Ichor Holdings, Ltd. Stock

Good day, ladies and gentlemen, and welcome to Ichor's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded.

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

Thank you, operator. Good afternoon, and thank you for joining today's second quarter 2026 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-K for fiscal year 2025 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. 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 Phil Barros, our CEO; and Greg Swyt, our CFO. Phil will begin with an update on our business, and then Greg will provide additional details about our results and guidance. After the prepared remarks, we will open the line for questions.

I'll now turn over the call to Phil Barros. Phil?

Thank you, Claire, and welcome, everyone, to our Q2 earnings call. Three quarters ago, we laid out our strategy to strengthen Ichor's operating model, expand margins and position the company to outperform in the next semiconductor growth cycle. Our results today demonstrate that we are delivering against that plan. Revenue of $295 million increased 15% sequentially and with gross margins up 130 basis points, we more than doubled the EPS compared to Q1. The additional revenue growth we had guided for Q2 was instead recognized 1 week later due to isolated part shortages that we have since resolved. And we are now driving significantly more growth in the second half compared to our expectations a quarter ago.

Gross margin of 14.1% exceeded the high end of guidance with improved product mix as we continue to grow our component revenues in non-semi business as well as improved product margins as we execute our strategic footprint realignment during this historic ramp. The gross margin upside in the quarter translated to $0.34 in earnings at the upper end of our guidance range and our highest quarterly earnings in 3 years, demonstrating that the strategic actions that we are taking are translating into meaningful financial results. We also completed the entire ATM equity offering during the quarter, providing significant flexibility for us to make strategic investments that will enhance our results going forward, which brings me to the underlying demand environment, which continues to strengthen since our last earnings call.

Ichor's revenue growth in 2026 is now expected to be even stronger than we communicated just 3 months ago. We have now reported 15% sequential revenue growth in each of the first 2 quarters of the year. Looking ahead, the steepening ramp in customer demand provides us with strengthening visibility, indicating sequential revenue growth exceeding 10% in each of the next 2 quarters. Our current demand forecast, along with our assessment of supply chain readiness, altogether supports our expectations for second half revenue volumes of at least 25% higher than the first half. Our confidence in both the magnitude and the duration of this growth cycle is higher today than at any point during this year.

The technology transitions driving the demand remain unchanged. Investments in advanced etch and deposition applications supporting AI infrastructure, gate-all-around architectures, advanced memory and leading-edge process technologies continue to favor Ichor's portfolio of highly [indiscernible]. We believe Ichor is well positioned to capitalize on these technology transitions. For 2026, in particular, we expect revenue growth in alignment with the high end of WFE expectations, which would be an increase of at least 30% over full year 2025.

Turning now to our strategic initiatives. Last quarter, we discussed our global footprint realignment and the actions we are taking to structurally improve our business. Today, we are demonstrating that these actions are translating into measurable financial results. Over the past 2 quarters, we have expanded gross margin to over 14%, exceeding our 100 basis points per quarter target while driving earnings to a 3-year record. This is exactly the type of operating leverage our business model can deliver as we execute our strategy. Further, because our footprint realignment and operating model improvements are structural, we continue to drive another 100 basis points in further gross margin improvement in each of the remaining 2 quarters of the year, even after coming in above the high end of expectations for Q2.

We are making meaningful operational improvements within our machining and component businesses with product margin expanding significantly from the first quarter. These improvements are resulting from operational efficiencies and the success of our product transitions and not merely by the increased factory utilization at these higher revenue volumes. We also saw product mix shift to a more favorable profile with strength in our proprietary products, higher-value manufacturing service and commercial space businesses. These improvements demonstrate exactly what we expect our operating model will deliver, higher proprietary content, higher internal manufacturing, greater operational efficiency and stronger earnings leverage as revenue continues to grow.

Our manufacturing transitions remain on schedule, and we continue to increase the amount of proprietary Ichor content within the systems we build. We secured additional key qualifications during Q2, including for our high-volume manufacturing site in Malaysia. This represents another important milestone in our product strategy. Every successful qualification expands our ability to manufacture internally, strengthens our competitive advantage and improves our returns over the long term. We are on track to our plans to qualify additional key components in Malaysia that will provide additional flexibility for us to optimize the supply chain and further ramp internal supply. This strategy is aimed at enabling even stronger execution for our customers and is a key element of our gross margin expansion plan.

Importantly, we have now reached an inflection point. Demand is not our growth constraint. Manufacturing capacity is not our growth constraint. And with continued success in our high-volume manufacturing site, our ability to reduce Ichor's reliance on external supply will become a competitive advantage. Over the past year, we have invested aggressively in people, inventory, manufacturing capacity and our global footprint to prepare for this significant ramp in demand. Those investments are now paying dividends. We have the capacity today to support $500 million in quarterly revenue. With targeted investments, we believe we can expand capacity within our existing footprint upwards of $3 billion annually, more than double our current run rate.

Our incremental investment needs will be focused primarily on expanding production of our high-value proprietary components in order to eliminate pain points in our supply base. These same investments will enable us to achieve our targeted product mix and gross margin objectives. As we look ahead, our priorities remain clear. Execute for our customers, complete our manufacturing transition, continue ramping proprietary Ichor content, expand margins and convert this exceptional demand environment to sustained earnings growth. The investments we have made over the past several years are positioning Ichor differently than any point in our history.

We are becoming a structurally stronger company with more efficient manufacturing network, higher proprietary content, stronger earnings leverage and the operational capacity to support our customers through what is likely to be the strongest growth cycle our industry has ever experienced. I've never been more confident in our strategy, our execution or the opportunities that lie ahead.

With that, I will now turn the call over to Greg to review the financial results in more detail.

Thanks, Phil. Before I begin, I would like to emphasize that the P&L metrics discussed today are non-GAAP measures. These measures exclude the impact of share-based compensation, amortization of acquired intangible assets, nonrecurring charges and discrete tax items and adjustments. There is a useful financial supplement available on the Investors section of our website that summarizes our GAAP and non-GAAP financial results as well as a summary of the balance sheet and cash flow information for the last several quarters.

Second quarter revenues of $294.8 million increased 15% sequentially. Isolated supply chain constraints that surfaced late in the quarter kept us from recognizing our full revenue forecast in time for the June 26 quarter end. And instead, we surpassed $300 million in revenue for the 13 weeks ending July 3. We have worked through these part shortages as we drive for another significant growth quarter in Q3. Gross margin increased to 14.1%, up 130 basis points sequentially and 60 basis points above the midpoint of guidance, driven by continued progress executing our machining strategy and improved product mix.

Stronger gross margin drove the majority of upside in profitability with Q2 operating expenses coming in at $25.3 million, operating margin improved to over 5.5%, demonstrating significant operating leverage as volumes ramp. Interest and tax expenses were modestly favorable to our forecast and the resulting EPS for the quarter was $0.34 based on an average of 36.3 million diluted shares outstanding during the quarter. Positive cash flow generation from the P&L increased significantly in the quarter with EBITDA increasing more than 50% sequentially to over $21 million.

As we prepare for continued growth ahead, we are making incremental investments in inventory and cash from operations was, therefore, a use of $15.9 million. Capital expenditures totaled $7.8 million for the quarter. Given that the stronger outlook for 2026 is expected to continue into 2027, we are accelerating investments in our factory clean rooms and machining capacity. As a result, we expect our CapEx level to trend higher in the second half while remaining within our target range of approximately 3% of revenue, which brings us to the balance sheet.

Cash and equivalents totaled $256 million at the end of the quarter, an increase of $167 million from Q1. During Q2, we completed the entirety of our $200 million ATM equity offering, issuing a total of 2,480,000 shares at an average price of $80.70 per share and generating net proceeds of approximately $195 million. The transaction significantly increased our available liquidity, providing additional flexibility to support growth initiatives, working capital needs and strategic opportunities. Both DSOs and inventory turns remained similar to Q1 at 32 days and 3.7x, respectively. Total debt at quarter end was $120.6 million, and our net debt coverage ratio stands at 1.1.

Now turning to guidance. As Phil mentioned, we are now anticipating a steeper revenue ramp for Q3 and the second half of 2026 compared to our expectations a year ago. We anticipate Q3 revenues in the range of $315 million to $345 million, which at the midpoint represents sequential growth of 12% and year-over-year increase in revenue volumes of 38%. Our gross margin guidance for Q3 is a range of 14.5% to 15.5% as we continue to drive gross margin improvements of 100 basis points per quarter through the remainder of 2026. Our guidance for total operating expenses this year has remained relatively constant year-to-date, even with the steeper ramp in demand.

We continue to drive disciplined cost management across the organization in support of higher revenue volumes, and we currently expect total operating expenses in 2026 will be up about 6% from 2025, with nearly all of the increase in the R&D line. This expectation reflects a relatively consistent run rate of $25.5 million of OpEx for both Q3 and Q4. Finally, our EPS range of $0.40 to $0.50 for the third quarter reflects our expectation for total interest and other expenses of $1.5 million and assumed effective tax rate in the range of 20% to 25%, and 38.5 million diluted shares outstanding.

In summary, our second quarter results demonstrate clear progress against the financial priorities we laid out earlier in the year, stronger profitability, continued execution of our internal product strategy, disciplined cost management and improved operating leverage as volumes accelerate. With demand strengthening, margins expanding and our balance sheet providing greater flexibility, we are entering the second half with momentum and a stronger earnings outlook than we have delivered in any period since 2022. We believe the combination of accelerating demand, improving margins, disciplined investment and enhanced liquidity positions us to support our customers through the ramp while continuing to convert higher revenue into stronger performance.

Operator, we are now ready for questions. Please open the line.

[Operator Instructions] And our first question will come from Krish Sankar with TD Cowen.

This is Steven calling on behalf of Krish. I guess, Phil, first question for you on the commentary around full year growth. You mentioned 30% plus potential for this year versus last year. I guess when we kind of look at some of the WFE numbers that some of your customers have been talking about and also sort of the full year growth rates that one of your key customers is talking about, can you kind of help us bridge some of the gap between customer commentary versus what you're seeing today? And again, I totally get that the sentiment and demand signals are very strong. But just from a quantity standpoint, anything you can help in terms of bridging the numbers, whether it's supply or just ramping up time frame for your capacity, that would be helpful.

Yes. Great question. What I would say is what we're trending to today is kind of a mix of all of our customers. If you look at how -- every one of our customers are guiding, I would say that we're a good blend of what they're saying based on what our percentage of shipments are to each of those customers. So in general, I'd say we're trending towards the higher end of WFE. So when we said 30% plus, that's kind of what we mean by that. That's where we're seeing the WFE kind of coalesce at this point in the cycle. What I would say is that we will continue to monitor that, and I would say that we're continuing to grow with our customers and a good blend of what they're seeing.

Okay. Understood. And for my follow-up, I was wondering for your lithography customer. I think prior quarters, you kind of mentioned that inventory levels might be a factor in how much you can grow at that customer this year. Just kind of curious like how has the inventory situation changed, if at all, at the customer over the last quarter?

Yes, I'd say the inventory position has been very consistent. We believe we're burning through the inventory this quarter. So I would say we're through that as we exit this quarter and Q3. Q4, we start to see a return in Q1 in particular. So we have really good visibility with that customer. They give us a long-range forecast that gives us good visibility for what they need. I would say we see significant growth in 2027 with that customers.

And our next question will come from Edward Yang with Oppenheimer.

Could you provide a little bit more detail on that piece of the revenue in the second quarter that was pushed out from the part shortage? And was that related to flow controllers by any chance? And as a result of that, did you miss any delivery timetables with customers? Just curious around some color around that.

Yes. That's all good questions. First of all, your nose is very good because I would say that if I talk about the suppliers that keep me up at night, I would say flow control is definitely one of those. The way I would think about it in terms of how we're executing for our customers, I think we're executing very well for our customers. I think we're keeping very good pace with them. I think we are not a drag on their output. And so I would say we're pacing very well. So everything that we're outputting is going to the system and shipping.

What I would say is that particular supplier, what happened at the end of the quarter, I would say, is more of an isolated incident. In particular, we chase parts every quarter. This is not a surprise. This is not a kind of things that we don't do as a daily part of our business. And quite frankly, this typically happens kind of earlier in the quarter, if you will. Unfortunately, it happened at the very end of the quarter, which kind of crossed quarter boundaries. I would say, if you look at when that revenue shipped, it shipped literally days after the quarter, but just not in time for us to recognize revenue.

Got it. And for my follow-up, maybe a question for Greg. One of the impacts from the tremendous revenue growth you're seeing is you're building up inventory and your operating cash flow has turned negative and you're burning cash on the operating cash flow side. When do you think that will start to revert back to positive?

So near term, we're going to -- as we said, we still have some investments to make in our inventory to make sure that we're meeting the customer demand. We do expect to see that we'll start to see the benefit of the inventory turns start to improve into the first half of '27 as we work through this demand cycle.

And moving next to Christian Schwab with Craig-Hallum.

I just have a clarity about something I thought I heard in the prepared comments. I think you guys outlined last quarter that you had yearly manufacturing capacity of up to $2 billion of revenue, which is a little bit higher than what was reflected 2 or 3 quarters before that. Did I hear you correctly that you think you have the capability to produce up to $3 billion in annual revenue?

Christian, that's a great question. What I would say is we've gone through our long-range planning over the past quarter. And as you can imagine, in this type of ramp environment, you spent a lot of time planning and making sure you're ready for the coming demand.

As part of that exercise, we went through and said, okay, what would it take to get to $3 billion? What would it take to get to above and beyond that? What I would say is $2 billion in our current footprint, not a problem at all. To get to $3 billion, we have the brick-and-mortar, which is obviously the longest lead time item. I would say we would have to add a little bit of clean room space, not a whole lot, but a little bit of clean room space, which actually we're executing in the second half of this year, which will put us in a good position.

