sets up a much stronger 2021 impact.
Speaker 9
Great. And maybe a follow-up question for Larry in terms of the operating model. Obviously, you've given some guidance and outlook of improving gross margins and that will be a key variable to improving the earnings leverage. On the OpEx side of things, given some of the investments you mentioned, it's going to be up $1,000,000 quarter over quarter. And I guess some of the investments that you're doing, whether it's in Japan and Korea as well as new product development.
Can you give a little bit of color in terms of OpEx, how you're going to manage that and how you're going to drive leverage on that metric on top of the improvements you'll see on gross margins?
Speaker 2
Well, I think in general, as I said, we expect to be in this $14,000,000 range. I mean, have the seasonality of the tax and other things in Q1. We'll continue to spend money where we need to on the R and D. It's a high priority as Jeff mentioned, not only for this year, but it has the longer term benefits in 2021. As far as the sales and G and A line, we're watching that very, very tightly.
We will be in the process of our implementation that doesn't hit the P and L probably till 2021 as we kind of start using the system. But general, I think keeping in that kind of mid low $14,000,000 range is where we want to be. I think it's the right place to be and still allows us to make the investments in R and D that we absolutely need as we hopefully get this penetration executed here.
Speaker 9
Great. Thank you very much.
Speaker 2
Thanks, Patrick. Thanks, Patrick.
Speaker 3
The next set of questions come from the line of Tom Deifley of D. A. Davidson. Please proceed with your question.
Speaker 10
Yeah. Good afternoon. So sticking with the the cost questions, I'm curious how long does it take to find and train an employee so they can replace them, you know, someone running overtime right now? And then how do you balance, you know, creating a lower cost workforce that way versus having the flexibility you get through just the OT?
Speaker 1
Yeah. It's a a good good question. So I I'd say the area that we're most obviously most challenged in finding employees, and we've been doing a pretty good job. But generally The US employment rate is very, unemployment rate's pretty low. These are also skilled workers.
There's different levels of these skilled workers. Certainly on the weldment side of the business, there's a portion that can come up relatively quickly in weeks. There's advanced hand welders, for example, that need to just have experience. Similarly, on the machining side, there's very few kind of pure entry level jobs. So we do have to find machinists with experience and we have to find some welders with experience.
And we've been ramping fairly well. We will not eliminate overtime, Tom. We will keep a certain amount of overtime because we do need to have some flexibility. So we are willing to carry some level over time. Right now it's very, very high in certain areas of the business.
Speaker 2
So I think, Tom, just to follow on. I think the to the extent that in most of our factories now we are going all out hiring. So it is as Jeff mentioned, the overtime rates are really too high, which do two things. One is just the economics of it, but the other is just the employee level of strain we put on employees. So everybody's committed to getting the product out to the customers.
They need it, and we're doing that. In almost But every factory now. We are all out hiring with extra recruiters and hiring bonuses and other things. So we're committed to getting to a more normalized view around headcount. And that does involve some temporary workforce and some level of overtime, but clearly not to the levels we're sitting at today.
Speaker 10
Yes. Well, sounds like a high class problem there. So Jeff, curious, you talked a lot about how right now you're just really scrambling to meet the the customer's demands for their shipments. At what point do you think we'll get to a stage where you can build inventory at your customers as well?
Speaker 1
Yeah. I I I would say we would expect a little of that this quarter. I think we'll start to see that next quarter. And it's it's kinda we've been alluding to. The ramp is very steep.
So everything that we kinda deliver is good by the tools. So but eventually, we'll catch up our capacity and we'll we'll be able to replenish the inventories that our customers want to have on-site at their businesses. So but I think any meaningful effect of this will probably be in the second quarter. Okay. Beginning.
Speaker 10
If I Larry, you said that you had been adding capacity. I'm just curious. Are you adding capacity across the board or are there certain areas where you've added capacity?
Speaker 1
Well, when you talk capacity in brick and mortar, we're adding very little of that. But there's some fixed assets in welding stations and some CNC machines, things like that for machining. But brick and mortar buildings were okay. It's people that is what will increase our capacity.
Speaker 2
People sort of across the board and then some machines in the weldment area and precision machining.
Speaker 10
Great. Thank you.
Speaker 2
Thanks, Tom.
Speaker 3
Our next set of questions come from the line of Gus Richard of Northland Securities. Please proceed with your question.
Speaker 11
Yes. Thanks for taking my question. Just a quick housekeeping one. What was your share gain revenue in the in 02/2019?
Speaker 1
We said 70,000,000 for the year with the full run rate of about a 100,000,000, which means we're gonna see about 30,000,000 of that on a year over year basis increase into 2020.
Speaker 11
Oh, okay. So kinda plugging that number in, your business before the share gains was down about 33% in 2018 versus your your big customers, which were down, can, calendarize about 22, 23%. You know, you tend to over perform and underperform in cycles, in the cycle. You know, what's what is your visibility and and kinda what's downstream from you guys? Do you have a sense of what you have a very short channel, but what the channel inventory might be?
Have your lead times stretched?
Speaker 1
So good question. When you say channel inventories, you're talking about inventories that we have at our customers that we've delivered that they have stock. It's very little if almost nothing in gas panels for sure. And it's we haven't really started any replenishment as what I said with the last caller. So from a channel, I think the channel's pretty lean.
