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Ichor Holdings Ltd (ICHR) CEO Thomas Rohrs on Q2 2018 Results - Earnings Call Transcript

by:Mingquan Machinery     2019-12-03
Yixin Holding Co. , Ltd (NASDAQ:ICHR)
August7 Q2 2018 earnings conference call, 20184: 30 PM etexecuvesclaire McAdams-
Investor Relations Consultant
Executive Chairman & CEO Jeffrey Andreson-CFOAnalystsJ. Ho -
Carl Ackerman
Cowen and companysinignhao
German central bank governor Mok-
Ladies and gentlemen, Needham & companyopergood day, welcome to the 2018 Earnings Conference Call for Ichor Systems for the second quarter. [
Operation instructions].
This call is being recorded as a reminder.
I would now like to introduce Claire McAdams, the host of Today\'s meeting, Ichor investor relations consultant.
Please continue.
Thank you, Claire McAdam.
Good afternoon, thank you for attending today\'s conference call, we will have a replay on Ichor\'s website shortly after the end of this afternoon.
When you read our earnings press release and listen to this conference call, please recognize --
They contain Forward
Forward-looking statements in the sense of federal securities law. These forward-
Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and may result in significant differences in actual results from such statements.
These risks and uncertainties include the risks and uncertainties set out in our earnings press release, as well as the risks and uncertainties we describe in our annual report in table 10
K. for the fiscal year 2017, documents have been submitted to the SEC and described in the documents subsequently submitted to the SEC.
You should consider all the progress.
Look at the statements based on these and other risks and uncertainties.
In addition, we will provide some
During this call, the GAAP financial indicators and our earnings press release contain these non-
Based on the most comparable GAAP financial measures.
Today, I received a call from Tom Rohrs, Chairman and CEO of Ichor;
Jeff Andreessen, our chief financial officer.
Tom will start with a review of the business, and then Jeff will review the finance and outlook for second quarter of 2018.
We will start asking questions after they have prepared their speeches.
I\'m transferring the call to Tom Rohrs now. Tom?
Thank you, Claire.
Good afternoon, welcome to our second quarter conference call.
Our second-quarter results, including of course the first half of the year, strongly justify our strategy and operational excellence efforts.
Our income of $0. 249 billion is in line with our forecast, down by 3.
The first quarter was 5%, up 56% from the same period last year.
Our total revenue for the first half was $0. 507 billion, up 64% from the first half of 2017.
This is an industry.
Leading performance.
$2 per share-
Sorry, $1.
02 is basically the same as our first quarter record, 70% higher than the same period last year.
In the first half of 2018, our gross profit margin and operating profit margin increased by 200 basis points compared to the first half of 2017. And year-over-
In the first half of this year, our earnings per share increased by 75%.
Even after completing a $25 million stock repurchase in the second quarter, our second-quarter cash balance remained at the first-quarter level.
Since then, we have completed the entire $50 million project that Jeff will discuss soon.
We have successfully achieved our goal of surpassing other industries.
Over the past four years, our fab equipment spending, customer revenue growth, and growth for almost all suppliers in the WFE market have outpaced us.
Despite our outstanding performance, our market value is almost the same as a year ago.
I think one of the problems last quarter was that we didn\'t tell our story very well.
But it goes beyond that.
Investors in syndicate have been worried about the downturn in the market.
Many people still believe that \"if the manufacturer of semi-original equipment catches a cold, then suppliers like Ichor will suffer from pneumonia.
\"Over the past three months, I \'ve spent a lot of time meeting with investors and analysts to explain why this cliché is no longer true.
So now I\'m going to talk about exactly what\'s going on in the third quarter so everyone can understand what our industry downturn looks like and why there\'s no need to be afraid of them.
I will then provide a progress report on all the incremental revenue growth drivers I have been discussing since last quarter.
Finally, I will tell you that we are deploying capital in a prudent and strategic manner, including through M & A and stock repurchase, including-
In order to increase the value of shareholders, excuse me.
Each of these three aspects is expected to help you understand why Ichor is a great company and a great investment.
