Ichor - Earnings Call - Q4 2020
February 2, 2021
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to iCar's Fourth Quarter twenty twenty Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Claire McAdams, Investor Relations for ACCOR.
Please go ahead.
Speaker 1
Thank you, Hillary. Good afternoon, and thank you for joining today's fourth quarter twenty twenty 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, 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 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 nineteen and prospective supplement 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 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 Van Bresen, 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 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 Andresen. Jeff?
Speaker 2
Thank you, Claire, and welcome to our Q4 earnings call. I hope that you all, all of you and your families are staying healthy and safe. To begin, I want to express my appreciation and say thank you to our employees for their extraordinary dedication and execution in a challenging work environment and to our customers and suppliers for their support and collaboration as we navigated our way through 2020. We have begun 2021 with optimism that we'll emerge from the COVID-nineteen health crisis this year and move forward towards a more normal environment for our employees and partners worldwide. Today, we reported another strong quarter of results with Q4 revenues at the high end of expectations and earnings per share exceeding the high end of guidance.
Revenues of $245,000,000 were up 8% from Q3 and marked our seventh straight quarter of sequential revenue growth. Gross margin increased 120 basis points, operating margin increased 170 basis points, and earnings per share increased over 30% from the third quarter. We also had a very strong cash flow quarter with free cash flow of $38,000,000 In all, Q4 marked a very strong finish to a challenging yet extraordinary year. The underlying demand in our overall wafer fab equipment or WFE market strengthened through each quarter of the year and through each month of the fourth quarter, culminating in an estimated total industry growth of 17% compared to 2019. The strengthening demand environment late in the year led to Q4 revenues at the high end of the range provided on November 1, with upticks in demand witnessed amongst each of our key customers and among each of our businesses.
Within the backdrop of a very healthy semiconductor equipment demand environment, Ichor, as well as the entire global supply chain, faced tremendous operational challenges stemming from the global pandemic. Nonetheless, in 2020, we achieved record revenues with year on year growth of 47% and earnings growth of over 100% compared to 2019 results. Our results for the year demonstrate our continued execution on our stated objectives, to outgrow the industry and to grow earnings faster than revenue. The WFE market continues at historic levels as we enter 2021. And as a result, our visibility remains very good, still extending about six months or so.
The midpoint of our Q1 guidance is now $255,000,000 a $5,000,000 uptick from our preannouncement, indicating 4% growth in revenues over Q4 and our eighth straight quarter of revenue growth. The strong demand environment we see is aligned with the outlooks and guidance provided in recent earnings calls from both our key OEMs as well as our key customers their key customers. As a result, the outlook for overall industry growth in 2021 has been on the rise from around 10% growth expected a month ago to now around 15%. With widespread expectations of another growth year for WFE in 2022, we appear to be in the second year of a multiyear growth cycle propelled by the convergence of multiple technology drivers such as five gs, IoT, AI, and autonomous vehicles, as well as secular growth related to the progression of work from home and high performance computing, which altogether are resulting in increased capital intensity for the semiconductor industry and higher levels of investment in fab technology and capacity. In other words, being an essential supplier to the wafer fab equipment market and having a nearly 100% focus on this somewhat cyclical but strong growth industry is a great place to be.
With that as a backdrop of our 2020 performance and the industry outlook as we enter 2021, I'll now turn to our key strategies to continue to outperform industry growth and in turn deliver strong operating leverage and cash flows. We recently put together a new investor presentation that helps to illustrate our strategies for continued outperformance, which provides a useful framework for our growth story. We prepared this presentation, which is posted on our IR website, for our December equity raise. We issued a total of 4,600,000.0 shares at $31.75 per share with net proceeds to the company of $139,000,000 We're very pleased to have completed the offering, had a great time in the industry, strengthening our balance sheet and providing us with the ability to be opportunistic with strategic M and A. Acquisitions are an important part of our growth story, and we have a good track record of identifying and integrating accretive businesses into ICORE.
I'll begin with our strategic focus on some of the strongest markets within WFE. Over the last five years, while WFE grew at a compound annual rate of 13%, deposition and etch grew a few percentage points faster. And the growth of EUV lithography has been higher than that. These are the three key markets for our products. And in the same five year period, our annual revenue growth has been 26%, that of overall WFE.
All three of these markets, deposition, etch, and EUV, are outpacing overall industry growth due to multiple technology drivers. In NAND, the industry is investing in the technologies 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 the 1z node, then to 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 of fluid delivery.
