Ichor Holdings, Ltd. (ICHR) Earnings

Management highlights

- **Strategic Execution Progress**: Management confirms the company is delivering on its 3-quarter-old strategy to strengthen operating models, expand margins, and prepare for the coming semiconductor growth cycle. Strategic footprint realignment and manufacturing transitions are on schedule, with gross margin expanding by 130 basis points in Q2, exceeding the 100 basis points per quarter target, reaching over 14% and delivering the highest quarterly earnings in three years. The company completed its full $200 million ATM equity offering in Q2, issuing 2.48 million shares at an average price of $80.70 for $195 million in net proceeds, strengthening its balance sheet and providing flexibility for strategic investments. - **Demand Environment**: The underlying demand environment has continued to strengthen since the last earnings call. The company has recorded 15% sequential revenue growth in both of the first two quarters of 2026, with technology transitions for AI infrastructure, gate-all-around architectures, advanced memory, and leading-edge process technologies driving strong demand that favors I-Corps' product portfolio. Management has higher confidence in the magnitude and duration of this growth cycle than at any point in 2026 to date. - **Manufacturing and Supply Chain Progress**: The company secured key customer qualifications for its new high-volume manufacturing site in Malaysia during Q2, including for machining and welding operations, an important milestone for its insourcing and supply chain optimization strategy. The company has existing capacity to support $500 million in quarterly revenue, and can expand capacity within its existing footprint to up to $3 billion in annual revenue (more than double the current run rate) with targeted incremental investment, primarily for high-value proprietary component production. - **Product and Margin Improvement**: Product mix shifted to a more favorable profile in Q2, with strength in proprietary products, higher-value manufacturing services, and commercial space businesses. Margin improvements come from structural operational efficiencies and product transitions, not just higher volume utilization. Insourcing of proprietary component production is progressing on track, reducing reliance on external supply and increasing long-term competitive advantage and margins.

Guidance

- **Revenue Guidance**: Management upwardly revised full year 2026 revenue growth guidance to at least 30% year-over-year from 2025, in line with the high end of overall wafer fab equipment (WFE) growth expectations. Q3 2026 revenue is guided to a range of $315 to $345 million, representing 12% sequential growth at the midpoint and 38% year-over-year growth. Second half 2026 revenue is expected to be at least 25% higher than first half 2026, with sequential growth exceeding 10% expected in both Q3 and Q4 2026. - **Margin Guidance**: Gross margin for Q3 2026 is guided to 14.5% to 15.5%, maintaining the company's target of 100 basis points of gross margin expansion per quarter through the end of 2026, even after exceeding Q2 guidance. Management remains confident in reaching a 20% long-term gross margin target, with multiple achievable paths to this goal even if flow control component insourcing is delayed. - **Profitability and Cost Guidance**: Q3 2026 non-GAAP EPS is guided to a range of $0.40 to $0.50. Total 2026 operating expenses are expected to increase only 6% year-over-year from 2025, with nearly all of the increase in R&D, and OpEx is expected to hold at a $25.5 million quarterly run rate for both Q3 and Q4. Capital expenditures are expected to trend higher in the second half of 2026 as capacity expansion is accelerated, but will remain within the target range of approximately 3% of annual revenue. - **2027 Outlook**: Management sees strong early demand momentum for 2027, with customers placing purchase orders 6 months in advance (an unusual level of visibility), and expects significant growth from the company's lithography customer in 2027. The company is gearing up for significant 2027 demand growth.

Segment performance

I-Corps does not break out detailed product segment financial results in this call, only sharing overall firm-level results. Total GAAP revenue for Q2 2026 was $294.8 million, a 15% sequential increase from Q1 2026. Non-GAAP gross margin hit 14.1%, up 130 basis points sequentially. Non-GAAP operating expenses were $25.3 million, pushing non-GAAP operating margin to over 5.5%. Non-GAAP diluted EPS was $0.34, an over 100% increase sequentially from Q1. EBITDA grew more than 50% sequentially to over $21 million. Capital expenditures for the quarter totaled $7.8 million. The company notes strong growth in the non-semiconductor segment, particularly commercial space and aerospace/defense, with commercial space leading growth in Q2, while proprietary products and higher-value manufacturing services also outperformed in the quarter.

Risks & headwinds

- Isolated parts shortages (specifically for flow control components) caused approximately $5 million in Q2 expected revenue to be recognized one week after the quarter end, though this issue has been fully resolved and did not impact customer delivery timelines. - Flow control components remain a persistent supply chain risk, and are one of the top supply chain concerns for management. - The company is currently using cash to build inventory in preparation for continued demand growth, resulting in negative operating cash flow in Q2, with positive operating cash flow not expected to return until the first half of 2027. - Reaching the 20% gross margin target and $3 billion annual capacity target still requires incremental targeted investment, and successful execution of ongoing manufacturing transition and qualification plans, with some uncertainty around timing of full capacity utilization. - Actual future results may differ materially from forward-looking guidance due to general market and supply chain uncertainties outside of the company's control, as outlined in regulatory filings.

Analyst Q&A

• Q: I-Corps guided 30%+ full-year 2026 growth, how does this align with customer commentary on WFE growth? Are there supply or timing factors explaining the gap? /

  A: Management states the 30%+ growth guidance reflects a weighted blend of all customers' outlooks, aligned with the higher end of current overall WFE growth consensus. The company is growing in line with its customer base, and will continue to monitor trends as the cycle progresses. In a follow-up, the analyst asked about inventory levels at the company's key lithography customer; management responded inventory levels have held steady, and the inventory drawdown is expected to complete by the end of Q2, with significant growth from this customer penciled in for 2027.

• Q: The pushed Q2 revenue was due to parts shortages—was this flow controllers, and did it impact customer delivery timelines? When will operating cash flow return to positive after inventory builds? /

  A: Management confirms the shortage was isolated to flow control components, an ongoing supply chain focus, but notes the delay only shifted revenue recognition by a few days across quarter end and did not impact customer delivery schedules or customer output. CFO Greg Swyt adds that near-term inventory investments will continue to meet demand, and operating cash flow is expected to return to positive in the first half of 2027 once the current demand ramp stabilizes.

• Q: Did management confirm the company can reach $3 billion in annual revenue within its existing footprint? When will this capacity be available? /

  A: Management confirms that existing brick-and-mortar infrastructure can support up to $3 billion in annual revenue, only requiring incremental investment in small amounts of additional clean room space (already underway in H2 2026) and additional machining capacity. While management declined to give an exact timing for full $3 billion run rate, it confirmed the company is gearing up for significant 2027 growth to meet coming demand.

• Q: What is the current progress of I-Corps' insourcing roadmap for proprietary components, and what is the target for the next 12 months? How does this impact margins? /

  A: Management reports that as of Q2 end, internal proprietary content hit a 25% run rate, in line with previous plans. The company targets 30% internal content by the end of Q3 2026, and 35% by the end of Q4 2026, driven by ramping production at the new Malaysia and Mexico facilities. Insourced components are delivering larger-than-expected product margin increases, and are the primary driver of ongoing quarterly gross margin expansion.