First, we look forward to the third quarter.
Our projected revenue decline compared to the second quarter is consistent with all the relevant outlook we have heard over the past two weeks.
This is almost the same continuous decline seen by our largest customers and major semiconductor WFE component suppliers.
In fact, they caught a cold, and we also caught a cold. that\'s how far it is.
There is no exaggerated effect due to inventory adjustments or reductions in outsourcing, or other things that may cause people to think that we are infected with pneumonia.
As I said in my conference webcast on June, after the memory capacity message starts to penetrate through the investment community, if our customers drop a little more than they expected in the second half of the year, then we will.
This is what is happening.
We have very-
A highly variable manufacturing cost structure, which means we can act quickly to align our cost structure with the revenue outlook.
With third-quarter sales falling in the 12 quarter, our gross profit margin will eventually reach around 16%, a drop slightly above expectations.
Edge pads and precision machined products are biased towards memory consumption.
At the midpoint of the guidance, our operating margin will still be close to 10%.
Nevertheless, while our variable cost model allows us to take action to reduce costs, we have not cut costs given that the fourth quarter looks better than the third quarter.
At this point, the relevant players have said that the third quarter will be a trough, is expected to rebound in the fourth quarter, visibility in the first half of 2019 will be stronger than the second half of 2018.
So despite that, we cut manufacturing staff by about 20% in the third quarter, and we didn\'t cut key R & D and marketing resources.
Back in my previous age of application materials, Jim Morgan once explained to me that the recession was the time to gain market share through product proliferation and qualification, and that\'s exactly what we\'re doing.
This strategy will enable us to achieve our goal of about $0. 49 to $0.
Earnings per share for the third quarter were $57, not about $0.
If we are less strategic about cost management, we will earn £ 60 per share.
This is a good time for me to make some comments about China tariffs, another key factor the industry faces in the third quarter.
Although there is still a lot of uncertainty and doubt about the impact of tariffs, it is becoming more and more obvious that as many as half of Chinese importers may face 25% tariffs.
As most of you know, we do not produce any products in China.
So when we sell our customers to the US, we don\'t face any major direct tariffsS. -
Operation-based.
We do have an important Chinese supplier to make precision manufacturing parts for us, but due to our strategic sourcing of talent, we now have the ability to make these parts and we will do so if necessary.
In this context, you have now seen the possible impact of the recession on our business.
While we don\'t cut spending in key areas like engineering, marketing or sales, we\'re going to make a decent profit.
We know that investors will always focus on the semiconductor business cycle, but our outlook for the third quarter suggests that these concerns should be eased.
The downturn in this integrated Fab industry is much shorter and the pain is much smaller.
Therefore, near
\"Suspension\" is actually a great opportunity for us to demonstrate the flexibility of our operating model.
So now let\'s talk about the situation after the downturn in the third quarter, which is a better time to enter 2019 from the fourth quarter.
Importantly, fab equipment growth is expected to slow from low double 2018
Single number-
According to reports in the past few months, the digital range has laid the foundation for the 2019 industry to grow for six consecutive years.
Last quarter, I explained why we continued to outpace industry spending and why we thought we could continue to grow faster than the fab equipment market.
This includes expanding our footprint and overall market share in the field of precision machining;
Expand our market share in the welding field;
Expand our footprint and overall market share in the gas panel business by gaining a foothold in Korea;
Achieve incremental revenue growth in market share for our emerging mobile delivery business;
Finally, M & A continued to maintain strong momentum.
Today, I will reiterate our incremental growth goals and submit a progress report to you on these initiatives.
In the field of welding and precision processing, our service market has increased by more than $1.
Through Acquisition Cal-50 billion
The claws of welding and innovation.
Before we buy these companies, they basically serve one customer.
We have a great opportunity to expand our share of these services markets by leveraging our strong relationships with four other big customers.
We expect to gain market share in welding parts and precision machining.
We started our initial qualification review last quarter and we expect to have our first revenue at the end of this year and accelerate to 2019.
So this is happening.
We have established new market share agreements and new customer qualifications for these parts of our business.