There has also been an increase in the number of gases used for technology advancements in both logic as well as DRAM over the past several years. In each case, as these geometries become more complex, this drives the need for faster etch rates, better material selectivity, and more precise control of the processes. The key takeaway as it relates to ICOR is that these advanced technology nodes require more fluid delivery content per system, particularly for logic and DRAM. Beyond etch and deposition, 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 and EUV.
Over the last five years, we've grown our revenues as a percent of WFE from 0.9% to 1.5%, or more than a 70% increase in our share of the industry. Our increasing share of WFE is due to the technology trends benefiting etch deposition and EUV as well as our continued market share gains and the complementary and accretive acquisition further enabled the expansion of our product offerings and global customer footprint. Now turning to our progress on our product and regional growth initiatives. I'm pleased with the progress we made in 2020 in a challenging operating environment. Our precision machining product growth programs are moving along well, and we are nearing the end of two qualifications.
Expect we'll see initial revenue in the second half of the year. We completed the acquisition of a machining business in Mexico that adds new customers, incremental capacity expansion in a low cost region, as well as additional technical capability. We are already investing in expanding that facility's capacity and expect to complete that in the next four months or so. We continue to work on gaining new share across our customer base for weldments as well as in our gas delivery business. In our geographic expansion initiatives, we continue to have active dialogue with several of the major OEMs in Asia.
COVID related impacts limiting travel and customer visits are resulting in a delay in the qualification of our liquid delivery system at our Korean customer. But this is still a large opportunity for us. And once we move past these limitations, we will be putting on a full court press. Finally, we continue to make progress on our strategy to leverage our engineering capabilities 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 continue to expect to have our initial beta units delivered in the next two three months.
In summary, the team did a phenomenal job managing through the operational challenges of 2020 to deliver a record revenue year, and we are off to a very strong start so far in 2021. The midpoint of our first quarter revenue guidance indicates our expectation for continued sequential growth above Q4 and year over year growth of 16% versus Q1 of last year. We are also driving continued incremental improvements in gross margin and operating margin as we are steadfastly focused on making meaningful progress towards 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 3
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. Fourth quarter revenues were $245,000,000 up 8% from Q3 and up 29% from 2019.
Business conditions continued to strengthen during the quarter and as a result, we came in at the high end of revenue guidance. While COVID continued to present operational challenges, we reported our seventh straight quarter of sequential revenue growth. We also achieved sequential increases in gross margin, operating margin and earnings per share. Gross margin for the quarter was 15.8%, up 120 basis points from Q3 and up 200 basis points from Q4 twenty nineteen. Gross margin exceeded our forecast in the fourth quarter due to a more favorable product mix combined with accelerated benefits from our cost reduction programs to deliver a significant quarter over quarter improvement.
As expected, COVID related costs continued to impact gross margin by around 50 basis points. While material sourcing costs are now largely normalized since the first half of this year, we still face higher costs associated with ensuring the health and safety of our global workforce and higher freight costs versus pre COVID levels. We continue to drive improvements to our gross margin and expect further incremental improvement as we progress through 2021 in a continued healthy customer demand environment. Operating expenses came in lower than expected at $14,200,000 flat from Q3, primarily as a result of the timing of certain R and D program spending that shifted into 2021. Operating margin improved 170 basis points in the quarter and operating income was up 29 over Q3.
Our effective tax rate of 10.7% for the fourth quarter reflects a true up to our full year tax rate, which was 11.3%. The full year tax rate was slightly lower than forecast due to certain credits related to higher U. S. Exports and larger than planned R and D tax credits. Our planning rate for tax over the next next couple of years continues to be in the range of 11% to 13% with 2021 expected to be at the high end of that range.
With revenues at the high end of guidance, gross margin and operating expenses favorable to forecast along with a slightly lower tax rate, earnings of $0.81 per share were above the high end of guidance by $04 This was inclusive of the additional shares reflected in our weighted average shares outstanding as a result of our equity offering, which increased the fourth quarter share count by about 850,000 shares. Now I will turn to the balance sheet. We strengthened our balance sheet in Q4 with the issuance of 4,600,000.0 shares, net proceeds to the company of $139,000,000 We also reported a strong cash flow quarter in Q4 with $38,000,000 of free cash flow contributing to the additional $35,000,000 increase in our cash balance over Q3. Our strong cash flows in Q4 were helped by lower days sales outstanding of thirty eight days compared to 42 in Q3, as well as higher inventory turns of 6.1 compared to 5.4 last quarter. In total, we increased our cash position by 174,000,000 to the end of the year with $253,000,000 compared to total debt of $2.00 $2,000,000 We expect continued free cash flow generation and a continued healthy demand environment in 2021.