In other words, what we ship I think is getting consumed fairly quickly. So the first time we'll see any kind of channel inventory build is
Speaker 2
probably in the second quarter.
Speaker 11
And then have you had lead times stretch out in
Speaker 0
terms
Speaker 11
of your customers and rather than typically four or five weeks it's been longer? Is that pretty much constant?
Speaker 1
Well, I mean, we have contractual lead times that we try to meet. Certain aspects or places in our business, they are stretching a bit. We're trying not to stretch them out. Obviously, when you ramp like this, you work very closely with your customers just to really understand the forecast horizon. So we do have better visibility, as I said, even on the last call, like into Q2, we have pretty strong visibility.
And that helps us plan better and and keep our lead times generally close to where they're at. But they have stretched a little.
Speaker 11
And and then in terms of, you know, the last down cycle, you know, as you sort of start to underperform your customers, what were the first signs of that? Can you just give a little bit of color as to, you know, how you know, because going into the the last cycle, you you you felt like you're gonna track your customers exactly and that didn't happen. And I just wanna make sure sure I sort of understand, is there something different here or will there be a point where, uh-oh, here we go again?
Speaker 1
Well, that is is the question. So, I mean, when you look at last year, obviously, you know, the overall WFE market declined, I don't remember, around 20%, twelve, fifteen, something like that. Anyway, you got to remember that memory we have a high exposure in memory. So we we get hurt a little more on the down. So memory was down about 40% year on year.
So that affects us because our largest customer is highly concentrated into memory. We also EUV was a much bigger component in 2019. And so while we get to benefit from that, it's kind of a percentage of revenue we're much smaller than a typical process tool and gas panel. But as for triggers, I think we're seeing what we really saw in memory was really comes down to pricing and inventory and things like that. We keep an eye on that.
Right now we seem to believe those are moving in a positive direction for 2020.
Speaker 2
So just let me follow on a little bit. So one of the things, I mean, year, clearly from the OEMs middle in of the summer, we were getting a lot of indications that it was a flat business. And as part of that and the fact that the downturn was as many quarters as it was, we know for a fact that they were draining out their inventories. So I think you saw a little more of that impact on us than would be normal. And even what they probably would be comfortable with, but no one saw the second half twenty nineteen that ended up happening.
So I think you see a little bit of that kind of over rotation in 2019 on the inventory. And then you have a steep ramp, which as Jeff mentioned, they pretty much were shipping gas panels and products that they want so they can immediately ship the tools. The second half of this year, we should definitely start seeing that inventory get kind of back to a normal level, at least the the request for them to replenish those inventories that they drained last year.
Speaker 11
Got it. Thank you for your patience.
Speaker 2
You bet. Thanks.
Speaker 3
Our final question comes from the line of Quinn Bolton of Needham and Company. Please proceed with your question.
Speaker 6
Hi. This is Charles Chi on behalf of Queen Bolton. Jeff and Larry, congratulations on the strong result and, upbeat guidance for the next quarter. So, I want to back up a little bit, to ask a question from the WFE in 2020 and from this perspective. So if you are aligned with your largest customer who set WFE up about 20%, some I mean, plus minus and a little bit front half loaded.
When I think about your gross margin, does I mean, does slow it looks to me maybe there's some headwinds for your gross margin profile if we look into the second half of the year. But when I think about the WFE mix in the second half, it's probably a little bit more memory loaded than foundry logic. Do you see any kind of a tailwind for your gross margin in from that aspect? Maybe there's a little bit difference in terms of your custom mix, product mix if memory is stronger than logic in the second half.
Speaker 1
Yeah. We well, I'm not gonna talk specifically about, you know, customer level pricing, but there's obviously different gross margins for different parts of our business. I'd say the gas panel business is generally the lower margin business versus weldments, precision machining and our plastics business. So from a tailwind, I think what we've tried to let you guys know is we'll see gross margin improve this quarter. We expect it to improve again next quarter.
And then given the revenue levels, think we have plans in place to continue to improve the gross margin for the year. Don't a gas panel that goes on a tool destined for foundry or logic versus etch, it's more about how many gases they use versus the difference between the customers. We price them all the same. It doesn't matter who the customer is, the end customer to our customers.
Speaker 6
Do you see, like, a higher content of or high margin business like components and machine weldments going a little bit higher if memory ramps up in the second half? Or is that the
Speaker 1
Well, yeah, I'd say we we would expect our kind of our higher margin component businesses to probably grow a little faster by midyear. To the point we made is is right now gas the gas delivery side of our business is ramping clearly the fastest. And so it is kind of outstripping some of the other components from a mix perspective. So once those kind of normalize and we get the inventory rebuilds, that would be a nice headwind, I think, as we cross midyear.
Speaker 6
All right. Thank you very much.
Speaker 1
Yeah.
Speaker 3
We have reached the end of the question and answer session. I'd now like to turn the call back over to Jeff Andresen for any closing remarks.
Speaker 1
Thank you for joining us on our call this quarter. I'd like to thank our employees and suppliers for their tireless efforts and tremendous support of the Ichor during the steep ramp in business. I'd like to thank our shareholders for their continued appreciation for our business execution and strong earnings and cash flow performance through the industry cycles. We look forward to updating you on our Q1 call in early May. Thank you.