In addition, most of our additional capacity is being built in Malaysia, where competition in cost structure is fierce.
Next, through our recent acquisition of IAN Engineering, we now have a beachhead position in South Korea, which we will use.
We will provide welding and precision machining capabilities for Korean equipment suppliers as well as Korean subsidiaries of other OEMs, which will be the driving force for incremental revenue of 2019.
We also have the opportunity to expand our market share in liquid delivery modules, and through IAN, we have started working with SEMES, a $1 billion fab equipment company, bring our proprietary liquid delivery solution to Korea during 2019.
IAN has provided gashouse for SEMES and wonik ips, one of the fastest
Mainly growing equipment suppliers in the field of CVD.
That means our total share in $1.
The acquisition increased the natural gas panel market by 5 billion.
In addition to our new foothold in South Korea, our liquid transport business has multiple growth opportunities, a $0. 7 billion market opportunity.
We won an important award with the United States. S.
Last year\'s OEM has just started and will definitely increase revenue in 2019 and beyond.
In addition, we work closely with other OEMs to expand our coverage in cleaning tracks and other wet processes and further increase our market share.
In the long run, we see more geographical expansion.
In addition to the customer market, we are also involved in the strategy of expanding market share with OEMs of equipment, especially in Japan.
We are eager to bring our liquid delivery products there to some of the largest OEMs who have a considerable market position in wet processing
Wet processes such as CMP, cleaning, and track.
Starting in 2020, these should be an important source of revenue growth.
Last quarter, we launched new slides on the IR platform, summarizing all these important opportunities.
Overall, our service market has expanded from $1 to $1.
5 billion of the gas panel market, up to $4 billion in market opportunities, can be leveraged through our acquisitions, geographic footprint and our appropriate products.
As we said last quarter, just $2019, we have quantified at least $100 million in incremental revenue from these initiatives, and we are progressing well in all of this.
This will lay the foundation for additional growth and performance beyond next year and beyond.
Finally, we will continue to make more acquisitions that are in line with our strategy and aligned with our earnings.
We will continue to use our plastic in Ajax, Cal-
Waeld, Talon innovation, is IAN now.
We will maintain the strategic advantage of fluid dynamics in the semiconductor market, we will work with more and more customers, we will acquire companies that provide us with additional revenue growth platforms, we will do some value-added transactions.
So all in all, here are the main points of our business and I hope all of our investors understand them well.
First of all, our financial performance in the third quarter proved that, as we now know, there is nothing to worry about in the recession.
They are lighter, shorter and more profitable than yesterday\'s downturn.
Second, we have made solid progress in implementing our incremental revenue growth drivers.
We have won a design victory in liquid delivery, we have infiltrated new customers in welding and precision processing, we are landing and expanding with original equipment manufacturers in Korea, we are preparing products for customers in Japan.
Third, we commit to deploying capital through organic investment and mergers and acquisitions and the return of cash to shareholders.
Through this year\'s stock buyback, we have returned $50 million, twice the number of our shares.
2 million shares.
Finally, as I said earlier, we have surpassed the fab equipment industry since 2014, with an annual growth rate of 38% compared to 14% in the industry.
As fab equipment grows in single digits in 2018, we will continue to surpass the industry and we will grow at several times the rate and we can do it again in 2019.
As we all know, Ichor has been implementing our strategic growth plan with little patching
Unparalleled speed, over the industry and every one of our peers and customers.
We hope to gain your confidence in the other year of revenue growth, outperforming the industry, expanding gross profit margin and operating profit margin, strong revenue growth, and multiple drivers of incremental revenue exceeding 2018.
Our view is that we will show our operational and financial flexibility in the third quarter and be stronger than ever before.
Our current visibility is better in the fourth quarter, and our revenue strength is also accelerating as we investigate 2019.
With this, I will hand it over to Jeff to provide more details on our second-quarter financial performance and third-quarter guidance. Jeff?
Thank you, Tom.
Before I start my review, I would like to remind you that the profit and loss indicators discussed today are
GAAP measures unless I identify them as GAAP-based.