However, given the capacity investments necessary to support 2021 and beyond revenue growth, we expect capital investments this year to be in the range of 2% to 3% of revenues, which exceeds our historical range of 1% to 2%. Now I will turn to our first quarter guidance. With revenue guidance in the range of $2.45 to $265,000,000 our earnings guidance of $0.64 to $0.76 per share reflects the full quarter impact of our 4,600,000.0 share equity offering. The midpoint of the EPS range reflects an expected gross margin increase of around 20 basis points and operating expenses of approximately $15,800,000 The sequential increase in operating expenses is primarily due to seasonal increases in payroll taxes, audit and legal costs, as well as the timing of the R and D project spending mentioned previously. In addition, we must become SOX compliant this year, which drives incremental audit fees.
We will also have additional expenses associated with our new ERP system and plan to increase R and D spending to support new product development programs. For these reasons, we expect our quarterly operating expense run rate to be slightly higher than Q1's level for the remainder of 2021. Our EPS guidance assumes an ongoing interest expense of $2,000,000 per quarter and expect tax rate of 13% for 2021 and approximately 28,600,000.0 diluted shares outstanding for the first quarter. Before turning the call over to questions, I want to again reiterate that we anticipate additional sequential improvements in gross margin as we move through 2021. This includes an assumption of a continued 50 basis point impact each quarter from COVID related costs.
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 margins higher through incremental cost reduction programs, growing our share within our higher margin components business and increasing our content of proprietary IP within our products. Operator, we are now ready to take questions. Please open the line.
Speaker 0
At this time, we'll be we will be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment please while we poll for questions.
Speaker 1
Our first press question is from Patrick Ho with Stifel. Please proceed.
Speaker 4
Very much. Belated Happy New Year, and congrats on the nice quarter and and to the year. Jeff, maybe first off, in terms of your businesses, on the weldment and precision machining side of things, you talked about share gains over the last year, eighteen months or so. Are you now starting to see those going to volume, particularly as your OEM customers are introducing new products on their end?
Speaker 2
Yeah. I mean, as as you know, we we in 02/2019, we won kind of a kind of a large award. Since then, we win it on kind of a product by product basis. So, we are seeing some wins that will manifest themselves in some volume products as new products get rolled out. And I'd say that's been pretty good so far, but that's actually later in the year that we'll start to see some of the effects of that.
We've seen some of the fourth quarter stuff rolling into the first quarter as we go in both of those. And specifically, I talked about two wins that we're about ready to complete in the precision machining that will address second half growth as well. So we're really happy with the progress really on the component side of our business.
Speaker 4
Great. That's helpful. And maybe Larry, the gross margin side, it was good to see the improvements in Q4 and the commentary you provided on the outlook going forward. Obviously, is a contributor to gross margin increases. What are some of the other key variables?
Is it the mix that's going to help you continue to grow gross margins, the shift over to weldments and precision machining? Or are there other variables that will help drive the projected outlook in 2021?
Speaker 3
Thanks, Patrick. I think there's a few other things. As we mentioned, we do have a lot of cost reduction programs, both in the materials side and the factory efficiency that we saw some of that benefit coming in nicely in Q4. We'll continue to see that as we go into 2021. We also talked about the plastics business and rightsizing that with the announcements of our Union City facility.
That facility will be kind of closed up in the first quarter, so that should help us a little bit. And as Jeff mentioned, continued progress in market share on the components business, both in weldment and precision machining. We're seeing those wins. They're starting to show up in the numbers. I think, that should accelerate as we go through 2021.
And I think, in addition to the volume you mentioned, just keeping an eye on our expenses and, getting that volume leverage as it comes through, is key. And then, with the healthy outlook in the business, we're pretty bullish on this year.
Speaker 4
Great. Thank you very much, guys.
Speaker 5
Thanks, Patrick. Our
Speaker 0
next question is from Craig Ellis of B. Riley Securities. Please state your question.