And then I would say above and beyond that, what we will do is invest in machining capacity because as we see the ramp continue, we're going to see a need for additional machining capacity to meet our internal component needs as revenues continue to grow. So for the most part, what I would say is within our 4 walls, we can do $3 billion in revenue. It just takes a little bit of investment for us to get between now and then.

And that investment, it sounds like you're doing it in the second half of this year. Typically, that may take 6, 9 months to get the clean room space up and going. So is it safe to say that at some point in calendar 2027, that's the direction we're marching to. Did I hear that correctly?

Yes, I'm not going to guide $3 billion right now. If we get closer to that, maybe I will. But what I'll say is we are gearing ourselves up for a significant 2027.

And our next question will come from Brian Chin with Stifel.

Maybe first, back on the supply. Maybe can you unpack a little bit more about how the -- how you're executing on that Malaysia manufacturing ramp? And also maybe related to this or maybe kind of it's beyond this, but are you getting mandates from some of your direct OEM customers at this stage to accelerate maybe in-sourcing and design of certain passive, maybe even active components based on any part shortages that are existing or maybe at risk of emerging across the supply chain?

Yes, Brian, I think those are great questions. What I would say is a couple of things. First and foremost, our Malaysia ramp is going exceptionally well. And what I would say for that is there's a couple of areas where I was concerned of the ramp-up of Malaysia. That would be in machining and our welding, both of which have been qualified by both of our major customers. So that's a big win in the quarter. So great progress there. What I would say is we talked about it before with Malaysia being a headwind until we fully absorb that factory. That's one of the major reasons we see the second half of the year. We continue to march to that 1 point per quarter gross margin increase. That's a portion of that is Malaysia ramp-up as well as internal supply.

In terms of our customers and what they're asking from us from an internal supply, I would say the answer is yes. Our customers really want us to bring on additional supply because that's going to give them the amount of flexibility they need. And that's exactly what our customers are asking us for. I would say that, in general, the qualifications with our customers in terms of products are going faster than normal, and that's an indication of there's risks in the supply chain that they need to derisk, and we're offering kind of relief valves for that with our internal supply.

Great. Appreciate that color. And maybe on the demand side, again, it sounds like you're targeting at least $350 million revenue in the fourth quarter and that 25% at least second half or first half growth. And given your commentary on visibility stretching out, how would you calibrate or describe growth momentum in first half next year relative to second half?

Yes. We've got a couple of things that are interesting in the first half of 2027 that are going to be additive that we did not see or we're not going to see in the second half of this year, in particular, litho, for example. We see that picking up significantly in the first half. I think it's a little early to call the first half of next year. I normally wouldn't want to guide out 6 months ahead of time. But what I can tell you is our customers are placing POs out 6 months ahead, which is abnormal for our customers, as you know. So I feel very good about the trajectory of 2027 at this point. And I think our customers are giving that same level of confidence. So I just continue to echo that as well.

And moving on to Linda Umwali with D.A. Davidson.

My first question was to double-click on demand capacity. I think you said that demand isn't constrained anymore in manufacturing as you get Malaysia up and running and bring more production in-house. I want to understand how much more room do you have to support customers if demand stays strong. I don't know if you mentioned it but I missed it -- color on that would be great.

Yes. I would just -- point of clarification. Our manufacturing capacity is not a constraint today. I want to be ultra clear when I say that, that our manufacturing capacity is at the point or above where our customers need it to be today. And I would say that, that is -- I feel comfortable with that.

Now with that said, what we talked about in the prepared remarks was that we are growing -- we have the capacity today to do $2 billion within our installed capacity. And as we enter into next year, we're looking at growing capacity up to about $3 billion. That increased capacity, once again, is preparing for growth and growth beyond what we need today. And what I would say is that, that $3 billion kind of run rate is more than what we have or more than double what we're going to need essentially this year. So we have the ability to more than double our size from this year.

Got it. And now I want to switch gears to the non-semi business. Could you talk about what's driving the non-semi business today? Is the growth still mostly commercial space and defense? And how should we think about that business in the second half and over the next year?

Yes. I would say actually, the commercial space business this quarter grew significantly and that it's continuing to grow into the second half of this year. We did receive an official qualification for a particular part family that's going to be growing in the second half of the year. So we feel really, really good about that trajectory.

We are also unfortunately seeing a little bit of growth in our defense business because of certain activities that are driving that. But with that said, I would say that we're seeing growth in both the commercial space business as well as the aerospace and defense. But I would say the commercial space business is pacing by far or is that growing -- or driving it by far.

And our next question will come from Denis Pyatchanin with Needham & Company.

So I think I have only one question here today. And maybe you could provide an update on the internal content road map. Maybe provide an update on where you are today and where you expect to be over the next 12 months? And if that's changed from kind of the last time we spoke, along with perhaps what kind of gross margin improvements we could see as a result?

Yes. That's a fantastic question again. What I would say there is -- we exited Q2 at around just below our 25% run rate that we exited last year with. So as we bring capacity down from Minnesota and into Mexico with our realignment, obviously, we purposely took down some capacity. And we brought that back up. That's now up and running. So we're about 25% as we exited the quarter. As we bring up Malaysia and additional capacity within Mexico, we expect to be at a run rate around 30% as we exit this quarter and around 35% as we exit next quarter. That's very well in line with what we expected.

I would tell you that, that's a large driver for our gross margin increases over the next couple of quarters. And the exciting part to me more than just the percentage of products that we're getting in there is the product margin we're seeing with those. As we've moved these parts, we're seeing significant increases in product margin. While that was expected, I'm really happy with what we're seeing in terms of kind of realizing those gains [indiscernible]

And we'll go next to Craig Ellis with B. Riley Securities.

I'll stick with the gross margin theme. Phil, at the beginning of the year, you laid out 4 factors that could lift gross margins to 15%, and we're essentially at that level, and you outlined 4 that could take the business to 20%. Can you just talk about your confidence in getting from 15% to 20% gross margins, the visibility you have and what specifically you're focused on, executing for this next 500 basis points in expansion?

Yes. I would say my confidence today is, I would say, higher than any given point. Obviously, when you're planning out these things, everything is a plan on paper, but to see it actually come out in execution is when you start to realize that it's going to happen. And so that's to me where I get comfort at this point because we're starting to see that in the actual results, right? As you saw from the last couple of quarters, we outperformed compared to where we thought we were going to be from 100 basis points per quarter execution. We outperformed that. So that, to me, is just a testament to everything that's going on and all the changes that we're making, and they're turning into meaningful results.

Now as you pointed out, we're at the 15%. Now what have you done for me lately, how you're going to get to 20%? So getting to 20%, it's going to be a lift. We talked a bit about 100 basis points over the next 2 quarters. A lot of that's going to come from parts that we already have qualified that we need to ramp up. A lot of that's going to come from Malaysia. And once again, that's going to come from the margin -- gross margin improvement that we have in those particular products.

Now one thing I do want to highlight that I maybe haven't said publicly before, but we have put out a road map that had flow control as a requirement to get to 20%. I would say that I can see a path today without that. There's more than one path to get us to the 20%. And I think that as revenue continues to grow and our execution of our product strategy continues to be -- to continue, I would say that, that's opening up additional paths for us to be successful.

That's really helpful. And then there hasn't been a lot of conversation this call about just the relative strength of different products and how you feel about fulfillment at a product level. So can you talk a little bit more about gas panels, chemical delivery, weldments, et cetera, and where you think the business is in terms of meeting customer demand and your ability to hit higher calls from customers as you go through this year and into next year?

Yes. I would say that we're performing, at least in my view, very well for our customers. Our customers, as you know, are demanding group. With that said, I would say that we are executing to what they need. And I think that's on all aspects, whether it be chem delivery, gas delivery or our weldment business. We are seeing significant growth in our weldment business, which is a part of our business that has been kind of brought down for a period of time. So we're starting to see that pick back up and recover. So that feels really good.

We have increased our capacity [indiscernible] weldment [indiscernible] the areas [indiscernible] first was in our weldment business. So that's one area where we're going to have additional capacity come online as we get into the second half, which I think with the product mix.

This now concludes our question-and-answer session. I would like to turn the floor back over to Phil Barros for closing comments.

Yes. Thank you, operator, and thank you, everyone, for joining our call today. I want to once again thank our employees who are taking on this ramp and strategic transformation all [indiscernible]. I have complete faith in the team's ability to [indiscernible] more proud to be [indiscernible]. We can build momentum and energy at the [ quarter ]. I look forward to our next update at our Q3 call in November. In the meantime, please reach out to Claire to arrange any follow-up requests for meetings. Operator, you can conclude the call.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

Good day, ladies and gentlemen, and welcome to Ichor's First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded.

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

Thank you, operator. Good afternoon, and thank you for joining today's first quarter 2026 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-K for fiscal year 2025, 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. 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 Phil Barros, our CEO; and Greg Swyt, our CFO. Phill will begin with an update on our business, and then Greg will provide additional details about our results and guidance. After their prepared remarks, we will open the line for questions. I'll now turn over the call to Phil Barrows. Phil?

Thank you, Claire, and welcome, everyone, to our Q1 earnings call. Just a few months into a multiyear growth cycle, and we are already delivering upside to our outlook and demonstrating strong earnings leverage. Q1 revenues of $256 million came in at the upper end of our expectations, up 15% from Q4. Gross margins of 12.8% also approached the high end of our guidance, enabling us to more than triple our operating income versus Q4 and deliver our highest earnings per share in 3 years.

The early investments we made in ramping labor headcount and prepositioning inventory are paying off. These are enabling Ichor to deliver strong execution for our customers and achieve growth towards the high end of our demand forecast. Demand across our core markets has further strengthened since our last earnings call. Our visibility now extends deeper into 2026. Within this very robust demand environment, we expect Ichor to be a top performer, both in terms of growth and earnings leverage. Our Q2 forecast now reflects unconstrained demand exceeding $300 million. This is one of the steepest ramps witnessed in Ichor's history, representing growth well over 30% in just 2 quarters. Not only that, but with stronger visibility since our last earnings call, we continue to expect every quarter in 2026 will be a growth quarter for Ichor.

We entered the year with increased momentum and a clear strategy. Our higher confidence today reflects Ichor's critical role within the WFE industry and strong progress towards our strategic objectives. The technology transitions and strategic capacity expansions underway largely in support of AI hyperscaling favor etch and deposition applications, which favors Ichor. A great example of this is the 30% increase in the number of process steps required to produce leading-edge logic with gate-all-around architectures. Increased investments in gate-all-around technology are significant tailwinds for Ichor's growth.

Our objective is to gain share through this cycle and the steps we have taken to preposition inventory and ramp labor headcount will allow us to continue to perform for our customers, and this is how we will win.

Turning to an update on our strategic initiatives we introduced last quarter. Q2 is shaping up to be a major step forward in our global footprint realignment. As a reminder, this initiative is aimed at driving 3 primary benefits: First, we are structurally eliminating the margin challenges we faced previously in order to drive stronger cross-cycle performance and greater predictability in our business.

Second, we are enabling more efficient, scalable, high-volume manufacturing of our Ichor-branded products, which will get us to our cost targets for these components.

Third, by driving higher level of Ichor content within the systems we build, we will deliver significant improvements in gross margin flow-through and earnings leverage as revenues ramp. We have made strong progress, and I'm proud of the team, especially given the scale of the ramp we are operating in.

Just a few months into the year, and we have already installed and qualified half of the plant equipment moves, which is ahead of schedule. We are now performing all manufacturing steps for our substrate product line within the same 4 walls within Mexico. These are the types of efficiency gains that will structurally improve our product margins and drive higher gross margin flow through within the gas panel manufacturing business.

In our valve product line, in Q1, we achieved full customer qualification to manufacture in Mexico. This significantly expands our capacity for this product line, enabling us to source internally and cut our dependence on outside suppliers. We will continue to ramp up capacity through Q2 and expect to be at full production as we exit the quarter. The success and speed of both the moves and qualifications gives us the confidence to reinitiate valve qualifications on one of our major customers, which we had placed on hold due to capacity constraints. As we exit Q2, we will begin to see the gross margin impacts of our footprint realignment into Mexico, with these moves enabling increased levels of proprietary Ichor content in the gas panels we make.

As we move through the remainder of the year, we will be ramping Malaysia, which will drive a richer mix of machining revenues. Driving higher volumes of machining revenues and completing cost reduction initiatives in our footprint realignment are the final two steps in achieving our near-term gross margin targets of at least 15%.

As a reminder, while we complete the ramp-up of Mexico, we are temporarily increasing external supply to ensure strong, consistent delivery in our integration business. Taking all of this into account, today, we are guiding Q2 revenues of approximately $300 million, plus or minus $10 million, a sequential improvement in gross margin from Q1 to expected range of 13% to 14%.

Beyond Q2, we continue to expect approximately 100 basis points per quarter in gross margin expansion as we complete our transitions into the second half. This level of gross margin expansion continues to support our expectation that gross profit dollars will grow around twice the rate of revenues as we move through the second half. On today's call, I will reaffirm our stated target to exit 2026, delivering 35% Ichor branded content within the systems we build.

As a reminder, we exited 2025, delivering systems with 25% Ichor branded content, up from 15% in 2024. Our next step function increase Ichor branded content is in flow control, which is progressing to plan. We see 2026 as a qualification year with first meaningful flow control revenues in 2027. We expect that bringing the capacity online in both Mexico and Malaysia, along with flow control qualifications will enable us to reach our goal to be capable of providing up to 75% of Ichor-branded content within the systems we build by year-end.