These measures do not include the impact of stocks.
Based on compensation fees, amortization of acquired and tangible assets, non-recurring expenses, and independent tax items and adjustments.
I would also like to point out that we have added a timeline that summarizes the GAAP and non-GAAP
The GAAP financial results were discussed in this conference call, as well as key balance sheets and cash flow indicators for the investor segment of our website, as well as revenue by geographical region.
Revenue fell $0. 249 billion in the second quarter.
Growth was 5% per cent over the first quarter and 56% per cent over 2017.
Our revenue for the second quarter included approximately $3 million in revenue from the most recent acquisition of IAN Engineering.
Our gross profit margin for the second quarter was 17.
As a result of lower income levels and lower product portfolios, 8% of revenue declined from expectations.
Gross margin increased by 200 basis points compared to 2017, mainly due to our acquisition of Cal-
Our innovations and improvements in other products.
Operating costs are $12.
7 million, accounting for about 5% of revenue, including about $200,000 related to our acquisition of IAN Engineering.
Our operating margin is 12.
7% declined slightly from the first quarter record, but increased by 220 basis points over 2017 and remained close to our long-term levelterm model.
Our interest expense for the second quarter was $2. 3 million.
After the second quarter, a similar price range was $2. Between $4 million and $2.
As Libor rates rose this year, interest spending was 5 million per quarter.
Our tax rate for this quarter is 9.
5%, including one year-to-
We now expect a date adjustment of 2018 of the overall tax rate.
Lower interest rate, which is the result of the expected decrease in our US profit contributionS.
Earnings per share are about $0. 03 per share.
Net income was $26.
The 7 million base in the first quarter of this year was flat at 10.
7% of revenue, up 72% from the same period last year.
Earnings per share are $1.
02 compared to $1. $03 and $0 for Q1. 60 in the year-ago period.
I\'m moving to the balance sheet now. Cash of $63.
4 million is roughly the same level as the previous quarter.
Our cash flow generated very strongly this quarter, with free cash flow of $25. 8 million.
Total capital expenditure was $5.
1 million, as we continue to increase our ability to support our market share growth opportunities, Tom discussed this in his previous comments.
The company gave a $25 million buyback of about 1.
1 million shares, bringing the total repurchase at the end of the second quarter to $30 million.
Starting in the third quarter, we purchased the remaining $20 million and have now completed a share repurchase authorization of $50 million.
We re-purchased about 2 in total.
The average price is 2 million shares at $22. 78 per share.
We also purchased IAN Engineering for $4 million, and if they achieve certain financial and operational milestones, they will pay an additional fee of up to $4 million in the future.
We will continue to review our capital allocation options to balance the investments needed to ensure that we develop products and build the capacity to support the growth goals discussed earlier by Tom, while balancing this, our value-added acquisition strategy, prudent management of our debt levels and cash flow generation.
24-day sales fell from 27 days in the first quarter.
Inventory fell to $148.
1 million, down 10% from the first quarter, revenue fell by 3.
5%, because we have made very good progress in managing inventory levels.
Our EBITDA was $33 in the second quarter.
9 million. over the past 12 months, we have created an EBITDA of $0. 109 billion.
Our total debt amounted to $0. 19 billion. to-
EBITDA ratio is a comfortable 1. 7.
Now let me talk about the guidance for the third quarter.
Our forecast is that revenue is between $0. 175 billion and $0. 185 billion.
Given these levels of revenue, our earnings per share will be in the range of $0. 49 to $0. 57.
This assumes a slight decrease in gross margin due to the product structure and lower amount of revenue, lower operating expenses, lower effective tax rates and lower total diluted number of shares.
Our third-quarter revenue continued to decline in line with our peers and customers.
In our-
In the guidance for the third quarter, our revenue will be down 28% from 2018, up 9% from the third quarter of last year.
Our revenue guidance includes approximately $2 million related to IAN engineering.
We have a strategy to maintain a highly variable manufacturing cost structure so that we can adapt quickly to market changes as we saw in the third quarter.
We started making appropriate adjustments to the business at the end of June and completed it in early July.