Speaker 5
Thanks for taking the question and congratulations as well guys on the nice execution in the quarter. Larry, just wanted to do a quick follow-up on the prior gross margin question. You mentioned there were two things that drove upside in the fourth quarter, which in our model was about 60 basis points. What was the relative contribution to the two factors that pushed gross margins up so significantly?
Speaker 3
They're fairly even weighted. I mean, the cost reduction programs, were a pretty big contributor this quarter. And, if you look at, some of the product mix and some of the share wins that we've had in machining and components, that contributed another large chunk. So I'd say it was pretty balanced in what we saw.
Speaker 5
Got it. And nice to get the color on what can happen sequentially this year. So thanks for that. I'll ask my question to you, Jeff, and it really is related to some of the full year matters that you talked about and the strength that we're seeing in the industry. So I think you mentioned the potential for 15% industry growth.
We certainly see that. The question is, the company has done a good job outgrowing industry by 2x over the years. What are some of the tailwinds and even headwinds that would exist to continued excess industry growth of that magnitude as we look at calendar 'twenty one for Ichor?
Speaker 2
Yes, I think as you look over the last five years, there's a component in acquisitions that is added to the revenue stream, plus given us the opportunity to develop other products that we're having some success with. So without being specific on M and A, obviously, we're after the equity raise on strategic M and A and accretive M and A and M and A that brings IP to the table. So that could help along with just continued market share gains. But also it's our belief that as you look at some of the drivers that we're seeing during this multi year cycle that we're in the second year of is that we do believe that we're positioned very well. And our customers are doing very well across DEPA and ETCH and EUV.
And that will keep the growth rate up as well. Whether we can double it, I don't know that I could tell you that because some of that came from acquisitions. Now, we do something on the acquisition side, we could possibly continue to do that as well.
Speaker 5
Yep. And if I could just follow-up and ask a further question into that issue. Some have expressed a view that we could be seeing a year that's got a little bit more front end weighting to it. Can you provide any color on what your view of linearity is for industry? And any thoughts on what that would mean for Ichor?
Speaker 2
Yeah, maybe this is a really good question. Obviously, I think you're alluding to an earnings call from last week. I'd say, one thing is that our percentage of WFE is about 1.5%. And so if you see a bias towards above 15 to maybe 17, and there are people that now are forecasting that potentially can get to 70,000,000,000, I don't know if we're going to get there or not. But that will change the linearity of those comments.
I would also say that when you look at the exposure to the markets and the applications of our top three or four customers, they vary, obviously. And so some have better exposure or more balanced exposure between memory and foundry logic, for example. And that would also kind of change that outlook a bit for it. So I wouldn't necessarily draw the conclusion for Ichor based on that outlook of just one of our customers.
Speaker 5
That's helpful and count me in the group that thinks $70,000,000,000 is possible this year. Thanks, Jeff. Thanks, Larry.
Speaker 6
Thank you. Thanks.
Speaker 0
Our next question is from Mitch Steves of RBC Capital Markets. Please state your question.
Speaker 7
Hey, guys. Thanks for taking my question. I wanted to start first just on the customer side. Can you guys give us the 2020 mix Lam Research and apply just what percentage of revenue were? And then maybe qualitatively, do you expect that to kind of balance out a little bit more?
I mean, historically, when we go through a DRAM cycle, applied materials against, like, a bigger customer. I mean, I don't expect exact numbers for '21, but maybe twenty twenty twenty is a baseline and then any sort of qualitative comments on '21 if that's gonna if that balance is gonna shift a bit.
Speaker 2
Yeah. I I we typically report the customer mix with our 10 k, so maybe a bit early to preannounce that. I don't think you're going to see dramatic shifts from last year to this year in our customer mix. I I think that, you know, I think as you as you kinda go back in history, Mitch, you'll you'll see that size of our top two customers has kind of come down from the low nineties, and now we're kind of in the mid to low eighties of those two, which you would have to assume that our third largest customers continue to grow. So we see growth there.
Some of the market share gains that we see will obviously shift that mix depending on which customer we get gains at. And we're not going to be that specific for 2021. But we don't see any significant mix shifts between those two at this stage.
Speaker 7
Okay. And then a second one, on some of these conference calls, you're talking about kind of a improving console environment and improving smartphone environment, which kinda drove a lot of the sales in the front half of the year. Do you guys any have any sort of commentary on what type of products you're selling into? Meaning that is it more just due to those two end markets, which are very front half heavy? Because I think people expect consoles to be weaker in the back half along with smartphones, or or do you guys have no visibility on that and can't comment?