Finally, I will take the opportunity to reiterate our strategic priority to leverage our machining capabilities into high-growth markets outside of semiconductor. This business represents less than 10% of our revenues today, but we anticipate this will grow at a rate faster than our WFE this year, driven by a number of key positions in commercial space and defense markets.

To close, we have made significant progress on our strategic initiatives and all within a backdrop of rapidly growing demand. We remain confident that Ichor is well positioned to capitalize on the ramp and deliver strong earnings leverage through this cycle. With that, I will now hand it off to Greg.

Thanks, Phil. Before I begin, I would like to emphasize that the P&L metrics discussed today are non-GAAP measures. These measures exclude the impact of share-based compensation, amortization of acquired intangible assets, nonrecurring charges and discrete tax items and adjustments. There is a useful financial supplement available on the Investors section of our website that summarizes our GAAP and non-GAAP financial results as well as a summary of the balance sheet and cash flow information for the last several quarters.

First quarter revenues of $256.1 million came in at the upper end of our guidance range, up 15% sequentially, reflecting continued demand momentum and strong execution as volumes ramped through the quarter. Gross margin increased to 12.8%, up 110 basis points sequentially and 30 basis points above the midpoint of guidance, driven primarily by incremental factory leverage on the higher revenue levels in our integration business.

Operating expenses in the quarter were aligned with our forecast at $24.1 million. As a result, operating income for Q1 more than tripled compared to Q4 to $8.7 million or 3.4% of revenue, demonstrating meaningful operating leverage as volumes ramped. With both interest and tax aligned with expectations, earnings for the quarter were near the high end of guidance at $0.15 per diluted share based on 35.3 million diluted shares outstanding. Positive cash flow generation from the P&L increased significantly in the quarter with EBITDA of nearly $14 million. In the early stages of what we expect will be a sustained multiyear ramp, we are making incremental investments in inventory in support of our customers.

As a result, cash from operations was a use of $2.9 million. Capital expenditures for the quarter were $7.1 million. We are managing our CapEx investments towards approximately 3% of revenue, so we expect this CapEx level to trend up modestly as we move into the second half of the year, which brings us to the balance sheet. Given our current levels of investments in inventory and CapEx, cash and equivalents totaled $89.1 million at the end of the quarter, a decrease of $9.2 million from Q4. DSOs increased modestly to 33 days and inventory turns improved to 3.7, reflecting improved throughput as volumes increased. Total debt at quarter end was $122 million, and our net debt coverage ratio stands at 1.6.

Now turning to our guidance for the second quarter of 2026. As Phil mentioned, we are anticipating a steeper revenue ramp for Q2, compared to our expectations a quarter ago. We anticipate revenues in the range of $290 million to $310 million, which at the midpoint represents sequential growth of 17% and a year-over-year increase in revenue volumes of 25%.

Our gross margin guidance for Q2 is a range of 13% to 14%. And as Phil noted earlier, we continue to expect gross margin improvement of 100 basis points per quarter through the second half of 2026. Our guidance for operating expenses this year is largely unchanged from last quarter. We continue to drive disciplined cost management across the organization in support of higher revenue volumes, and we are managing to a target of only 5% to 6% OpEx growth for the full year. This reflects a relatively consistent run rate of approximately $25 million beginning in Q2, slightly up from Q1's level as a result of higher variable compensation forecasts on the improved outlook for the year. The midpoint of our guidance for revenues, gross margin, and operating expenses in the current quarter indicate the highest level of operating income reported since fiscal 2022, and an increase of nearly 80% from Q1, reinforcing the strong earnings leverage expected as we continue to ramp revenues, as expectations for interest and tax this year are unchanged since last quarter.

We anticipate approximately $2 million per quarter in total interest and other income and expense, and our assumed effective tax rate continues to be in the range of 20% to 25%.

Finally, our EPS range for Q2 of $0.25 to $0.35 reflects our expectation for a diluted share count of 35.5 million shares.

In summary, Q1 reflects improving profitability, strong operating leverage and disciplined cost control as volumes accelerate, and we believe we are well positioned for continued progress through the remainder of 2026. Operator, we are now ready for questions. Please open the line.

[Operator Instructions] The first question is from Brian Chin from Stifel.

A couple of questions. First question, impressive job in terms of the sequential growth Q1, and then the outlook, maintaining sort of a mid- to high-teens sequential ramp at this point. Phil, maybe can you walk us through sort of some of the puts and takes in the second half of the year in terms of ramping Malaysia in terms of product mix and kind of how that distills down to what level you can sort of sustain sequential growth into the back half of the year?

Yes. If you follow our customers, they're forecasting, say a 25% growth year-on-year. We're going to project that at this point in terms of how much we think we're going to grow for 2026 over 2025. What I would say is, at this point last quarter, I would have guided $26 million to $27 million -- or $265 million to $270 million for Q2. So -- and now we're guiding $290 million to $310 million. So as you can imagine, we're seeing a lot of growth, a lot of movement and a lot of puts and takes, if you will. So we are seeing a lot of movement in our forecast. And I would say my visibility today is stronger today than it was a quarter ago, and it will be stronger, I believe, a quarter from now than it is today.

Great. That's helpful. Then thinking about the margin -- gross margin progression in the back half of the year. When you think about the 100 basis points, Q3, 100 basis points in Q4. Can you, I guess, sort of walk through how much of that is volume related, how much is mix inclusive of increased vertical content?

Yes. In terms of percentages, what I would say is, in general, think of our gross margin growth is coming from it's as much event-driven as it is volume-driven. And I talked about the global footprint realignment. That's a big driver of our cost savings as well as our margin accretion as we move through the year. So I would say they're pretty closely equally weighted in terms of gross margin impact. So I would say that volume leverage is about 50% of it, and our cost reductions are about 50% of it.

The next question is from Craig Ellis from B. Riley Securities.

Yes. Congratulations on the good result and guidance. Phill, I wanted to start with more of a qualitative question on where Brian left off. So it was the beginning of the year when you outlined a 4-point plan to really drive much better gross margins to 15%. And it sure seems like the business is solidly on track for that. But can you talk about how happy you are with where you see the business executing in the different company controllable areas that you're focused on, where are you happier? Where do you need to get better performance to be real confident in that 100% per quarter in the back half of the year?

Yes. What I would -- well, 100% would be great. I think you said 100 basis what you meant. But yes, I would say that in general, I am very happy with the progress the team is making. I would say we're on track, if not ahead of schedule in most of the initiatives. And that's tough to do in this type of environment, obviously, as we're ramping up revenues at the same time as doing a strategic transformation. It's very impressive for me to see the team really execute at this level. So I would say, in general, I'm very confident and very happy with where the team is at.

If you looked at where I had risk in terms of the transformation in the Q1 time frame, it was getting customer qualifications in Mexico, and it was getting e-beam welding up and running in Mexico. Both of those are behind us. So I'm at a much stronger, much more confident position than I would have said about a quarter ago.

That's really helpful. And then just looking ahead to what sounds like a really strong view for the second half of the year. And I think most everybody is really constructive for robust calendar '27 year-on-year growth. Can you just talk about your comfort with capacity upside beyond the level that you're guiding to in the second quarter, so we can get comfortable that as demand continues to improve, Ichor is going to be able to meet that demand?

Yes. I would say that the 2 major drivers or paces for our output right now would be supply chain, number one, and labor headcount number two, I would say we are well-positioned brick-and-motor-wise and clean room-wise and infrastructure-wise, which to me are the kind of the long lead items, if you will.

I would say, from a supply chain standpoint, we have boots on the ground that are -- there's always multiple suppliers that pop up in these types of ramp periods. We have boots on the ground as well as increased inventory levels in certain areas where we saw risk. So I feel pretty good about that. In terms of ramping up headcount, I would say we are well along the path there.

I feel very good about where we are in terms of headcount as well. So I would say, in general, we're -- we have the ability to ramp. What I would say is in terms of brick-and-mortar, in terms of headroom and room for us to grow, we could more than double what we did last year, in terms of brick-and-mortar. So I'm not worried there. Like once again, it's going to be headcount and supply chain that's going to pace us going forward.

The next question is from Christian Schwab from Craig-Hallum Capital Group.

Just a follow-up on that last statement, more than double revenue as far as given your global realignment in manufacturing. So in aggregate, do you believe that you have the potential if the end market demand remains robust as expected on a multiyear basis that you would have $1.8 billion to roughly $2 billion in revenue capacity on a yearly basis? Did I hear that kind of correctly?

Yes. I would say from a brick-and-mortar and kind of fixtures and equipment standpoint, I would say we have some areas where we need to make investment. There is some equipment in the second half of the year that we're going to be positioning to grow to those types of levels. But what I would say is the long lead items like clean room, overhead, building space, brick-and-mortar, we're in a very good position there, especially with our new facility put in place in Malaysia that we turned on last quarter.

Great. And then congrats on the gross margin progression expected throughout the course of the year, as you increase your branded products or your vertically integrated products, however you want to refer to them into your end boxes. Do you have yet an aspirational goal of where you'd like to end gross margins at the end of 2027?

We haven't drawn out the model at the end of 2027 at this point. I would -- it's a little bit early to do that, as you would know, as we enter -- we're 1 quarter into 2026, it's a little early to guide 2027 because a lot of that's going to be volume driven as well, as you know. I do expect '27 to be a growth year, but even with that, I'm going to be a little bit shy on guiding 2027 at this point.

And then my last question, just on the sequential progression, I know the mix of business of you and your largest public competitor are different. But do you anticipate after such a very strong start in the first half of the year, and 17% sequential guidance at the midpoint from March to June, would you expect double-digit sequential growth as we go forward? Or would you assume that, that would potentially be more high single digit?

I would say we could see double-digit growth in the second half in total. I would say at this point, it's going to be our supply chain that's really going to get us in terms of revenue growth. I'm a little bit cautious on the second half at this point until we have good visibility there. But what I would say is, we're executing really well. And the reason I want to say that is I think that's why we're seeing a very big pickup in Q2. we're not leaving a lot of revenue behind, if you know what I mean. We're not rolling a lot of revenue from quarter over to quarter. And that's going to show a growth profile that kind of leads our customers and goes ahead of our customers because we deliver before ours receive.

The next question is from Charles Shi from Needham & Company.

First, I want to, first, congrats on the very strong Q2 guide, but obviously, a lot of people in my seats are going to ask you what's your capacity, max capacity right now. And I think you previously mentioned about potentially getting to that 20% gross margin at $400 million per quarter. To me, that's a read of your implying, maybe $1.6 billion capacity? I don't know if you need incremental CapEx to get to that. But what's the thought on getting beyond $1.6 billion capacity. What would be the next milestone? And how much CapEx do you think you're going to need? That's my first question.

Yes. Let me let me just be clear that we believe we have enough brick-and-mortar capacity today to go well above $2 billion. So just to be clear, it's not just the $1.6 billion. After that, it becomes very driven by kind of equipment. So if you look at the Ichor branded products, obviously, there's a lot of equipment that's required to build those. That would be the one area where we need to invest CapEx. That's what we've kind of alluded to when we said it's going to be second half CapEx-heavy. That's coming in as we fill out the machining capability within Malaysia. So that's really what's driving that. But once we -- like Greg talked about during his prepared remarks, we're really driving towards that kind of 3% of revenue CapEx line.

For this year.

For this year.

Got it. Is it fair to say that to get to like maybe $1.6 billion, there is not -- the capacity is already in place, like it's more about above $2 billion that we're -- you're going to need more equipment, et cetera? Or maybe I misunderstood some of the commentary.

What I would say is, in order to get -- to keep the 35% to 75% Ichor-branded content within a $1.6 billion, we need a little more equipment, from a brick-and-mortar from an overhead, from a clean room perspective, I would say we're well positioned for that to be around $2 billion.

Got it. Got it. May I ask you about the demand signal because one thing I noticed when you talk about Q2, you're talking about demand, unconstrained demand is already above $300 million. What kind of visibility you have right now? How much are the like PO back, let's say, hard commits already from your customers? Like how many quarters you can see that and stop the forecast, where do you see the end of your visibility as we speak right now?

Yes. I always say that we have good visibility for about 6 months. I'd say we have hard PO coverage for about a full quarter and about 6 months of great visibility. What I can tell you is that our customers do give us kind of soft guidance or kind of soft visibility and past that. I would say that right now, as they signal to you, they're signaling growth in 2027. So we're preparing ourselves to capitalize on that growth into 2027.

Got it. Maybe last question from me. I noticed from the financial supplement, the revenue from Europe was a little bit light in the quarter. I wonder with that data point, I would like to ask you, what's the latest you see on the lithography side of the business? And what's the expectation this year in terms of growth? Understandably, you talked a lot more about depth and edge, but I want to get thoughts on the litho side of the business.

Yes, I would definitely say Ed that we're growing faster. They're kind of leading the league right now. So I'd say that they're ahead of the litho business. We talked about last quarter how our customer has some level of inventory they need to burn through. We do see them burning through that inventory in Q3, and we start to see a pickup in the fourth quarter. So I would say it's a little bit of a headwind in Q3 kind of a tailwind in Q4 is the way I would think about it. But once again, that's more on the level of inventory that they're holding versus anything to do with their business, in particular.

The next question is from Krish Sankar from TD Cowen.

This is Rob Mertens online for Krish. Congrats on the strong quarter and guidance. Maybe first off, I'll just piggyback on Charles' question and ask if there's any changes in your view in terms of silicon carbide demand or from aerospace and defense customers compared to a quarter ago?

Yes. I would say aerospace and defense are growing very well. If you can imagine conflict in things of that sort of unfortunately do drive increase in need for defense spending. So we're seeing some impacts of that. And obviously, our other commercial space business is also growing. What I would say is a lot of the R&D work that we were doing for that commercial space business is now converting into RPOs. So we're seeing some strong growth through this quarter. So looking pretty good there. I would say silicon carbide is pretty light. I would say we're not seeing a major return in that as we speak today. I would say that, that's been pretty steadily down since it was last year.

Okay. That's helpful. And then I know some of this had been asked before, but I just wanted to dig into the strength you're seeing from your largest customers. I mean you mentioned visibility has improved and net sales should grow sequentially through the back half of the year. Would you expect the mix shift to shift towards more of your high-margin components and in-sourced products through the back half? Or could there be some near-term impact due to the high growth of the gas panels this year?

Yes, I would say that the reason that we will see growth in gross margin sequentially from quarter-to-quarter is we're going to be able to ramp up and fulfill some of our own internal source parts and a higher percentage of those. Right, So as we move into the second half of the year, I expect us to fulfill more of our Ichor-branded products within our gas boxes that we build. So that will be a good tailwind as we get into the second half of the year. That's all predicated on ramping up our global footprint realignment and what we're doing in Mexico and Malaysia. So we do expect that to come online in the second half and be fully running in the second half of the year.

The next question is from Edward Yang from Oppenheimer.

The first question is more of a clarification question. Did you say that you expect 2026 year-over-year revenue growth of 25%? And if that's the case, that would imply a bit less than double-digit sequential growth in the second half, but just wanted to clarify that.

We're definitely looking at double-digit sequential growth in the second half of the year, for sure.

Okay. That's helpful. And given that the industry is supply constrained, are you pretty much set in terms of your 2026 growth outlook? Or are there still bottlenecking opportunities that could provide you revenue upside?

What I would say is that, there is definitely bottlenecking opportunities that can give us revenue upside. We are seeing some constraints, some noise in the supply chain as we move through from Q1 into Q2. But with that said, I would say that we've got a good handle on it. I think we're well positioned in terms of inventory in order for us to execute, and I think we've been executing at a high level for our customers.

Okay. And just final one on your innovation pipeline. Could you speak to any new product or module wins beyond up-cycle opportunities?

Yes. What I would say is that we're making great progress in the flow control. And one of the things I want to just highlight here is I think there could be questions of whether or not we can get flow control qualified during the ramp like this. And what I do want to say is a ramp like this is the perfect opportunity to get qualified. Because if you look at some of the constraints we're running into, it happens to be in the flow control space. So I think this is -- there is an open window for us to capture share. And I think that's -- we need to be ready, and we need to be available for that window of opportunity that I'm talking about.

There are no further questions at this time. I would like to turn the floor back over to Phil Barros for closing comments.

Yes. Thank you, operator, and thank you, everyone, for joining our call today. I want to once again thank our employees who are taking on this ramp, and our strategic transformation, all at the same time and executing at a very high level. I have complete faith in the team's ability to execute and could not be more proud to be leading this team along this journey. You can feel the momentum and the energy within our quarter. I look forward to our next update on our Q2 call in August. In the meantime, please reach out Claire to arrange any follow-up requests for me. Operator, you may conclude the call.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Good day, ladies and gentlemen, and welcome to Ichor's Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Claire McAdams, Investor Relations for Ichor. Please go ahead.

Thank you, operator. Good afternoon, and thank you for joining today's fourth quarter and fiscal 2025 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-K for fiscal year 2024 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. 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 Phil Barros, our CEO; and Greg Swyt, our CFO. Phil will begin with an update on our business, and then Greg will provide additional details about our results and guidance. After the prepared remarks, we will open the line for questions. I'll now turn over the call to Phil Barros. Phil?

Thank you, Claire, and welcome, everyone, to our Q4 earnings call. As we enter 2026, there's a lot to be excited about. Ichor is entering its next phase of growth with increased momentum and a clear strategy. Since we last spoke in November, and again during our January webcast, customer demand in our primary served markets has continued to strengthen.

Our current visibility is that we are now operating in a sustained demand ramp, a ramp being driven by fundamental technology transitions and strategic capacity additions across our core markets. We are seeing increased adoption of gate-all-around architectures, accelerating growth in high-bandwidth memory and rising capital intensity in advanced logic and advanced packaging. These transitions increase etch and deposition intensity, and this is the segment of the market where Ichor is most highly levered. Our objective is to win share through this cycle and being highly responsive to our customer demand is a core aspect of meeting that objective, ensuring adequate supply and supporting our customers' strong ramp has been my #1 focus since taking over as CEO.

As a result, we are ramping labor headcount in our integration business and prepositioning inventory to enable us to address our customers' accelerating demand with strong predictable execution. In addition, our recent design wins in commercial space are beginning to translate into meaningful revenue. We expect these design wins to convert into revenue growth that could outpace our semiconductor growth this year. Based on current visibility, we see every quarter in 2026 as a growth quarter for Ichor.

Turning to our results. As provided in our January release, Q4 came in largely as expected. Revenue was $224 million, above the midpoint of outlook. We finished fiscal 2025 with $948 million in revenue, up 12% year-over-year. This solid year-over-year growth was driven primarily by strength in etch and deposition and was partially offset by the softening build rates of EUV as well as decreased demand in certain trailing edge markets.

Our commercial space business grew significantly in 2025. While still a small portion of our overall revenues, it has grown to the point where our fifth largest customer is now outside the semiconductor industry. Looking forward, we expect growth in nearly every application with nearly every customer as we progress through 2026.

Our outlook has further strengthened since entering the year, and our guidance today is for first quarter revenues in the range of $240 million to $260 million. At the midpoint, this equates to double-digit growth from our Q4 trough. Based on current visibility, we expect sequential growth every quarter this year, leading to what we expect to be a strong growth year for Ichor.

During our January webcast, I introduced our key strategic initiatives for 2026, and I will now review the progress being made. First is our global footprint realignment. Over the past few quarters, our investments have been focused on expanding our Mexico machining capacity and building out our new manufacturing center in Malaysia, which is our largest facility in Ichor's history. The Mexico expansion will be complete later this year, and Malaysia just began operation last month.

These locations will be our high-volume manufacturing centers for Ichor branded products. and will give us the capacity needed to meet the demand ramp we are now seeing. To enable this transition, we are in the process of relocating a portion of our receiving assets to these critical sites, which will temporarily reduce our capacity for these components. While these transitions are important, they will not gate our ability to support our customer demand. The realignment of our global footprint touches all 3 of our strategic focus areas for 2026 and is aimed at strengthening our supply resiliency, ensuring business continuity and bringing us closer to our customers. This realignment is also a key driver for us achieving our cost targets for Ichor branded products.

It will also structurally eliminate the primary sources of margin and ramp challenges we faced in 2025. Beginning Q2, we expect gross profit dollars will grow around twice the rate of revenues as we move through the year. We expect our global footprint realignment to begin driving meaningful margin improvement by midyear. This translates into significant earnings leverage expected in the quarters ahead.

Before closing, I want to touch on our product strategy and creating a differentiated Ichor. 2026 is a milestone year for Ichor. By year-end, we expect to have products in place to enable us to reach our long-stated objective of having Ichor branded products capable of supporting up to 75% of the content within the systems we make. Reaching this capability reflects our continued transition from an integration company to a product company and ultimately, a key technology enabler for our industry. This level of vertical integration gives us the tools and technologies required to support our customers as they move into the Angstrom era, where they are adding and removing material one molecule at a time. As our customers enter this era, our goal is for Ichor to outperform by delivering technology, products and execution required at this level of precision.

With that, I will now hand over to Greg.

Thanks, Phil. To begin, I would like to emphasize that the P&L metrics discussed today are non-GAAP measures. These measures exclude the impact of share-based compensation, amortization of acquired intangible assets, nonrecurring charges and discrete tax items and adjustments. There is a useful financial supplement available on the Investors section of our website that summarizes our GAAP and non-GAAP financial results as well as a summary of the balance sheet and cash flow information for the last several quarters. Fourth quarter revenues were $223.6 million, above the midpoint of guidance, but modestly down from Q3.

We believe Q4 represents the trough period during this cycle. With the recent softening in certain end markets and applications already showing signs of recovery. Gross margin for the quarter of 11.7% was 70 basis points above the midpoint of guidance reflecting modestly better execution against the lower revenue volumes and unfavorable product mix during the quarter.

Operating expenses for Q4 were slightly lower than forecast, at $23.4 million, and operating income was $2.7 million. As expected, our net interest expense for the quarter was $1.7 million while our non-GAAP net income tax expense was slightly lower than forecast at $400,000. Our resulting earnings for the quarter were at the upper end of our expectations at $0.01 per share.

Turning to the balance sheet. Our cash and equivalents totaled $98.3 million at the end of the quarter, a $6 million increase from Q3. Working capital improvements generated $9 million of positive cash flow and after $3 million of capital expenditures, free cash flow for the quarter was $6 million.

DSOs for the quarter were slightly better than Q3 at 29 days and inventory turns remained constant at 3.3. Our year-end balance of total debt outstanding was $123 million, down from $129 million a year ago. Our net debt coverage ratio currently stands at 1.7.

Now I will discuss our guidance for the first quarter of 2026. As Phil mentioned, our revenue outlook has strengthened year-to-date with anticipated revenues in the range of $240 million to $260 million, we expect gross margins to be in the range of 12% to 13%. And Q1 operating expenses are projected to be approximately $24 million, reflecting the seasonal impact of payroll adjustments, audit fees and other variable compensation costs. We expect the strong revenue ramp ahead for 2026 will be supported by a relatively consistent OpEx run rate of $24 million, which for the full year equates to an increase of about 5% compared to fiscal 2025.

Net interest expense for Q1 is expected to be approximately $1.7 million, and we expect this level to be relatively consistent throughout 2026. For modeling purposes, net interest expense for 2026 should be approximately $7 million. We expect to record a Q1 tax expense of approximately $1.1 million. As you update your models for 2026, our assumed effective tax rate is currently expected to be in the range of 20% to 25%. The increase in our anticipated non-GAAP effective tax rate is attributed to the geographic distribution of our profits this year and the sunsetting of our Singapore pioneer status in early 2026.

Finally, our EPS range for Q1 of $0.08 to $0.16 reflects our expectation for [ 35.1 million ] in diluted shares outstanding. Operator, we are now ready for questions. Please open the line.

[Operator Instructions] Our first question is from Brian Chin with Stifel.

Great. A couple of questions. Maybe, Phil, the first question relative to the update you gave last month on Q1 revenue your new midpoint is about $10 million higher. Can you firstly discuss sort of what has improved, I guess, since then? And also, when you think about the full year, if WFE forecast for the industry are coalescing around 15% to 20% growth, let's say. How do you expect to grow relative to that benchmark?

Okay. Let me answer your first question first. In terms of what we're seeing in the first quarter, versus what we saw first week. Let me just put it this way. Every week, we get an updated forecast. And every week, we're seeing strengthening demand. So we're becoming more and more bullish on the market as we move through the year. And I would say that we're seeing a lot of movement. So that's why we're not going to guide for the whole entire year, but I would say that your range of around 15% to 20% is kind of where we're coalescing as well. We think we are well set up to be in that range, if not outperforming.

Okay. That's really helpful. And then in terms of gross margins, you also published some slides last month that were very helpful and sort of crosswalk to a potential 15% gross margin sometime second half at a $250 million plus revenue level, you're kind of there sooner, right, to your point about the cycle strengthening. In terms of capitalizing on some of those attributes that get you from 11% gross margins to 15%. What's sort of embedded in that initial Q1 guidance? And how quickly do you take down some of those other parts of it, including, I think it was like 160 basis points from production levels, you're kind of there already. And then you have some others from the in-sourcing and other items.

Yes. As I kind of talked about during the prepared remarks, there's a couple of things that we're doing that I would call our short-term or transient at this point. First things first is we're moving some of our capacity from one site to another, in particular, we're moving stuff from one of our machining facilities to another machining facility to really set us up for long-term success. I would say that, that's going to be in place before we exit the first half of the year. So that's going to be a major benefit as we exit that. As you can imagine, that also brings down some of our capacity for our internal supply. So that's a short-term once again hit that we would -- or a headwind that we would see in the first half of the year. Once again, we expect that to be flushed through the system as we exit the first half of the year. I hope that answers your question.

Got it. So you still think that 15% second half is sort of a good target and sort of a linear progression or maybe kind of incremental in 2Q and then sort of a pickup in second half?

Yes, that's how I would model it.

Our next question is from Craig Ellis with B. Riley Securities.

Congratulations on the nice print and the solid team. Phil, I wanted to start just by going back to your comments on sequential growth through the year. We've heard some companies express that the year will still be significantly back half weighted. As you look at sequential growth, can you talk about what your half-on-half expectations are? And then inside of the growth view that you have, we wanted to see a much higher mix of components and other higher-margin products. do you see an opportunity for that to start to kick in at some point during the year? Or will things be much more gas panel oriented this year?

Yes, I would say that the first half is going to be heavy gas panel related. And as we move into the second half of the year, a lot of our growth in our gross margin is going to come from increased component supply. So that's actually one of the major drivers of that first half versus second half margin profile. In terms of revenue, I would still say it's second half weighted. But we are seeing a lot of movement into the first half and a lot of momentum into the first half. I wouldn't call that pull ahead. What I would call that is just additional demand pulling forward.

That's helpful. And then can you just go further on the Malaysia business relocation, given the strength of demand that you're seeing. Can you just provide some points that investors can look to that would give comfort that, that wouldn't have any adverse impact on either revenue execution or COGS and expense execution?