Our goal is to scale the organization at the appropriate level of resources to support a stronger fourth quarter and achieve good financial results, while continuing to invest in the business to support the market share growth opportunities before us.
We deliberately maintain a higher level of resources in our welding parts and machining to support the market share growth we are working to achieve, and the negative impact on our gross margin in the third quarter is about 50 to 60 basis points.
The current tax rate is about 11.
5% this year, given the slowdown in the US economyS.
The profit contribution we are looking forward to now.
In 2018, our cash rate was about 5%.
We expect our share of total dilution to reach 24.
7 million shares in the third quarter.
We are ready to answer the question, operator.
Please open the line. Question-and-
[Answer]
Operation instructions].
Your first question comes from Patrick Ho from Stiffel. J.
First of all, when you talk about showing your manufacturing capabilities to meet current demand trends, given that we seem to have suspended only one quarter, especially for businesses you just acquired, Cal-
The claws of the weld, considering that you have been in a gas delivery system for a while, how do you adjust their capabilities to accommodate these changing environments, you have apparently moved there throughout the cycle?
How do you let new businesses flow into your operating model goals?
Thomas RohrsPatrick, thank you for your question, it was a very good question when we bought Cal
The operating modes of Weld and Talon are somewhat different. And we did -
So we have to make some adjustments on how to deal with this.
The bottom line is, I think Jeff did mention that, and we did-
Welding and Talon, to a lesser extent.
The reason is that I mentioned this in both areas, and we are already doing a lot of qualification reviews for incremental revenue.
Even if we see the overall stronger fourth quarter before us, we see Cal-Weld and Talon.
I mentioned last quarter that we thought it was 2019.
At this point, we are now starting to see that there may be some shocks as early as the fourth quarter of this year.
So the bottom line is that we do cut the number of these two entities, not as much as we do in the gas panel section, mainly because we see opportunities for future market share increases. J. HoGreat. That\'s helpful.
Maybe as a follower
The question is, given that you are being adopted, or at least the strong interest of other customers in welding and precision machining, what are the variables that change the behavior of some other customers, because, as you pointed out in your prepared comments, they are primarily customer-centric?
What are the variables that interest other customers in these products? Thomas Rose
What happened was-
When they operate as independent companies, they have a long time
Personal relationships with specific customers --to-
A relationship.
All we can do is take advantage of our overall relationship with other customers.
By doing so, first and second, have a very, very good reputation with a very high reputationquality and on-
Delivery time, we have been able to go to these other customers.
They chose to start doing some business on our website.
I would say, one of the things that makes Cal-
Weld and/or Talon were on the previous ramp before, they had some problems keeping up with the team there and working with them, they were all very good teams, when we stepped up our investment in the first quarter, as you can recall, our business in the first quarter grew from about $0. 183 billion to about $0. 16 billion.
When we accelerated in the first quarter, we not only increased their business, but we put them in close to 100% of the time --time basis.
So it also makes it easier for others to want to be basically involved in their abilities.
Your next question is from Carl Ackerman of Cowen.
Karl AckermanI has two questions.
Tom or Jeff, given your outlook for September, I think we can all appreciate the flexibility of your financial model.
But first, where is our integration with Talon and Cal?
A year ago, now you are still experiencing this situation, with respect to your goal, Weld?
Secondly, given your comments, shipments should be higher in December and perhaps higher in the first half of 2019, what should we look at operating expenses after the September quarter?
Let me answer the first part.
So, from an organizational point of view, people who operate on any day-to-
The activities of the day, in essence, are as close to 100% integration as possible. So -
To give you a background, we have a functional organization.
We are not organized by product line.
We are not organized by geography.
We\'re not organized by customers.
We organize by function.
We have operational functions, financial functions, engineering functions, marketing and sales functions.
So when we buy a company, essentially, we don\'t run it as a separate business.
We took all their key people.
Key finance personnel will work for the CFO.
Key operations personnel will work for our COO.
Key engineers will be working for our CTO etc.
This makes integration very easy in operation and organization.
In terms of EDP, ERP system and so on, we still have some work to do, more in terms of system.
