Ichor Holdings' Q3 2025: Contradictions Emerge on IMG Revenue, Gross Margins, and Internalization Strategy

Date of Call: None provided

Financials Results

• Revenue: $239.3M, up 13% YOY, roughly flat sequentially (vs Q2)
• EPS: $0.07 per share (Q3)
• Gross Margin: 12.1%, impacted by ~100 bps reduction due to lower IMG volumes
• Operating Margin: ≈2.1% (operating income $5.1M; operating expenses $23.8M)

Guidance:

• Q4 2025 revenue expected $210M–$230M.
• Q4 2025 gross margin expected 10%–12%.
• Q4 operating expenses ~ $23.7M; net interest ~ $1.7M; tax expense ~ $0.9M.
• Q4 EPS guidance range: loss $0.14 to profit $0.02 (34.5M shares).
• Full-year non‑GAAP tax expense unchanged at $5.6M; 2026 assumed effective tax rate 15%–17%.

Business Commentary:

* Revenue Performance and Market Demand: - Ichor reported third quarter revenues of $239 million, exceeding the midpoint of expectations and up 13% year-over-year. - The upside in Q3 was primarily due to customer accelerations of gas panel deliveries for dry etch and deposition applications, reflecting strong demand in leading-edge investments.

• Non-Semi Segment Decline and IMG Impact:
• The demand profile for non-semi markets weakened during Q3, particularly affecting the IMG business, with a one percentage point impact on Q3 gross margin.

• The decline in IMG order rates, particularly in commercial space and aerospace and defense, resulted in lower than expected revenue volumes, impacting gross margin.

• Customer Demand and Forecast Revisions:

• The company's Q4 forecast reflects meaningful forecast revisions from its third and fourth largest customers, indicating continued slowing in system build rates for certain applications.

• The revisions are due to a pullback in demand across various segments, including EUV lithography and silicon carbide, alongside the decline in non-semi markets.

• Future Growth and Strategic Focus:

• For 2026, Ichor plans to leverage its strategic investments to strengthen long-term profitability and drive earnings growth faster than revenue.
• The company is focused on improving product margins across all verticals, completing customer qualifications, and transitioning products to volume for competitive edge.

Sentiment Analysis:

Overall Tone: Neutral

• Management highlighted a Q3 revenue beat ($239.3M) but noted gross margin pressure (12.1%) from lower IMG volumes and downward revisions from key semi customers. Guidance lowers Q4 revenues to $210–$230M and gross margins to 10%–12%, while management emphasized operational fixes, product ramps and a strategy to drive mid‑teens margins longer term.

Q&A:

• Question from Brian Chin (Stifel): Can you quantify the Q3 IMG revenue shortfall, expected Q4 decline, drivers, and prognosis for returning to Q2 revenue levels next year?
  Response: ≈$2.5M short vs. expectations in Q3, a similar incremental decline expected in Q4; cause is timing/funding delays from prime contracts to the sub‑tier; company expects stabilization in Q4 and recovery beginning Q1 with a return toward planned levels by Q2.

• Question from Charles Xie (Needham): Were the Q3 pull‑ins tied to your #3 and #4 customers, or were they from other customers?
  Response: Unrelated: the Q3 pull‑ins were primarily from the largest customer; the downward revisions from #3 and #4 are separate drivers of Q4 weakness.

• Question from Charles Xie (Needham): Are you aligned with a back‑half‑weighted WFE recovery next year and how does that affect Ichor's outlook?
  Response: Yes—management expects a back‑half‑weighted 2026 with front half relatively flatter and stronger inflection in H2 (and stronger 2027 thereafter).

• Question from Craig Ellis (B. Riley Securities): How do you move gross margin from ~12% to mid‑teens at a $250M run rate—what are the specific contributors?
  Response: Key levers are improved margins on proprietary products (valves/flow control), operational footprint rationalization (cost reductions), and increasing higher‑margin machining business mix; benefits roll through in 2026 and more materially in 2027.

• Question from Chris Sancar (TD Cowen): Update on U.S. machining hiring/capacity and timing for valve customer qualifications/adoption?
  Response: Minnesota hiring targets have been met; capacity will scale by adding Malaysia and Mexico production; the fourth valve customer is expected to come online in H1 next year.

• Question from Edward Yang (Oppenheimer): Are hiring/retention issues in U.S. machining resolved and will your CTO background help operational execution vs R&D focus?
  Response: Hiring issues addressed via incentive programs and met for Minnesota; management will duplicate production in lower‑cost regions and the CEO’s product/operations background will focus on smoother product transitions and execution in 2026.

• Question from Christian Schwab (Craig‑Hallum Capital Group): Do you expect 2026 year‑over‑year growth versus 2025; can you hit mid‑teens gross margin in H2 2026; is 20% long‑term gross margin still the aspirational goal?
  Response: Yes—management expects 2026 growth (back‑half weighted), plans to reach mid‑teens gross margin in H2 2026, and retains a long‑term aspirational 20% gross margin target enabled by flow‑control vertical integration.

