Ichor Holdings (ICHR), which made its IPO debut in December 2016, is trading higher this morning (+8%) after providing upside guidance for Q4 and Q1. Before getting into the guidance, a little background would help since most people are probably not familiar with Ichor. It's a supplier of fluid delivery subsystems for semiconductor capital equipment. Fluid delivery subsystems are key elements of the process tools used to make semiconductor devices.
Ichor's gas delivery subsystems deliver, monitor and control precise quantities of the specialized gases used in semiconductor manufacturing processes such as etch and deposition. Its chemical delivery subsystems blend and dispense the reactive liquid chemistries used in semiconductor manufacturing processes such as electroplating and cleaning.
Fluid delivery subsystems ensure accurate measurement and uniform delivery of specialty gases and chemicals at critical steps in the chipmaking process. Any malfunction or material degradation in fluid delivery reduces yields and increases the likelihood of manufacturing defects.
Historically, semiconductor OEMs made their own fluid delivery subsystems, however, most OEMs now outsource to a few specialized suppliers, including Ichor. Furthermore, semiconductor manufacturers are continuously trying to increase the number of transistors in a given area of silicon, enabling smaller and more feature-rich devices. As a result, this increases the number of process steps that a wafer must pass through, in particular, the number of etch, deposition and CMP steps. This benefits Ichor directly as the majority of its gas delivery subsystems are used in etch and CVD processes.
Ichor has close collaborations with customers. In fact, Ichor's engineers often work at its customers' sites to serve as an extension of its customers' product design teams. One area of concern is customer concentration. Its two largest customers, Lam Research (LRCX) and Applied Materials (AMAT), accounted for 51% and 46% of 2016 revenue. The good thing is that these sales were spread across 14 different product lines used in 10 unique manufacturing process steps. Also, its customers use its products on numerous types of process equipment which lessens the impact of the inherent concentration.
Finally, on the M&A front, we wanted to quickly mention that Ichor recently acquired Talon Innovations, which makes high precision machined parts used in semiconductor tools. Talon is expected to generate between $70-90 mln in annual revenue and $0.40-0.50 of non-GAAP EPS. It's also expected to add 200-250 bp to gross margin in 2018. The deal boosts Ichor's highly engineered value-added offering.
Turning to today's guidance, Ichor expects Q4 revenue of approximately $183 mln (includes $4 ml from Talon) with full results expected on February 7 after the close. It also expects Q1 revenue of $240-250 mln (includes $20 mln from Talon). The Q4 revenue was slightly above market expectations but the Q1 revenue is well above market expectations, even more than the $20 mln Talon boost. The Q1 guidance seems to be the main reason the stock is up sharply today.
In sum, the stock has been steadily climbing for the past year, although it did pull back in the Oct-Dec timeframe. This strong guidance for Q1 may get the stock back on the upswing. On a longer term basis, ICHR should benefit from the outsourcing trend in its industry.