They are still running with some of their old systems, and I should not say the old ones, but some of their legacy systems.
Then, we integrate in the actual construction of the product.
But we are now working on and starting to address these issues, and so on.
But in general, if you look at the company, I think if you ask our customers, they will say that they are very well integrated at this point.
Good Jeffrey langko.
So with regard to the fourth quarter and ongoing operating expenses, maybe I will answer that.
First, we did not provide specific guidance on operating expenses.
But I think when you accept the comments we made in earnings per share, you will see a considerable drop in Q1 and some drop in Q2, there will be another implicit cut in the third quarter.
We really try very, very hard to keep these things under control.
So what I\'m trying to say is that we don\'t expect anything other than the normal growth you get in the fourth quarter, and sometimes you get something like it.
On top of that, as we enter the end of the year, we will be as smooth and nervous as possible.
Carl, you said you had one more.
Carl ackmanisAs a follow-
Up, you are very vocal about how you acquired IAN to enable you to sell your existing portfolio in two Korean home-grown equipment providers.
With the design of these customers successfully converted into revenue in 2019, will your booking rate lead you to conclude that the merger of the two companies could be 10% of your revenue next year?
I can\'t see it\'s Thomas Rosno.
There are several reasons.
As I have always said, one of them, we are an important supplier of ASML and they have had a great time this year.
Our business there is growing faster than our business elsewhere.
Having said that, they will not be close to 10% because other business a is starting to get bigger;
B is also growing.
So it\'s just a math problem.
If you start in a small proportion, even if you double every year, it will take you years to reach 20% if another person grows 30% or 10% a year to reach.
So no, they won\'t be 10% next year. Operator[
Operation instructions].
Your next question is from Sidney Ho of Deutsche Bank.
Sidney HoJust said at your third-quarter earnings guidance
The drop so far should not be a huge surprise.
Can you talk about your expectations for the relative growth rate between your gas plate and chemical conveying products and your welding and transition processing products?
Will any of them grow faster than others?
Specifically, I am interested in your comments on the growth of your chemical transport business, regardless of whether this is going on as per your plan.
Thomas RohrsSidney, we never split our revenue by quarter.
It is clear that if we do not intend to break through individual segments in terms of revenue per quarter, we will not break through growth rates per quarter.
At the beginning of this year, I did point out that, as we did from the fourth quarter to the first quarter, a significant part of the growth was actually due to our core business, not our acquisition.
I did this because, at this point, two Cal-
Weld and Talon are relatively new and I don\'t want people to think that the core business is just plain and they are growing people.
So I did raise that at the time.
But generally, we don\'t break through what we\'re doing in terms of revenue from any particular product line we have. Sidney HoOkay. That\'s fair.
Maybe my followers
You seem to agree that the third quarter is a key customer for the trough period.
Tom, you mentioned that your visibility is better for the fourth quarter.
Can you talk about how much you expect to recover in the fourth quarter?
How will you adapt to not having much inventory in the supply chain this quarter, is this-
Is your customer or somewhere else in the supply chain?
Yes, Thomas.
Similarly, we will not lead to the fourth quarter.
In the comments I have prepared, I have said a lot to it, and in terms of how I feel about it, I have tried my best.
I think that is very clear, though.
I think my statement is very clear and we saw a turnaround in the fourth quarter from where we were.
So let\'s keep the status quo.
What is the second part of your question?
Sidney HoThat is, how do you feel comfortable that there is no stock in the supply chain yet?
People have also been worried about this.
That would be-
This will affect us now.
In other words, if there is stock in the off-season supply chain, the customer will actually use that stock instead of the time to place an order with us, which has always been the case in the past, if you wish.
That\'s why vendors drop 25% or 30% when customers drop 50% or 60% because-
Before they place a new order, their request comes out of stock.
Obviously, as we are-
As you know, Sidney, anything different from analysts and investors, this time it\'s not the case, I think it\'s because, as I said, the relationship between the original equipment manufacturer and the supplier, obviously I will speak specifically for Ichor, the relationship is like this, there is more trust, more understanding.