Yes. I'd actually say that part of our headwind in the first half is because we did turn on that facility. So you can think of that as a headwind in the first half. So that's baked into our Q1 guide. What I would say is that's a facility that's 2 miles away from our current facility, which is, I would say, our second largest facility today. So it's not too far away from our current facility that builds essentially every weldment for every factory that we have. So it's a strong factory for our business. What I would say is what we're moving to Malaysia is additional capacity, right? As we move through '26 and into '27, we believe that we're going to see a continued ramp. And we're going to need additional machining capacity, in particular, and capacity within our components business. And that's a lot of what we're putting into that facility. That's where -- last year, we spent a lot of our CapEx was in standing up that particular facility. I would say that the headwinds are baked into Q1. And we really see the tailwind of that 2027.

Our next question is from Krish Sankar with TD Cowen.

Congrats on the really strong results. Phil, the first question I had for you on the March guidance, really impressive growth, almost 12% sequentially. Is there a way to dissect it both by technology? Is it coming from dep or etch or litho and also by end markets like NAND or DRAM or foundry? Any color on March quarter would be helpful. And then I have a follow-up.

Yes. I would say that a majority of it is coming from dep and etch. So that's the vast majority of the growth we're seeing this quarter. We are seeing a slight increase in our non-semi business, I would say that EUV is pretty well flat quarter-over-quarter. But we do expect that to start picking up later this year, kind of late in the year. In terms of mix of technologies, I would say it's pretty -- it's I think the short answer to that is yes because everything is growing at this point. And that's -- one of the reasons a lot of people are calling this a super cycle is we're seeing every segment of our market grow and grow significantly, and that's really what's driving the positive trajectory as we go into '26.

Got it. Got it. And then on the gross margin comments, if I heard it right, you kind of said that the gross profit dollars should grow at 2x the rate of revenue growth. and it's also more second half weighted. How much of it is really like the gross margin growth is coming from revenue leverage versus in-sourcing?

Krish, it's Greg. So the revenue growth -- the margin growth is coming through actually a combination of the overall first half is, as Phil said, really the machine deployment that's hindering a little bit of our first half margin profile. And so that will start to ramp as those tools come online in the second half. So you can call that incremental volume leverage, getting those tools up and running and getting the leverage out of that. And then the second thing is increasing our machining and components mix strengthening as those tools come online, and we're delivering those products. And then finally, our non-semi business. is also -- as we're going into the year, that's strengthening and that will also bring some flow-through in the second half of -- on the non-semi business.

So let me just add one more thing on that, Greg. I don't mind. What I would say is -- in my prepared remarks, I talked about systematically eliminating some of the margin challenges we faced last year. What I mean by that, and just to be quite frank, is in order to meet our cost targets on our products, getting these into the new factories. Once again, these are factories that in particular, in Mexico has already stood up is running pretty high volumes. We're just building out and finishing out the build-out there. Very high confidence level in all of that, that's going to come through. So little risk there -- little to no risk there. I would say Malaysia is a little higher risk in terms of qualifications, but that's -- once again, that's more to get volume out than it is anything else.

Our next question is from Charles Shi with Needham & Company.

Maybe the first one, so you talked about the view is on sustained the ramp of the business. I wonder if you can characterize your current demand visibility, how far out it is right now as of today? I recall you used to say you have a pretty good view about within that the next 6-month window. Is it further out? Or do you see anything for 2027 at this point?

Yes. What I would say is, typically, our 6-month window is pretty hard in terms of we know what customers are -- those are going to go to and what that demand profile looks like. So you're exactly right, 6 months out is very solid. And what I would say is that with our current visibility, if you look at what our Q3 and Q4 outlook looks like in terms of what our customers are telling us, what they're slotting inside their demand windows. At this point in time, it's very solid in the second half compared to what you would normally would see walking into the year. So that's why we have a lot of confidence in the second half of the year. And then obviously, you hear it from our customers directly. They're talking about what they're seeing in 2027. I would say that our view on 2027 is very similar to what they say.

Our next question is from Linda Umwali with D.A. Davidson.

My first question was a follow-up on the litho business. I think you said that you were expecting like flattish quarter-over-quarter and then to pick up later in the year. Are we to assume that the challenges, given the inventory actions at your customer have been resolved. And maybe some of the end market demand trajectory that wasn't favorable is now favorable? Or what have you seen change in that business?

Yes. I'll say 2 things. First is we have seen that customer as they guided that they're going to be starting to see a pickup in orders. And so we expect to see a similar level of pickup in orders. What I would say is that they do have a level of inventory that they need to digest. Based on our current visibility, we think they will digest that by roughly Q3 this year, which would show some uptick in Q4. There's still a little bit of unknown there, so I would caution that a bit. But with that said, I do believe based on their feedback and what they've told us and what they're guiding that they do expect to see growth in the second half of next -- or second half of this year entering into next year.

Got it. And then going back on the broader industry demand, DRAM and NAND prices are -- seems to be surging. And are you looking at this as mostly driven by capacity shifts towards AI applications? Or are any other drivers that you guys can call out?

Yes, I would say AI applications are definitely the drivers. Obviously, there's a lack of capacity in the DRAM and NAND, and that's driving a lot of the demand profile we're seeing. We also see, obviously, foundry logic also being strong this year. So we're seeing, like I said before, really across the board, every one of the major aspects of our market strong and continue to strengthen.

Our next question is from David Duley with Steelhead Securities.

Congratulations on a nice quarter and outlook. I guess the first question I have is -- and you've kind of addressed this, but I was wondering about the inventory levels at your 2 biggest customers and what the situation with that is. And typically, at the beginning of cycles, I think you might grow a bit faster than your customer -- your 2 big customers just because they start to replenish inventory. And I was wondering if that's what you see unfolding during '26 and '27.

Yes. The way I would put it is our revenue forecast or what we're forecasting is starting to match what they're saying, which is a good indication that inventory levels are coming down and inventory levels need to be replenished, and that's kind of what we're seeing in terms of customer demand and what they're pointing towards us. Remember, a bulk of our business, which are gas panels, there's not a whole lot of inventory that's held on those systems. I would say that the one exception to that would be that EUV customer, whereas a nonconfigurable system, it's the same every time. So they can build up an inventory level which they can hold on to.. What I would say is we're starting to match what our customers are saying, which is a good indication to me that the inventory has really burned through in terms of the last cycle.

Okay. And then I think you mentioned in your prepared remarks and I think in the press release that you expected to gain share in '26 and '27. I was wondering if you might help us understand what areas that you will gain share in?

Yes. So I think I mentioned it during my January webcast, but one of the major focuses a little difference between me and the past is it's really been about driving growth within the business. And when I say we want to drive growth within the business, it's in all aspects of what we do. But in particular, where I want to spend a lot of our effort in terms of growing shares first and foremost is in our commercial space business our non-semi business, the machining aspect of that, that we've been chasing around for a while. On top of that, what I would add is all of our componentry and then I also want to gain share in gas panels. So it's really across the board. And what I would say is our customers really give you out share based on platform. I want to get a little more balanced in terms of what platforms we're on. So there's a little bit of work to do there as well. But I would say across the board, during a ramp cycle is really where share can be won and lost. And I believe we're preparing ourselves to win some share during this cycle.

Our next question is from Christian Schwab with Craig-Hallum.

Congrats. Most of them have already been asked. I just have one. As the growth trajectory at WFE is expected to remain robust again in '27. Do you think that from a component standpoint that you can operate near previous targets, say, 18% to 20% gross margins? Or will it take a little bit more time to get there?

Yes. I don't want to throw out a time line for the 18% to 20% at this point. It's a little early to guide that. But what I would say is with the current trajectory of 2027, I think we can get back to some historical levels in terms of revenue. And I would anticipate with the components kicking in and things of that sort that we should see significant earnings leverage as we move forward through 2027. Like I said, I don't want to at this point in time and this far away from next year guide what we think in terms of gross margins are going to be at that point.

Our next question is from Edward Yang with Oppenheimer & Company.

Congrats on the quarter. You mentioned commercial space as a growth opportunity. And could you just remind us what percentage of your business is that? And how the margin might compare versus the corporate?

Yes. I wouldn't want to call out the margins because that gives a little too much away. So I won't comment on that, but it is accretive to our general margin profile. What I would say is that they're a sub-5% customer today. Our goal in the kind of medium term is to turn them into a 10% customer. Obviously, with what we're seeing in terms of the semi ramp, that's going to raise the bar for that. So it's going to be a little harder for the team to meet that, but that's still the goal. But that is our goal and I would call the medium term in terms of what we want to do with that particular customer.

Okay. Great. And given the growth outlook, how are you thinking about CapEx? CapEx in 2025 as a percentage of revenue in absolute dollars was up year-over-year. Do you expect that to grow from these levels or moderate back to norms? And related to that, you have taken some restructuring actions, significant restructuring actions in the last couple of quarters. Are we past any sort of additional accruals for restructuring at this point?

Ed, it's Greg. I'll take those. On the CapEx front, we did about a little -- close to 4% this year in '25, so about $36 million. And a lot of that investment was in our new facility in Malaysia. Shifting to '26. We will be moderating it down and moving towards a more manageable rate of around 3% of revenue. But that requires more on the machining equipment to be deployed now to the facility in Malaysia. And then we're rebalancing some machining equipment within North America as we execute on that. realignment of the North America machining facilities. And so it will moderate down to about 3% in '26 and that will give you an indication of what we think we should spend there. And then on the restructuring, yes, we did take about $10 million in Q4, and that was still, obviously, a heavy lift for the full year, but the majority of that effort is now complete. We still expect to see some activities as we wind down these facilities that we're realigning in the U.S., but it won't be at the magnitude that we saw in the full year nor in Q4.

There are no further questions at this time. I'd like to hand the call back over to Phil Barros for any closing comments.

Yes. Thank you, operator, and thank you, everyone, for joining our call today. In closing, I wish to convey our confidence in the new Ichor and our expectations to deliver strong earnings leverage through this cycle. I look forward to our next update at our Q1 call in May. In the meantime, please reach out to Claire to arrange any follow-up meetings that you may have. With that, I conclude today's call.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Good morning. Welcome to the 28th Annual Needham Growth Conference. My name is Charles Shi. I'm the semi-cap analyst at Needham. Joining me here is Ichor. Thrilled to have Phil Barros, the new CEO of Ichor. Welcome to joining the Needham Growth Conference. I believe first time.

Yes, first time.

Yes. And Greg Swyt, CFO. Greg, you've been here for a few times, but once again, a pleasure to have you here. We also have Claire McAdams, who is responsible for the IR function for Ichor.

Maybe let's start with this. You guys have some slides, and especially, we think it's important for Phil to have a presentation first to allow investment community to get a little bit more familiar with Phil. And then we transition into fireside chat. How about that?

All right. Phil, please get started.

Well, while he's doing that. I'll do the legal portion of it. So our discussion today will include forward-looking references to future financial performance and other forward-looking events. Please refer to our SEC filings with regards to the risks associated with forward-looking statements. And as they continue that, what I'll do is just give a brief update or introduction of myself.

So obviously, as Charles mentioned, I'm the new CEO of Ichor.

There you go.

Well, I might be the new CEO, I am not new to Ichor. I've been with Ichor for now, actually, this week will be my 22nd anniversary. So I'm on my 23rd year with Ichor. I worn all the hats. I know the company like the back of my hand. I know the business like the back of my hand. This is a very niche market. I would say that gas and chemical delivery for semiconductor manufacturing, there's very few subject matter experts out there, and I would be considered one of those subject matter experts, I believe.

If you talk to our customers, our customers would say that they come to me for some of their most challenging issues. So that's where I fit into the scheme. If you look at Ichor into the future and if you look at our market into the future, my technical experience is more important now than ever. Our customers are now removing one molecule at a time. We're moving into the [ angster era ] and our customers need strong technical partners like myself to help them move beyond and execute the [ angster era ]. So that's why I believe me being a technical CEO, a product-driven, technology-focused CEO is more important now more than ever.

So how familiar are all of you with Ichor and what we do? I see no hands, so I'm just going to go ahead and tell you what we do. So we build systems and components that go into the equipment that make microchips. We are mission-critical to the semiconductor industry, and we've been so for over 25 years.

As we move into 2026, we have 3 primary areas of focus. First and foremost is our cost transformation. What this means to me is building a more cost competitive Ichor. We have a lot of consolidation that we'll be doing in the first half of the year and into the second half of the year. But most of that is good hygiene. I wouldn't think of this as a retraction. What I would think of this as good hygiene because we are going to need the capacity as we move into 2026 into the next segment of this, which is our secular headwinds or tailwinds, excuse me, tailwinds.

We believe etch and dep is going to outgrow WFE as a whole. The technology trends that we're seeing in our market are really going to drive etch and dep to outperform WFE as a whole. And we need to be ready for that ramp, and we are going to be ready for that ramp. And this is our time to capitalize on that ramp.

And last and not least, this is kind of near and dear to my heart is creating a differentiated Ichor. We are moving from a manufacturing company to a product company and to ultimately a technology company. It's our vision to help our customers solve their most difficult challenges. And it's our products and our technology that will lead us to help do that.

So as I talk about cost transformation, there's really 3 main levers we're looking at here. First and foremost is what we call global footprint realignment. And what that is, is taking some of our underutilized assets and capitalizing on some of our recent investments in Malaysia and Mexico. So we have a lot of capacity we added in Mexico and Malaysia, and we have a lot of products that we need to move down to Mexico and Malaysia as we move through the year.

If you follow the Ichor story at all over the past year, you understood that one of our biggest challenges was ramping up headcount, right? Ramping up headcount, in particular, in our Minnesota facility. This realignment of footprint will help us put that in the past because we will have more than one site for every product we make. This will allow us to have multiple sites where we can build up our own internal content and no longer be captured by one particular job market like we were in the past.