Contradiction Point 1

IMG Revenue Decline and Recovery Expectations

It involves differing expectations regarding the timeline and reasons for a decline in IMG revenue, impacting financial forecasts and investor expectations.

What was the Q3 revenue shortfall from IMG? What is the expected Q4 decline in IMG sales? What is driving the decline? What is the outlook for returning to Q2 revenue levels by next year? - Brian Chin (Stifel)

2025Q3: IMG revenue shortfall in Q3 was about $2.5 million, primarily in higher margin businesses. Q4 will see a similar decline, with stabilization and recovery expected by Q1 2026. The decline is driven by supply chain delays and delayed program funding from primes. - Greg Swyt(CFO)

What upside expectations from earlier this year are no longer expected? - Yu Shi (Needham)

2025Q2: The $5 million revenue haircut is primarily driven by reduced EUV and U.S. OEM CapEx investments. - Jeffrey S. Andreson(CEO)

Contradiction Point 2

Gross Margin Improvement and Strategic Focus

It highlights differing perspectives on the primary drivers of gross margin improvement and the company's strategic focus, which are crucial for financial performance and investor confidence.

1. Excluding the lower IMG mix impact, did Q3 gross margins improve ~60 bps sequentially due to improved operational execution in Minnesota's internal component supply ramp? 2. Phil, what specific actions will the company take over the next 6-12 months to sustainably improve internal supply execution and product yield, creating a foundation for meaningful gross margin expansion once revenue returns to $250M/quarter levels? - Craig Ellis (B. Riley Securities)

2025Q3: The gross margin improvement is due to operational improvements and aligning with projected product margins. Our focus is on volume production, improving product margins, and expanding our product lineup. - Phil Barrows(CEO)

Can 20% gross margins still be achieved with higher revenue and smoother manufacturing? - Christian Schwab (Craig-Hallum Capital Group)

2025Q2: 20% gross margins are our target. We'll reach this through internal sourcing of flow controllers and gas boxes, which have high IP content. These products will significantly impact our margins positively as production ramps. - Jeffrey S. Andreson(CEO)

Contradiction Point 3

Internalization of Components and Gross Margin Impact

It involves expectations regarding the internalization of components and its impact on gross margins, which are crucial for understanding the company's financial performance and growth strategy.

Can you quantify IMG’s Q3 revenue shortfall? How much is IMG’s Q4 sales expected to decline? What factors are driving the decline? What is the prognosis for returning to Q2 revenue levels next year? - Brian Chin(Stifel)

2025Q3: In Q1, we didn't achieve the flow through we anticipated due to purchasing more external supplies than forecasted. We expect to see improvement in Q2 as our internal supply catches up. - Jeff Andreson(CEO)

What caused the rise in external resource purchases? - Charles Shi(Needham and Company)

2025Q1: In Q1, we didn't achieve the flow through we anticipated due to purchasing more external supplies than forecasted. We expect to see improvement in Q2 as our internal supply catches up. - Jeff Andreson(CEO)

Contradiction Point 4

Gross Margin Improvement Outlook

It involves the expected timeline and drivers for gross margin improvement, which are important for assessing the company's operational efficiency and financial performance.

The press release indicated optimism about improved business levels in next year's first half. Could you share more details on your visibility for months/quarters and what indicators suggest the business trajectory will improve by then? - Brian Chin(Stifel)

2025Q3: We are seeing initial signs of recovery in Q1 2026, with IMG stabilization and growth from smaller customers. Optimization of our operations and product margin improvements will drive our growth in the second half. - Greg Swyt(CFO)

What challenges did you face in forecasting supply needs? - Charles Shi(Needham and Company)

2025Q1: Despite some headwinds, we're working through them and expect to show incremental improvements in gross margin throughout the year. - Jeff Andreson(CEO)

Contradiction Point 5

IMG Revenue and Market Demand

It reflects differing perspectives on the stability and recovery of revenue from the IMG segment, impacting investor expectations regarding Ichor's financial performance.

What is the revenue shortfall from IMG in Q3? What is the expected decline in IMG sales for Q4? What is driving the decline? What is the prognosis for returning to Q2 revenue levels by next year? - Brian Chin (Stifel)

2025Q3: IMG revenue shortfall in Q3 was about $2.5 million, primarily in higher margin businesses. Q4 will see a similar decline, with stabilization and recovery expected by Q1 2026. The decline is driven by supply chain delays and delayed program funding from primes. - Greg Swyt(CFO)

Are you being conservative in your revenue stabilization outlook, or increasing resources to improve responsiveness? - Brian Chin (Stifel)

2024Q4: Our expectation is that demand strengthens across all segments of our business driving a recovery back to capacity utilization rates during 2025. - Jeffrey Andreson(CEO)