In fact, many of our orders are almostin-
Time order, we will have our products
They call it a combined shipment, and we actually merged the products on our way to the customer\'s website, not to mention sending them to the OEM\'s inventory, waiting for the integration.
So I think it\'s just a very, very good way to get to know what we \'ve been talking about and we really expect any recession to be very consistent with our customers, of course there will be no larger order of magnitude.
It is strange that we are happy to have the opportunity to prove this.
Jeffrey Andry Sidney, this is Jeff.
I will, as you ask.
I think, under our guidance, how confident we are, and you can see that our revenues are very, very consistent with what the industry sees.
This is also the source of our confidence.
I hope so will yours.
This is true.
If I can squeeze out another problem in terms of capacity to follow up on the previous issue.
You mentioned recently that there are some adjustments to your ability.
Can you remind us of your capital expansion plan?
What kind of income can you support?
When is the current plan fully implemented?
Jeffrey and Reina, yes. Never -
I think we\'re starting to talk about this and even as we get into the year we\'re going to spend somewhere between 1.
5% and 2% of capital expenditure income this year. We are -
We are very cautious about this, but we will not stop projects that allow us to gain market share.
I think Tom said that the market share opportunity before us is about $100 million.
I said I think
In addition, we say that capacity increases can be handled in roughly the same range.
We bring them online when we need them.
They don\'t just come at once.
So this is a big piece.
Your next question comes from Edwin Mok of Needham.
Tom [Edwin Mokso] wants to knowindiscernible]
Let\'s talk about precision, some machining and welding parts today.
Is there any growth this year [indiscernible]
What growth opportunities?
I mentioned in my statement, Edwin, let me go back at this point.
When I talked about this a quarter ago, I thought it was 2019 in terms of some precision machining and a little bit of welding.
We now think we may see some in the fourth quarter of this year.
Anyway, if there is one, it always bodes well for us to be more optimistic about it.
Edwun MokAnd just to clarify [indiscernible]
The number of incremental revenue you expect-
You believe you may be caught in 2019 with the increase of these 4 drivers. Is that fair?
Jeffrey and Reina, yes.
I think we are very much in line with the opportunity of $100 million.
We did not break this for all of these incremental drivers.
But we have been talking about this for next year.
As far as Tom is concerned, it may happen a little this year, but it will start to grow slowly.
I think, Edwun MokJeff, you answered my next question, which is that you will not break out between the four opportunities for this $100 million opportunity.
Jeffrey AndreanoEdwun MokYes. Okay. Right. That\'s helpful.
Can you talk about profit?
I mean, obviously, because Cal-
The welding has slowed down and we expect the business to improve in the fourth quarter as well, so it will recover.
Is that what you think of the long term? I think how will your profit margin change in the first and second quarters?
In fact, the operating profit margin for the first quarter was 13%, even lower than this quarter.
Is this the way to think about your long term problems?
Term margin target for model?
Jeffrey and Reina, yes.
I think the way you should think about it is, obviously, Tom talked about the gross margin of 16%, which was about 18% last quarter.
But we have a model. And what you -
If you look at it, you will see the incremental margin flowing on it.
So whether you model our revenue numbers in the fourth quarter, you\'ll see incremental profits --
I will not give you the exact number, but it will be in the north of 20% and the south of 25% depending on our components, compared to the gas panel business, precision machining and welding have a higher incremental profit due to its fixed cost structure.
So you will see the leverage in the model.
Like Tom said, I think we will.
We will continue to drive all of our operational plans and hope to increase those incremental profits. But they\'ll -
It will recover as it grows.
Please also keep in mind that during this period we carry some redundant resources that we expect to increase in the next period. So -
I have then commented on OpEx.
We will also be very, very cautious there. Operator[
Operation instructions].
There are no further problems.
I transferred the phone back to Tom rose.
Ed Thomas rawlgood
Thank you all for joining our conference call for this quarter and we look forward to providing you with the latest information at our third quarter conference call on November. Thank you.
Operator at the end of the conference call today.
You can disconnect now.
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