Cost management. We've done a lot of work releasing new products over the last few years. We need to get those products to the cost targets we have. We have the plans. We know how to get there. We just need to execute to get to the cost targets we set forth. That's a laser focus for 2026. And I already talked about faster ramps, and I know this doesn't quite sound like it sits on a cost transformation slide. But what I'll say here is if you follow the Ichor story, our biggest margin detriment and the reason we haven't met our margin has been our ability to ramp up our new product. And they talked about the global footprint realignment and making sure we have more than one site where we can build every component, that will help with these faster ramps.

Okay. I don't think I need to sit up here and explain to you that the semiconductor market is a growth market. If you looked at anything in the stock market in the recent couple of weeks, you would know that there's a pretty big hot trend on semiconductor stocks. But what I do want to tell you is the fundamental technology shifts that are occurring in our industry are going to drive etch and dep to outgrow WFE. This is because as our customers now scale at a 3D level with 3D NAND, gate-all-around and eventually 3D DRAM, etch and dep capital intensity goes up and EUV capital intensity comes down. And when etch and dep goes up, that's good for Ichor because those are the gas-specific processes, gas-heavy processes that we participate in most. So we are highly levered to this segment, and we believe this to grow faster than WFE as a whole.

Now this slide really highlights my vision for Ichor now and into the future. Traditionally, we are a manufacturing company where we integrated systems for our customers. We help them design them most often, but we put them together, quite frankly. We've been in a transition to a product company. And as we exit 2026, we will be 1 of only 2 suppliers who can deliver the level of vertical content that we can. There will be 2 of us out there that can do what we do. And I see a place in the future where our customers are going to need to lean on us more, and it's going to be those companies with the most vertical content that are best capable of serving that market. That market is called active process control. That is where I want Ichor to go.

But before we get there, we need to complete our vertical integration strategy. Traditionally, we purchased 90% of the components that go into the systems we build. We made 10% of those, which [ were weld mills ] . As we exited 2025, we are now capable of building 35% of the components that go into the systems with Ichor branded products. So these are parts that have Ichor IP built into them. As we exit 2026, our target of 75% long-term stated target of 75% vertical content capability will be met. We will be capable of meeting our 75% target of vertical content with Ichor branded products. So this is a big, big milestone for Ichor.

Now we talk about our vertical integration model as really a margin play the most. But what we don't talk a lot about is how the vertical integration has helped us grow our market. If you compare 2015 to 2025, we have 10x or tenfold grown the size of our market. And this is by expanding our capabilities by delivering new products and through strategic acquisition. We've grown our market from $2.5 billion from right before we went public to where we are today at $25 billion as we enter 2026. And it's these new areas, as you can see, we have very little share in. We have a lot of opportunity to grow.

As I said before, I'm going to be a growth-oriented CEO. My goal is to grow Ichor faster than the market. My goal is to grow in each of these orange buckets. And one of the verticals we don't talk a lot about is our non-semi business. Our non-semi business is growing to be a more significant part of our business. And as we exited '25, for the first time ever, our fifth largest customer is not a semi company. Our fifth largest customer is SpaceX. Our fifth largest customer is a growing business that we are going to grow with. And aerospace and defense is an area where we plan on growing to outgrow our served available market -- served market.

So to sum up my words today, I said a lot of words, to sum that up, I would say we have 5 key levers to grow margin and to grow revenue. First and foremost is we need to build a strong foundation to build everything off of. We need to realign our footprint with a target of 35% reduction in our overall footprint. Once again, not a retraction. This is downsizing our underutilized assets because we're going to need our capacity as we move forward.

Next is cost management. We have a 15% target to get the cost out of the products that we make. We have the road maps. Now it's time for us to execute. We believe that there's a strong tailwind in our market, and we believe the submarket that we participate in most, etch and deposition is going to outgrow WFE, and we will continue to do so.

Next, once again, near and dear to my heart, is a differentiated Ichor. That's completing our journey to a product company by delivering 75% of the content, being able to deliver 75% of the content that goes into the systems that we build with Ichor branded products and Ichor technology. And last but definitely not least, we talked about how we've expanded our market. We now need to spend our sales efforts on executing that new growing market. So that's where we're going to spend our time and our sales efforts in terms of growing our serviceable market.

So with that, I'll hand it over to Greg, and he can talk us through some of our financial strategies.

Thanks, Phil. So as Phil's led up to this discussion here, how does all of this reflect in our gross margin strategy? Outgrowing the industry, Phil talked about our technology and capturing additional market share with the size of our SAM, growing that. Leveraging, we're very close to etch and dep and continue to capture and through our vertical integration, grow more of that. And then new products, we've talked about the IP and Phil talked about the flow controller and the IP that we're going to get through the content there. And then our non-semi Phil mentioned about that. That has very strong margins. And as we grow that, that will also be accretive to our overall consolidated gross margins.

And then finally, M&A is always on our strategy. While in '26, we're focusing on the operational execution of our facility plans and all of that. M&A will always be part of our strategy, and we'll be strategic on that. All of that leads to driving our gross margin. Higher-margin components. Phil talked about how the more we get more of that share, those components bring higher margin for Ichor. The IP brings more margin because we can get more value for that IP. The cost reductions and the footprint rationalization, those are operational strategies that will -- once we complete that and get our factories rightsized and get our facilities set up and optimized, that will bring incremental margin as well. And then as I mentioned, the non-semi business, as we grow more of that share, that will bring accretive margin to Ichor.

This morning, we did a pre-announcement on our Q4 results that we have -- that we will be slightly above the midpoint that we guided to for this -- for Q4 so we did that pre-announcement. And we also announced that we will see some additional incremental improvement in our revenue entering Q4. And then while we haven't given guidance yet because we will do that in a couple of weeks, we do expect to see some sequential improvement in our overall operating margins.

It was Q1...

Q1, sorry. So we've talked about all the things that we're doing and how that will benefit in improved gross margin. And this just gives you that walk from where we are today to where we expect to be when we get to a normalized run rate at $250 million. We have some things that we are in process right now that's going to take 1 to 2 quarters to see the benefit of those. But when we get to this $250 million run rate, and we have those operational strategies in place, we do expect to be in the 15% gross margin profile. And you'll see how those things are levered up to get us to that 15%.

And again, this is when we get to a normalized run rate.

We've been talking about a long-term strategy that when we hit our target models, and when we've talked about Phil's strategy to get higher content, to get our non-semi business and to get that 75% content on the gas panels. And when we get to what we've been stating is to that $350 million quarterly run rate, all these things that we're executing on should get us to this 20% gross margin profile. That strategy is still in place. We are starting to execute on this year. And as we enter into the -- probably that '27, '28, fiscal '27, '28, we should be well on our way to achieving this 20% gross margin.

As well as we look at operating expenses, we are very controlled on that, and we will start to lever up that operating expenses without having to add a significant amount of incremental cost into our operating expense profile. All of that leads to achieving our long-term strategy. And this just gets you to that once we've achieved that 15% gross margin, the next step is really the strategies around gaining market share, increasing further content in our vertical integration and then the non-semi business continuing to expand as well. So these are the levers and the strategies that we're starting to put in place that will help us achieve that 20% targeted gross margin profile.

And then I'll let Phil wrap up our overall investment summary.

Yes, I think we covered most of this throughout the presentation. But I would say we have a good solid balance sheet that we can lever as we move forward. We're positioned well to capture the WFE ramp as that ramp continues. We're building a differentiated business, really driven by IP within the products that we make and driving more and more IP into the business.

As we talked about before, we have a major initiative to go after that expanded SAM. So that's where we're going to be heavily focused. As Greg mentioned today, those will all be accretive to margin because those are all higher IP levered parts. And then obviously, we're going to be driving discipline within our operations to make sure that we have, like I said before, more than one site making parts and making sure that we're able to meet the ramps that our customers are requiring to us.

So with that said, I will hand it back to Charles for.

Yes. Great presentation, Phil and Greg. I think I want to start, maybe going back to your pre-announcement this morning. So going back 90 days, I think the message was first half of the year of 2026 was probably flattish. Maybe second half, you're going to see the pickup, but it looks like for March quarter, you are seeing some pickup already. So versus 90 days ago, what's the change?

There's a lot of change. I don't want to forecast too much here. Obviously, we're in the second week of the quarter. So we're going to be a little conservative with how much we come out with. What I would say is we normally have good visibility to 60 -- or I'm sorry, 6 months of forecast. Anything out there past that, I would say, is your guess is as good as mine.

But what I would say is we're seeing pull forward of some of the demand that we expected in the second half of next year, and that's what's really showing the strength as we walk into the quarter. If you were to take the analysis of our pre-announcement, which was $240 million at the low end, that would be the low end of guidance if I had to give it today. But once again, we're still digesting the information as we go through the quarter.

Got it. Got it. So there is a little bit of a pull forward from the second half of this year, I think you said next year, this year.

Yes.

But hopefully, that doesn't change your original projection. It's going to be a second half weighted year. No change to that at all?

Our visibility today shows a strong second half. But once again, I caution that as I should, with the fact that our forecast is really good for the first 6 months. We're showing growth in the second half, but I don't want to commit to that at this point until we have a time to digest it.

To be quite frank, over the last 4 weeks, we've seen a lot of movement. And we're still digesting that movement, and we're trying to figure out what actually our customers are going to be targeting as they go forward.

Got it. Okay. Maybe we can ask you a little bit more about the movement over the last 4 weeks a little bit more later. But maybe zoom out a little bit. I want to talk to you about -- you talked the dep and etch, right? And 2 of your top customers, they are -- one has a strong position in DRAM, one has -- the other has a strong position in NAND. I think both are strong in memory, right? Memory pricing has been surging, right? Yes, on both sides.

In terms of that part of the market, do you think some of the movement you talked about over the last 4 weeks is more about memory? Or can you tell from the orders you're getting from the forecast you're getting or maybe that's logic, that's something we were not -- maybe we didn't pay enough attention to.

Well, I would say all 3, but the short answer. I'm obviously not going to forecast for my customers, so I'm not going to give their guidance for them. But what I would say is we are seeing strengthening in memory. As you can see, the memory pricing is increasing. That's normally a good indication that equipment is going to be purchased. So we're seeing the same thing you're talking about.

But I would say, in particular, we're seeing a heavy move towards dep and etch in those particular markets. As we know, we talked about before, etch and dep is where we participate most, and we're seeing good adoption or good momentum in that direction.

Okay. Got it. Maybe let me talk -- let's talk about the lithography a little bit. We know you're bullish on dep and etch, where things are going there. But lithography EUV is still a well, meaningful amount of your business even today, right? But over the last few quarters, that part of the business does seem to have a little bit of challenges given the inventory actions that customers are taking and maybe some of the end market demand trajectory that wasn't very favorable. Do you see any change to that part of the business? Do you expect maybe we can finally pick up some growth in the lithography business this year?

Yes. What I would say is -- and we've been a long partner with ASML -- I'm sorry, with the large lithography company. We've been a long partner with them. We helped them design their lab tools back in 2009 so we have good visibility and good relationship with that business. With that said, I would say, year-on-year, that's the one segment that I would call flat. But I wouldn't call it flat because of their performance. They do have an inventory position that they're sitting on, on the products that we build. So I do not expect that to be a growth segment for Ichor this year. But I would not once again put that on their performance. What I would do is put that on the fact that they have an inventory position.

Got it. So normally, I remember like from the time you deliver the parts, the products to that particular customer to the time they deliver the systems to their customers, there's quite a 6-month-ish lead time. Is that still the right thing for?

Yes. I would say that the -- first of all, their lead times are long, right? They have mirrors that take 8 months to polish. So their lead times are very long. We're typically 6 months ahead of their schedule. So I would say if we were to see any meaningful movement in this year, we would start to see that in the first half or start to see triggers in the first half, and we're not seeing that yet. That doesn't mean it's not going to come in the second half. And we still have, I would say, maybe 6 months to see that. But in terms of year-on-year, I would say that it's pretty much flat.

From our perspective, once again, this is not an indication of how they're performing. They are sitting on an inventory position. I would say coming out of the last ramp, what they did is they built a -- kept the supply chain running because they didn't think that the down cycle that they were going to see was as long as it ended up being. So they built up a significant inventory position, try to keep the supply chain wet and building parts. So they're still digesting that inventory. I would say there's still some time before we would actually match up to what they're seeing.

Got it. We have seen some similar dynamics with your #1, #2, especially #1 customers, right, over the last couple of years as well. There are lots of inventory digestion. But hopefully, we're now at a point that they have to reorder lots of stuff.

I am hoping for that as well, my friend.

All right. Maybe switching gear a little bit to the gross margin. I think a lot of folks in this audience know that you guys are in a very good position in the industry, in the supply chain. But over the last couple of years, a few quarters, maybe not in the last couple of years, but the last few quarters, gross margin has been a little bit of a challenge for Ichor. Maybe can you talk about a little bit more about that internal content, the vertical integration story you mentioned, I believe you said exiting 2025, is it 35% covered by internal content?

Let me clarify there. It's 35% capable.

35% capable. I'm going to ask you to clarify again what does that mean, capable. And then exiting this year the target number is 75%. Can you kind of unpack a little bit what -- how do you get there that 40 points improvement in this year alone? And please do clarify capable what that means.

Okay. Thank you. I'll use this chart to kind of explain that, if that will. So everything in blue are products that we have released. Everything in blue represents around 35% of the BOM content. So we have released products that cover around 35% of what we build. As we exit this year, we will have our high-volume flow control released, some of our specialty valves and the filter product line. That will get us to the 75% capable.

Now I don't want to sit up here and promise that every customer is going to be 100% Ichor. That's almost impossible. You have legacy platforms that have been out there for a long time, that are going to take time to convert. So with that said, if you look at the 35% capable last year, just to give you an indication of kind of what that looks like as a business, we did about 24% last year on that 35%. So that kind of bridge that gap a little bit.