Speaker 2
Well, the the the answer is we don't have visibility down to that level. Our customers may track that, but, you know, we're a derivative of our customers. So in general, what you hear from them, we will we'll be associated with it almost exactly. So, you know, we have seen strength on those particular areas, and I know, you know, the largest foundry talked about the HPC side of it, data centers, things like that, that strength continuing. And but I would say, in general, you're still seeing some pretty bullish commentary around some of the things that I pointed out, which is the transition to five g, just the IoT applications, AI, edge computing, etcetera.
I think all of those bode well for this multiyear cycle that I believe we're in.
Speaker 7
Okay. And then just one last clarifying one, if I could. Just 50 basis points of margin impact, does that include, like, the freight cost and all that stuff too? How are you guys getting to that 50 basis points COVID impact, like you said Yes. In the
Speaker 3
It includes the freight impact and the impact of social distancing, shows up in additional cleaning, additional shift coverage, where we have more seven by 24 coverage in our factories now and shift premiums. So it's the whole, the whole enchilada.
Speaker 7
Okay. That's helpful. Thank you so much.
Speaker 2
You bet. Thanks.
Speaker 0
Our next question is from Quinn Bolton of Needham and Company. Please state your question.
Speaker 8
Hey, Jeff and Larry, congratulations on the nice margin performance. Great to see. I wanted to start just with the question on the LDM. You mentioned some of the delays you're seeing in qualification with your largest green customer. Should we be thinking now that revenue maybe from the second half of this year, maybe into 2022, the results of some of those delays, or do you think you still might have a shot at at recognizing revenue from your Asian customers later this year?
Speaker 2
Yeah. I I think that it's definitely gonna be second half and, like, lightly in the second half of the second half. I mean, in later in the year, I think, for some of these qualifications. So I think significant revenues from any qualifications will be at 2022. We still are working closely with our US customers, which is a little a little easier.
So I still think there's some opportunity on those side to see expansion in 2021.
Speaker 8
And just a quick follow-up. I think you had mentioned the Korean customer with those delays. Did you should we think that the Japanese customers were also seeing similar delays due to COVID?
Speaker 2
Yeah, essentially travel is very restricted. It's restricted into Japan, it's restricted within Japan. Like I said, the dialogues I think are active. We're not I wouldn't say we're that far off a track given COVID. But generally speaking, we're going to need to get technical people on the ground there to kind of get to the commitment level for evaluations and things like that with them.
So again, I don't think getting some beta units out in the second half is out of the question at this stage. But anything associated with those would probably be a 2022.
Speaker 5
Got it.
Speaker 8
Great. And then just a second question, given the equity raise, can you just give us your thoughts on sort of the health of the M and A pipeline? Are you seeing a pretty active dialogue right now? Or are valuations still sort of an issue given what the public companies' stock prices have done?
Speaker 2
Yeah. I mean, obviously, I can't comment specifically about any companies we're looking at. But typical in these types of environments, the activity does certainly increase. A number of them get presented to us each month. We look at them.
We're pretty disciplined in our approach. We obviously like to buy at reasonable EBITDA multiples. Having said that, if we see really good growth opportunities, we are not afraid to invest. We did a very small deal, as you know, in November, which we're actually increasing the footprint and the capacity of that as we speak. So while that was a relatively small business, it gave us a reasonably good sized footprint from which we can grow the business through our customer synergies, so to speak.
So we continue to look. We're focused on businesses that have a higher level of IP, which really generally means more accretive gross margin for us. The activity is better. Obviously, have better flexibility now on the balance sheet with the equity raise. And so I think we can be very opportunistic and move relatively quickly if we see the right opportunities.
Speaker 5
Great. Thank you, Jeff.
Speaker 2
You bet. Thanks, Quinn.
Speaker 0
Our next question is from Sidney Ho of Deutsche Bank. Please state your question.
Speaker 6
Thank you. Congratulations for a very impressive growth rate in 2020. My question is on the the WFE side of things. I think you mentioned 15% growth right now, and your largest customers talk about 15% to 20%. And your first quarter guide is right in that range on a year over year basis.
How confident are you that you can continue to outgrow WFE this full year given some of the share gains you have in various product lines and new products? Or will that be a more difficult comp based on how much you outgrew the market already in 2020 by close to, like, 30 basis 30 percentage point.
