Good day, ladies and gentlemen, and welcome to the Ichor Systems first quarter 2019 earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require assistance during the conference, please press star and zero on your touch-tone telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Claire McAdams, investor relations for Ichor. Please go ahead.
Thank you, operator. Good afternoon, and thank you for joining today's first quarter 2019 conference call, which will be available for replay telephonically and on Ichor's website shortly after we conclude this afternoon. As you read our earnings press release, as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in our earnings press release, those described in our annual report on Form 10-K for fiscal year 2018 on file with the SEC, and those described in subsequent filings with the SEC. You should consider all forward-looking statements in light of those and other risks and uncertainties.
Additionally, we will be providing certain non-GAAP financial measures during this conference call. Our earnings press release contains a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures. On the call with me today are Ichor's Chairman and CEO, Tom Rohrs, and our President and Chief Financial Officer, Jeff Andreson. Tom will begin with a review of our results and outlook. Jeff will provide further detail regarding our growth initiatives, first quarter results, and second quarter guidance. After the prepared remarks, we will open the line for questions. I'll now turn over the call to Tom Rohrs. Tom?
Thank you, Claire. Welcome to our first quarter conference call. Ichor continues to operate with strength and profitability in the current industry downturn. The first quarter came in above where we expected, with revenues above the midpoint of guidance at $138 million. This represents a decline of 2.5% from the fourth quarter, better than what most of our peers and customers are reporting. We think this indicates two things. First, that our market share gains are helping to offset the weak spending environment. Second, that the inventory corrections are largely behind us as we enter Q2. Our results also demonstrate that our customers are not pursuing a strategy to reduce their outsourcing during a period of weak industry spending. During the first quarter, we continued to make progress executing on our strategies to grow our share within our served markets.
This gives us increased confidence that our revenue levels will be meaningfully stronger in the second half of the year compared to the first. Our first quarter earnings were $0.25 per share, $0.02 shy of the midpoint, but still demonstrating solid profitability at these revenue levels. I feel that we have done well adjusting to weakening business conditions as we executed right-size strategies over the last two quarters. Today, we have balanced our resources between the current level of business and the increased sales we expect in the second half. With our reduced operating expenses and variable manufacturing cost structure, we will be in a position to demonstrate our financial and operating leverage as our revenue rebounds in the second half. As we look forward to the second quarter, we expect a similar level of revenues as the first quarter.
We believe this reflects continued favorable trends in our results compared to the overall soft wafer fab equipment spending environment. For example, while we believe that the bulk of downward revisions in industry spending are behind us, recent industry reports indicate continued modest sequential declines of about 5% or so in new OEM system deliveries for process tools in the second quarter. For Ichor, in particular, we are witnessing a one-quarter drop in sales to our lithography customer before their revenues pick up significantly in the second half. Offsetting these two quarter-over-quarter headwinds are the gains we are making in winning incremental business in each of our served markets. We remain on track to achieve incremental revenues for market share gains this year of about $75 million-$80 million as we said last quarter. Our gains to date contribute incremental revenues in the single digits for the first quarter.
We expect to move into double digits for the second quarter and accelerate from there. Consistent with our comments last quarter, we continue to expect our incremental revenues from market share gains will be strongly weighted to the second half of the year. