Ichor Holdings 2026 Q2 Earnings Call

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 EPS compared to Q1. The additional revenue growth we had guided for Q2 was instead recognized one 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 mixes continuing to grow our component revenues and 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 three 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. This brings me to the underlying demand environment, which continues to strengthen since our last earnings call. Ichor's revenue growth in 2026 now expected to be even stronger than we communicated just three months ago.

We have now reported 15% sequential revenue growth in each of the first two 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 two 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. 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% from full year 2025. Turning now to our strategic initiative. 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 two quarters, we have expanded gross margin to over 14%, exceeding our 100 basis points per quarter target while driving earnings to a three-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 two 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 factor utilization at these higher revenue volumes. We also saw product mix shift to a more favorable profile, which strengthened 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 plans. Importantly, we have now reached an inflection point. Demand is not our growth constraint. Manufacturing capacity is not our growth constraint. 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 into 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, non-recurring charges, and discrete tax items and adjustments. There is a useful financial supplement available on the investor 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 26th quarter end, and instead, we surpassed $300 million in revenue for the 13 weeks ending July 3rd. We have worked through these parts 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 ramped. 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, 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 3.7 times, respectively. Total debt at quarter end was $120.6 million, our net debt coverage ratio stands at 1.1. 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-$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%-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. 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 rates in the range of 20%-25%. 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. Thank you.