Speaker 2
Yeah. I think I I'm very happy with the performance, obviously, of 2020. The team did a great job. We we did we did gain share a very good large chunk. Would say it was as big as 2019.
I think in 2019, we really pushed tremendously hard in those types of environments. The customers are looking for opportunities. They have more bandwidth to help you versus in ramps. That attributed to our kind of larger than expected growth. So I wouldn't want to give you an indication that we could do 47% versus 17% again.
But we have very good plans. We have line of sight to a lot of these share gains of similar size that we did in 2020. So we have very good confidence that we can again grow above the WFE growth rate.
Speaker 6
And that's ahead of having
Speaker 2
any acquisitions on in the year.
Speaker 6
Okay. Great. Maybe a follow-up question is related to gross margin. You guided first quarter up 20 basis points, and you had talked about improvement throughout the year. It looks like there's a lot of initiatives that's going to kick in maybe towards the second half of the year.
Is there something that you can help us think about what's the right gross margin target in your mind exiting this calendar year?
Speaker 3
Well, I think the assuming revenues stay healthy, mix stays healthy, we expect that we should be able to get probably a 20 to 25 basis points improvement each quarter as we kind of go through from Q1 to the end of the year. So and that's assuming we can continue our share gains and everything we expect to do in the components business. But we're very bullish and very optimistic that we can continue the progress we've made in the last couple of quarters.
Speaker 6
Excellent. Thank you very much.
Speaker 2
Thanks, Sydney. Thanks, Sydney.
Speaker 0
Our next question comes from Tom Diffely of D. A. Davidson. Please state your question.
Speaker 9
Yeah. Good afternoon. Thanks for taking the question. Maybe a follow-up to Sydney's question. Jeff, when you look at, you know, call it 15% growth this year, a lot of that growth, it seems like it's gonna come from both the foundry and EUV.
So I'm curious, do you think the, etch and depth markets, specifically outperform again this year like they have over the last few?
Speaker 2
You know, I I you know, obviously, our customers are closer to it. But as we look at it, I mean, I think foundry, is is growing again year over year, has a very high level of capital intensity as well. I think we see strong DRAM year. We we actively see three d NAND being selling into that, obviously, through our Korean operations. So I I I think you will definitely see etch and deposition again improving.
I think there's some technology reasons. I think you're seeing very good success at one of our customers and market share growth as well. So we benefit from that.
Speaker 9
Okay. Great. And then, Larry, you talked about CapEx being up, the 2% to 3% range this year. Is most of that going into Mexico and the expansion there? And is most of that expansion gonna be for semiconductor specific?
Speaker 3
It's it there's a good portion going into Mexico, but it's also in some of our integration sites, both in Asia and in North America. So it's spread out. We also have some investments in IT and and other things. But a very, very large portion of it is for capacity, and and it's both for precision machining and for the integration to kinda meet the needs of what the customers are telling us and what we're seeing.
Speaker 2
Yeah. I'd say, you know, we when we bought the the operation in Mexico, we knew we were gonna put in a a significant amount of capital into the footprint. And had that not happened, we'd probably be at the higher end of our one to 2% range, but it it did pull us up and over.
Speaker 9
Okay. And longer term, what is that facility gonna do to either your tax rate or to your labor cost?
Speaker 2
It's like I said, it's a low cost region, so the labor the labor costs are certainly different from the profile we have based in The US. The tax, I I don't think it's gonna have a tremendous amount of impact on our tax rate. It is it's a little bit higher than, you know, not having a holiday in Singapore, for example. So I think as Larry talked about, we'll be towards the higher end of that tax rate range that we typically talk about, 11 to 13. But I'd say that's a relatively small factor in it.
Speaker 10
Okay. Thank you.
Speaker 2
You bet.
Speaker 0
Our next question is from Krish Sankara of Cowen and Co. State your question.
Speaker 10
Hi. Thanks for taking my question. Jeff, the first question I had is you kind of spoke about a six month visibility. Is there any way you can quantify what your June revenues would look like relative to March?
Speaker 2
I don't wanna give you q two guidance, Krish. Appreciate the effort. I I would tell you that we still see a very strong demand environment in q two. And so it's it's it it remains healthy, and I'll I'll leave it at that for q two. It's it's obviously I think there's a lot of variables in the second half of the year that can make our second half better that we talked about a little bit earlier today, which is I think there's some bias towards the continued growth in WFE over and above this 15% level.
Speaker 10
Got it. Got it. And then I have two other quick follow ups. Jeff, at what point do you think ASML or EME, because of EME's trend, can get to be a greater than 10% customer for you? Will it be this year, next year, or is it longer?
I
Speaker 2
think it's down the road and not because we don't see growth, but we see higher levels of growth in some of the the component side of the business targeted at the process tools versus lithography tools sector. So it's gonna continue to grow, I think, year over year. Think, as you know, there's pretty good transparency from that customer to the investor community. So we're very aligned with their growth projections.
Speaker 10
Got it. And then a final question for Larry. You spoke about gross margin improving through the year. Are you baking in any gross margin upside or cadence from some of your Japan, Korean ease outs turning to revenue? Or is it not part of the gross margin improvement forecast?
Speaker 3
It's it's a very little impact into our overall plan for 2021.
Speaker 2
Yeah. I think we just were talking, Chris, that some of that due to some of the limitations of travel and customer or visiting customers that some of that is pushed later into the year. So it it won't it won't be significant. It won't be detrimental, obviously. It'll be helpful, but it'll be a small small component.
Speaker 10
Got it. Thanks, Jeff. Thanks, guys.
Speaker 4
Yeah. Bet. Chris.
Speaker 0
Our next question is from David Dooley of Steelhead Securities. Please state your question.
Speaker 10
Thanks for taking my question. I have
Speaker 11
a couple. First, I think you mentioned that, you know, with next generation process tools, the gas delivery is increasing in intensity. Do you have an idea about, you know, how much more intense the gas delivery content is for you versus older generation tools?
Speaker 2
Yeah. We don't really, Dave, talk about ASPs and things. But if I was to go back five years, I'd say on average, for DRAM, for example, they were probably using 12 gas sticks or gases, and we're probably closer to 18 now. Now that doesn't mean that you get a 50% increase in your ASP. It's just certain components increase and certain components just get enlarged, so to speak.
So it's been beneficial over over that period of time. And large largely, you're seeing the higher level of gases in in DRAM and the logic side of the business.
Speaker 10
Okay. And then I think you also mentioned you have a next generation gas delivery
Speaker 11
product coming. Will that new product have higher gross margins, or do you expect it to allow you to carve out a bigger piece of business or increase market share with your customers? Could you just elaborate on also the timing of when that's going be available?
Speaker 2
Yeah. I think we talked about our first beta unit potentially in the next two to three months. I think we're still tracking to that. These are long qualifications. In general, these are very margin accretive to the business should we win these applications?
And you're going to have to win them kind of product by product, application by application. But yes, they can be highly accretive to the gross margin. The timing is probably more in the 2022 time frame. But as we kind of update you guys each quarter, we'll let you know how we're doing on betas. Because once you get a beta out, you're probably looking at nine months to twelve months for full qualification.
Having said that, we're progressing with that's a full solution, but there are steps along the way where we can get incremental content onto the gas boxes. And that may not move the top line, but that allows you to bring components that you formally purchased from a third party to something you manufacture, so we keep the gross margin stack on that. So that's accretive to the margin as well. And that's some of our gross margin improvement is tied to these types of of activity this year.
Speaker 11
Okay. Final question from me is you certainly have an assortment of of growth opportunities. When you look at your crystal ball into 2000 and or into the current calendar year, 2021, could you just perhaps rank what you think the top three growth opportunities for you will be?
Speaker 2
Talking about on the revenue side, I think they're we're targeted on the component side. I'd say we're thinking maybe that's going to be half ish. The other half is probably going to be geared around gas delivery. I mean, obviously as the percentage of that market grows, we continue to get a larger piece of it. There's some activities where we're doing, for example, we're doing some incremental support of some of the reefer business out there.
And that's all new business for us this year. That's a pretty good contributor for us this year. So there's a areas, number but it's probably the component side of the business and the gas delivery. Then following that is probably success in the second half in a limited way with some of the plastics liquid delivery solutions that we have.
Speaker 10
Thank you.
Speaker 5
You bet.
Speaker 0
Ladies and gentlemen, I see no further questions, and I would like to turn the call back to Jeff Andreessen for closing remarks.
Speaker 2
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 the operationally challenging but strong growth year in 2020. We look forward to updating you again on our next earnings call in early May. Operator, that concludes our call.