If you look at the BOM cost of a typical system, 40% of the BOM cost is a flow controller. The flow controller is by far the most expensive part and by far, the most critical part, but also the most important part of the system. And getting our high-volume product out there is going to enable us to capture that 40% of the BOM cost. Mind you, it's going to take some time to get adoption. I would say the year '26 will be a qualification year. '27 will be a year where we start to see meaningful revenue. Do I think it's ever going to be at that 40% level? Probably not but we will be capable of doing that.

The good thing with flow controllers is it's a large market. It's a very significant market. And if you know our history at all, we were a flow control business at one point in time. Our biggest customer was not ourselves. So we sold those flow controllers to other contract manufacturers or other gas box builders. So I believe once we get spec-ed in, once we have flow control as a meaningful part of our business, we'll be able to expand that share beyond Ichor spend. So I would say that, that's the real opportunity there.

Got it. Got it. So if I recap what you just said, that 40 points jump is mostly from flow controllers.

Mostly.

Mostly from flow controllers and going from 35% capable to 75% capable, that's largely under your control. That's your product, right? That's your product. But for customers to adoption to go from 24%, that's what you said, right, as of the end of last year to maybe approaching that 75%, you think it's going to take some time. It looks like based on what you said, maybe '27 next year, you see a little bit more meaningful revenue. It feels like it's counted in years to get there. Are you able to give us a little bit more, like more quantitative, where do you think you can get to like end of this year, end of next year?

If I was to guess a number today, and once again, this is a guess, I would say we'll be in the mid-30s in terms of vertical content this year. As we talked about in the earlier part of the presentation, we are doing some site consolidation. So there's a little bit of unnatural acts that will happen in the first half of the year, which will affect that as a large scale. But I would say a good target would be mid-30s.

Got it. Okay. So I guess maybe there's one more question, right, as maybe a follow-up to one of the PowerPoint, but along the same line of questioning I've done so far. I think the ultimate vision you have about Ichor is to be in that active process control, right?

Yes.

There's a zero company there. You want to be there. But I mean, the first part, integration, integration plus passive components, then you add flow control on top, that's a natural progression. But what does active process control mean for you?

So I'm going to be purposely big, and I apologize for that because I don't want my competitor who's here today to understand what I'm going to do.

Understood.

Okay. But let me just put it this way. Our customers and their customers are now adding and removing one molecule at a time. And this is hard. This is very, very difficult. They are going to need suppliers that have strong technical capabilities to help them meet those goals. And having this level of vertical integration enables us to have the technology and the products and the bench strength and the technology to help them get there. So I foresee a future in the not-too-distant future, where this is going to be a critical part of their business. And I believe our capabilities in terms of technology and product will put us in a unique position to capitalize on that.

Okay. All right. All right. I'm definitely looking forward to more specifics as we continue to talk.

So I can't give away all my...

Understood. Understood. So maybe switch gear to gross margin, Greg, I think you have that chart showing how you want to get there. That 20% gross margin under $350 million, I believe that's run rate. $350 million per quarter run rate. I think there's one thing you said in the prepared remarks that market share gain should be one of the contributors. I mean, other than stuff we're familiar with the volume should be a driver. Internal content should be a driver. Expansion of the non-semi business, margin accretive should be a driver. What does market share gain there means you?

You can take that.

I'll take that one. Sorry. Yes, each of these orange buckets, as you can see, we're underpenetrated, right? So as I talked about before, as we release components, there's market outside of Ichor for those components. Critical machining, we have a significant market there where we can go gain additional share and some subassemblies that go into the tool that's outside of the core gas and chemical delivery. But by the way, within our same customer base, these aren't new customers that we need to go capture and figure out who they are. We know who they are. It's just about taking the products we have now and selling them lighter within that customer.

Then obviously, we talked about the non-semi business. We are laser-focused on aerospace and defense. The real reason there is if I look at aerospace and defense, it's a lot of the same engineering and technical capabilities that we use in the semi space is going to be required in the non-semi space. So that's why we're really focused on that vertical.

Great. Maybe for the I'll ask the last question. And then maybe hopefully, there's time for a question from the audience. I think this is probably the best way to finish this fireside chat. Phil, I think given your recent appointment as the CEO, well, you gave a presentation here, very detailed strategy. And what can we expect for you to do, let's say, differently compared with your predecessors? And what will you keep the same?

Okay. It's a good question. First, I don't want to compare myself to my predecessor because he's a good friend, and he was a mentor to me at one point. But what I would say is I'm going to bring a more technology-focused, more product-focused, more engineering-focused effort. I mean, how we built this business to begin with is by solving our customers' high-value problems. And that's how I believe we need to unlock value going forward. And to me, that's the difference I'll bring to the table. And having a heavy focus on product and expanding our market and being a growth-driven CEO, those are the major areas where I see myself different.

Obviously, we have some work to do on our operational discipline. We're going to continue to execute on that. And beyond that, what I would say is it's about doing what we say we're going to do. And I think you've got a little hint of that this morning with the pre-announcement, hopefully, that we plan on being a more predictable business going forward.

Great. Any questions from the audience? We probably have time for one, maybe 2. Yes, please.

Can you talk a little bit more about the nonsemi [indiscernible] customer? Could you shed some light on...

So the question is about the non-semi business, the investor would like to have more color and any additional customers in that part of the business other than SpaceX?

Yes. What I would say is they have 3 main customers within that vertical. We have 3 main customers within that vertical. SpaceX, I would say, is the largest of the 3. So obviously, they're our fifth largest customer and the largest of the 3. But we are gaining share and continue to gain share in other markets or other customers within there. As I said, they're all within the either commercial space or aerospace and defense markets.

You can see from the pictorial that we have -- the aerospace side is the rockets with SpaceX and then the drone there is another customer that we have contracts with that we're doing machining work for various components on drones.

Yes?

How should we be thinking about the attache rate to dep and etch levers. We have seen strength across let's say [indiscernible] excess customer [indiscernible] event that need to be dealt with? And then how we should be thinking about the attach rate to dep and etch market leaders going forward?

Yes. Now let me repeat the question. The question are twofold. Number one, what's the attach rate -- your business attach rate to your 2 leading customers, etch and edge customers? And number two, what was the other part?

Looking back the excess component...

Access inventory, where they are in the inventory cycle?

I don't know their exact inventory number to be exact. But what I will say is I think we're closely matching what they're seeing at this point. So I would suspect that their inventory is largely burned down, at least in our space. So with that said, I would say that we will mirror kind of what they do, in particular, in etch and dep deposition.

In terms of attach rate, if you look at our 2 largest customers, which are publicly -- public information, most of that business, and I would say 90% of that business is etch and dep. I'd say the remaining 10% is more wet clean and things of that sort. So 90% of our published numbers on our 2 biggest customers are etch and dep related.

All right. Thanks, Phil. Thank you, Greg. Thank you for the insights. And I hope everyone enjoyed the rest of the conference.

Thank you.

Good day, ladies and gentlemen, and welcome to Ichor's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded.

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

Thank you, operator. Good afternoon, and thank you for joining today's third quarter 2025 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-K for fiscal year 2024, 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. 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, as usual, are Jeff Andreson and Greg Swyt. We also have our newly named CEO, Phil Barros, joining us for today's call. Jeff will begin with an update on our business, and then Greg will provide additional details about our results and guidance. Phil will then make his remarks before opening the line for questions.

I'll now turn over the call to Jeff Andreson. Jeff?

Thank you, Claire, and welcome, everyone, to our Q3 earnings call. Thanks for joining us today. This afternoon, along with our third quarter earnings release, we announced that Phil Barros, our long-time CTO, has been named Ichor's CEO, effective today. We are very pleased to have Phil joining us for today's call. Phil has been with Ichor for over 20 years and held executive roles spanning engineering, product management, sales, account management and corporate development and strategy. He has been instrumental in the development of the company's product strategy, and I look forward to watching the company's success develop under Phil's leadership.

Third quarter revenues of $239 million exceeded the midpoint of our expectations entering the quarter. Similar to the upside witnessed in Q2 we once again experienced customer accelerations of certain gas panel deliveries for dry etch and deposition applications into the quarter. There's no question that the demand environment for etch and deposition is strong and has strengthened year-to-date, particularly in support of leading-edge investments and gate all around and high-bandwidth memory. We believe the Q3 upside, however, reflected a pull-in of deliveries from the fourth quarter rather than an increase in overall second half demand among our primary customers.

At the same time, the demand profile for other served markets continue to weaken as we progress through the third quarter. While we've been discussing demand erosion affecting multiple applications for several quarters now, most significantly in the areas of EUV lithography and silicon carbide, what surprised us most during Q3 was the decline in our non-semi end markets. As we entered the third quarter, we began to see order rates coming down from within our IMG business. As a reminder, the primary non-semi markets served by IMG include commercial space and aerospace and defense. IMG's business also brings strong contribution margin to our overall financial performance. So when we did not see IMG order rates recover to their planned levels inside of the quarter as we had expected in early August, this resulted in a 1 percentage point impact to our Q3 gross margin.

As a result, our continued progress made during Q3 in ramping capacity of our internally sourced components and meeting our hiring objectives was overshadowed by the gross margin impact of lower IMG revenue volume. With our current visibility, we are expecting IMG to continue to run at a lower rate for the remainder of the year, which is reflected in both our revenue and gross margin guidance for the fourth quarter. Our Q4 forecast now reflects meaningful forecast revisions from our third and fourth largest customers, reflecting the continued slowing in system build rates for certain applications and end markets.

Our operational focus continues to be on improving the cost of our internal component manufacturing capacity to align with our targeted product margins and increasing our output to fulfill our customer demand. In parallel, we are making steady technical and operational progress on our 2 additional proprietary component products, which are designed to expand our addressable markets for both flow control and balance. We are targeting our first beta unit for customer evaluation in early 2026. These next-generation offerings will allow us to serve a broader range of applications and customer needs, further increasing our value across the semiconductor supply chain.

As we reflect on the customer demand environment, there's no question that our 18% year-over-year revenue growth recorded for the first 3 quarters of 2025 demonstrates strong performance relative to overall wafer fab equipment or WFE growth. Our strong growth this year reflects increased demand from our 2 largest customers in a strengthening environment for etch and deposition partially offset by declines in our EUV lithography business, our silicon carbide business and the closure of some of our smaller underperforming business units during the year. With the currently strong demand environment for etch and deposition expected to continue, the beginning of a recovery in these underperforming served markets for Ichor could very well result in Q4 2025, proving to be the trough quarter for this next phase of Ichor's growth ahead with Phil Barros, as CEO.

With that, I'll turn it over to Greg to recap our Q3 results and provide further details around our financial outlook. Greg?

Thanks, Jeff. To begin, I would like to emphasize that the P&L metrics discussed today are non-GAAP measures. These measures exclude the impact of share-based compensation, amortization of acquired intangible assets, nonrecurring charges and discrete tax items and adjustments. There is a useful financial supplement available in the Investors section of our website that summarizes our GAAP and non-GAAP financial results as well as a summary of the balance sheet and cash flow information for the last several quarters.

Third quarter revenues were $239.3 million, above the midpoint of guidance up 13% year-over-year and roughly flat to Q2. The gross margin for the quarter was 12.1%. As Jeff discussed, while we made good progress in ramping output of our internally sourced products, the slowdown in our non-semi business impacted Q3 gross margin by 100 basis points.

With operating expenses aligned with forecast at $23.8 million, our operating income for Q3 was $5.1 million. Our net interest expense and net income tax expenses were likewise aligned with our expectations at $1.7 million and $0.7 million, respectively. The resulting EPS for the quarter was $0.07 per share. Our Q3 GAAP results reflect $18.3 million in restructuring costs related to the strategic consolidation of our global operations and consisted of inventory impairment and fixed asset charges as well as personal transition and facility shutdown costs. We anticipate there may be additional charges in the fourth quarter and fiscal 2026 as we continue to execute on the strategy.

Turning to the balance sheet. Our cash and equivalents totaled $92.5 million at the end of the quarter, flat to Q2. We generated $9 million in cash from operations and our capital investments for the quarter were $7.1 million. Working capital changes reflect a consistent level of days sales outstanding and an $18 million decrease in inventory. Our planned CapEx investments for 2025 are still expected to total approximately 4% of revenue as we finish the build-out of our new Malaysia factory that aligns with our strategy to consolidate our global operations and capacity in close alignment with our customers.

In Q3, we completed the refinancing of the company's credit facility in order to reduce our overall borrowing costs. This refinance impacted our GAAP provision for other expenses during the quarter. We reduced the fixed amount of the revolver facility from $400 million to $225 million in favor of an accordion feature. We also extended the term of the facility another 5 years. Our outstanding term loan balance remained unchanged, and at the end of the quarter was $125 million and our net debt coverage ratio was 1.5x, well below any potential threshold for covenants.

Now I will discuss our guidance for the fourth quarter of 2025. With anticipated revenues in the range of $210 million to $230 million, we expect our Q4 gross margins to be between 10% and 12%. In comparison to our earlier expectations for gross margin, about half of the reduction is due to the lower level of IMG revenues and the other half is due to the lower revenue from our third and fourth largest semi customers. We expect Q4 operating expenses to remain relatively consistent with Q3 levels at approximately $23.7 million. Net interest expense for Q4 is expected to be approximately $1.7 million. We expect to record a tax expense in Q4 of approximately $900,000, reflecting a full year non-GAAP tax expense of $5.6 million, which is unchanged from our prior expectations.

As you update your models for 2026, our assumed effective tax rate is currently expected to be in the range of 15% to 17%. Finally, our EPS guidance range for Q4 of a loss of $0.14 to a profit of $0.02 reflects a share count of 34.5 million shares.

I will now turn over the call to Phil Barros. Phil?

Thank you, Greg. First, I want to thank the Board for their confidence and Jeff for his mentorship. And most of all our employees. You make everything we do possible. It's an honor to lead the company that I've been part of for nearly 22 years into the next phase of growth. While I may be new to the CEO role, I'm not new to Ichor, our business or our customers.

So I want to outline the strategic priorities that will drive us in our next phase of growth. 2026 will be a year of transition for Ichor. We plan to realign our global footprint and cost structure to strengthen our long-term profitability, while leveraging the benefits of our recent strategic investments. We are focused on improving our product margins across all of our product verticals. These initiatives are aimed at driving our earnings growth faster than our revenue. As one of the key architects of our proprietary product strategy, I fully believe it's the right strategy for Ichor. Our focus is now on smoother execution, completing customer qualifications, transitioning our products to volume and delivering new products to give Ichor and our customers a clear competitive edge.

We believe in the long-term fundamentals of our markets driven by AI, high-performance logic and advanced packaging. These inflections are reshaping the industry and will drive sustained growth in our core WFE markets. But our goal is not to simply grow with the market, it's to outpace it. At our core, we are an engineering company. We create value by engaging early with our customers to solve their most critical problems. These partnerships enable us to drive sustainable growth by developing products and solutions that Ichor is uniquely positioned to provide.

Finally, our machining business drives the highest contribution margin across our product portfolio. And we will stay focused on expanding it across both our semiconductor and non-semiconductor markets. I see tremendous opportunities ahead and have complete confidence in our team's ability to continue to outgrow the markets we serve.

With that, I will now open the call for Q&A.

[Operator Instructions] Our first question comes from Brian Chin with Stifel.

Appreciate the question -- opportunity to ask a few questions. Thank you, Jeff, for your help over the years. And welcome, Phil. Look forward to speaking with you more.

Maybe first question on the environment and some of the updates here on the call. Can you quantify the revenue shortfall from IMG in Q3? How much is IMG sales expected decline in 4Q? What's driving the decline? And what's the prognosis for returning to Q2 revenue levels sometime next year?

Yes. So it's Jeff, Brian. Yes. I would say enter in the quarter, it was down a couple $2.5 million or so from what we expected, and most of that was in their higher margin businesses. And then going into Q4, it's going to drop again a similar level, stabilize, we believe, and then start to recover in the first quarter, I would say maybe by the second quarter, we'll be back to where we thought we would be about now. That's the IMG story -- what was the second part?

That was sort of what drove the decline?

Yes, yes. It's interesting. I think some of this is just -- it's taken. We have some business that runs at a run rate into the sub tier, that was a portion of it. But the biggest portion was really new programs where the funding just didn't drop down through the prime to us. It's not gone. It's just a matter of when it comes. A piece of it has already arrived. So it's already been kind of incorporated into it and another couple of pieces are going to start to layer in. But really, they won't be able to affect the fourth quarter. They'll start to help the first quarter growth.

Got it. Okay. So that can tie into sort of the budget grid lock that we have and the continued resolution in terms of frozen budget levels and what not.

Yes, which could be [indiscernible] but I can't on that. I don't know what's taken so long, probably.

Maybe a second question. In terms of the your top 4, and there's been kind of more weakness on maybe your 2 smaller of the 4 customers that kind of is lingering here maybe into the end of this year. What's the optimism you had? There was something in the press release that sort of suggested some optimism that business levels improve first half next year. What -- can you maybe provide more -- a little bit more color on what kind of visibility you have months and quarters and kind of what gives you a sense that the business trajectory can come back in the first half next year?

Yes, good question. I mean, again, I think largely the outlook as we entered the third quarter, what's really changed, I think you pointed out was it's the IMG softness and then it's our smaller -- or none, call it, 10% customers business levels. But what we have seen from a visibility is already we're starting to see a recovery into Q1. I think some of the latest news about the elimination of the 50% ownership threshold, I think we're going to see some impact from that.

Having said that, we haven't seen anything and it's probably pretty late in the quarter to react to that. But I think we can already see kind of the core depth and etch market starting to bounce up. I'm not ready to guide you a quarter 1 revenue, but we're pretty confident that we're seeing in Q4 as the trough.

Maybe last question, this might be for Phil. So adjusting for that lower IMG mix in Q3 it sounds like gross margins might have increased around 60 basis points or so Q-on-Q or not for that kind of unfavorable mix. I guess, firstly, was that tied to some improved operational execution in terms of the internal component supply ramp in Minnesota? And then kind of more broadly, reflecting on sort of the transition year commentary you made. What -- I know it's maybe a little unfair to ask you this right about, Phil, but what can the company -- what will the company do -- yes. So answered however you can, but what can the company do? What will the company do in the next 6, next 12 months to sustainably improve the execution around that internal supply and product yield the way a good foundation for the appreciable gross margin improvement once helped obviously once revoking of get back to that $250 per quarter level as well.

Yes. I'll start off with the answer and then I'll hand off to Greg to talk about the $250 number. What I'll say is the new products, we are on track or on track to what we projected last quarter in terms of our improvements that we talked about last quarter. So well on track there. We have key initiatives to continue to increase our gross margin on those products, in particular, getting our valve product line to our product margins where we want it to be. We're very close to those and should see that in early next year. So we'll continue to see those grow over the next couple of coming quarters.

With that said, I'm going to hand over the $250 question over to Greg. If you don't mind Greg.

Yes. Thanks, Phil. I think, Brian, the first question was on the Q3 miss. And we talked about IMG, but the recovery quarter-over-quarter within the machining business was there. It's just that the full miss was really predominantly driven by the IMG miss.

When we look out into the outer quarters and we are -- as Phil talked about, the plans on the machining business, we still expect to get to the to the mid-teens. When we get to that kind of second half, what we've always been saying recently for the past couple of calls is that $250 million run rate, still expect to be in those mid-teens, as we execute on our machining strategy to get the volumes up and get those efficiencies to where we expect them to be.

Our next question comes from Charles Shi with Needham.

Jeff, really appreciate working together for the last couple of years, and wish you well for your next chapter. Phil, welcome on board, looking forward to more conversation with you. So maybe the first question I want to ask a little bit more near term. Some of the commentary I would hope you clarify a little bit. You talked about the Q3 revenue benefited from some of the pull-ins and you talked about the some of the Q4 revenue decline. There is some downward revisions from #3 and #4 customers, are those 2 things correlated, meaning there was a pull-in into Q3, done by the #3, #4 customer? Or are they not?

Charles, thanks. It's Jeff. No, I would say, generally, they're unrelated. I mean the pull-in actually was offsetting some of the softness in IMG, but I would say largely that was at our largest customer.

Great. Thanks for getting that clarified. So Jeff, I want to -- Jeff and so I want to get your thoughts a little bit more specific on next year's expectations. Maybe not exactly about Ichor, but the overall WFE trend. I think your customers have talked about maybe first half next year kind of at the similar level as the second half of this year and second half next year could see some of the stronger inflection to the upside. Are you aligned with that? And specifically maybe the outer quarter Q1, Q2, since your second half '25 run rate actually come down a little bit given your Q4 -- what you guided for Q4. Is that still the same picture there?

Well, what I would say here, what I would tell you is as we still kind of see a more back half-weighted year next year with the growth in the year. Probably you're going to have to assume it starts around mid-year. I think some of this China reduction of the 50%. That might also help the front half a bit, but I still think our view is a stronger back half of the year. And then a stronger '27 is kind of what is our view of what's going to happen over the next couple of years.

Our next question comes from Craig Ellis with B. Riley Securities.

I'll echo the thanks to Jeff and the good wishes and the welcome to Phil, look forward to being in conversation going forward. I was hoping I could pick up on some of the questions thus far. So it sounds like as we look into 2026, we can expect 100 basis points or more of gross margin expansion just as IMG normalizes, but from there to the 15% at $250 million in revenues, Greg, how would we build that layer cake? What are the specific contributors, whether it be something in weldment, something in gas panel, et cetera. Can you help us just understand how we go from 12-ish percent up to 15?

Sure. Thanks, Craig. So it's a couple of things. And it's still continued on the conversation around improving our proprietary products and that's going to be, as Phil has mentioned, our key strategy to drive. And so as that moves through the year, that will keep me one of the biggest levers that we have. Phil also in his comments, talked about our global operations footprint that we are rationalizing as we move through that. We'll see some improvement later in the year, but not incremental that will be more of a '27. But we're working on driving efficiencies that will help move that through.

And then not only on the branded product and the leverage of our factories, but driving incremental revenue from our machining business, which garners obviously, a higher product margin than our integration business, and getting that mix up as a higher percentage of the business.

That's helpful. And then the follow-up question and maybe that you've covered some of that. In Phil's prepared remarks, he characterized calendar 2026 is a year of transition. I was just hoping to get further color on what the elements of the transition were and what was targeted to achieve in 2026 versus elements of a transition that might start in '26 and then yield more benefit in '27 and beyond?

Yes. As Greg kind of mentioned earlier, I would say it's 3 major levers. First and foremost is getting all of our products into volume, getting them at the cost targets and, quite frankly, expanding those products across more and more customers. I think we talked about on our last call, in particular, we slowed down one of the qualifications because we, quite frankly, weren't ready for the ramp. So we're going to be ramping that product and that customer through the first half of the year, which will increase our touch points with additional customers in terms of our proprietary products.

Second, as Greg mentioned, in particular, our global operations and our global footprint. We're going to be doing work to making sure our products have made the right location for the right margins. And also that will help us from a flexibility standpoint. If you think of it this way, we want to use our machining business within North America to drive our quick turn, and that quick turn is going to be our revenue growth for our long term, if that makes sense.

Our next question comes from Krish Sankar with TD Cowen.

This is Robert Mertens online for Krish. I think you had previously mentioned some friction in your hiring process for the machining business. Could you just provide an update on where you are in that business in terms of current capacity and that which would be needed to service demand in a more normalized demand environment?

Yes. We talked last quarter that we needed to get the hiring up in our Minnesota factory in particular. We have met those hiring targets. As we see increased demand for those products, though, what we will be doing is increasing our capacity by bringing on both our Malaysia footprint as well as our Mexico footprint building some of those same products.

That's helpful. And then last quarter, you mentioned qualifying a third customer in your internal valve system, and we're engaged with the fourth customer. Do you have any update at this time, if you can provide us on where you are in the qualification phase and sort of the rate of adoption you're expecting for these customers going internally sourced products?

Yes. That's what I was alluding to in my comment on the last question. In particular, we believe that fourth customer will come online in the first half of next year in terms of our valve supply.

Our next question comes from Edward Yang with Oppenheimer.

So just to clarify, we passed all the hiring and retention challenges in the U.S. machining operations. And it's nice to hear you got the hiring up. How are you able to hit those targets?

Yes. I think we talked about in the past about different incentive programs we put in place in order to get the hiring programs in line. We are on track. We've met all of our higher requirements for our Minnesota factory. What I will say is as we see these products expand, we will be duplicating resource requirements and lower cost regions as well.

Okay. And just a follow-up question for you, Phil. As your -- how does your prior perspectives as CTO, would that be helpful for you in alleviating some of these execution issues that we've seen, which were more manufacturing related. And when you talk about 2026 being a year of changes, does that mean again, that you're going to focus a little bit more on the R&D side versus manufacturing or operations? Or am I reading too much into it? Again, you coming from the CTO position to CEO.

Quick answer is yes. What I would say there, as Jeff has talked about in the past, some of the growing pains we've gone through as we transition from more of a services business to our products business. So we've -- my perspective has been one of the architects of the products business is how we grow our operations with our products is going to be very, very important as we move forward. So that was one of the key -- the key milestone -- the key things we need to get done in 2026 is making sure our product transitions are very, very smooth going forward.

Yes, just as a comment on Phil. Phil has obviously been in so many different roles within the company, but he has been deeply engaged in driving the alignment of cost targets with what we need to do. And so not new to him by any way, shape or form. This has been a real big team effort, and he's been a critical player in that.

Our next question comes from Christian Schwab with Craig-Hallum Capital Group.

With Q4 being the trough for the year, as we're kind of thinking about 2026, would you expect year-over-year growth in '26 versus '25?

Yes, definitely. That's our current view without guiding the whole year next year is I think we are anticipating growth. I mean we just said that Q1 should be better than Q2. Q4 is the trough, and then it may be relatively flattish in the front half. We'll see how that works out. Generally, as you know, Christian, things start to pull forward. But we do see right now in alignment with but others are forecasting customers are telling us the back half of the year is going to be very strong.

So with that in mind and getting to the target of $250 million, then run rate in the back half, is the internal plan to be able to hit the mid-teens gross margin goal in the second half of '26...

Yes, Christian, that is the plan. That's what the operations is putting together right now.

Okay. Great. And then my last question then we discussed an aspirational goal of vertical integration driving a gross margin of 20%. Is that still the aspirational goal that you guys have in mind?

Yes, long range, that is still our aspirational goal. Flow control is going to really be -- flow control is really going to be the enabler for us to get from that mid-teens to that 20% gross margin.

This now concludes our question-and-answer session. I would like to turn the floor back over to Jeff Andreson for closing comments.

I want to thank you for joining us on our call this quarter. I'd also like to thank our employees, suppliers, customers and investors for their ongoing dedication and support over my last 8 years at Ichor. Phil and Greg will look forward to our next quarterly update in early February for our fourth quarter earnings call.

Operator, that concludes our call.

This now concludes our conference for today. Thank you, everyone, for your participation. You may disconnect your lines, and have a wonderful day, ladies and gentlemen.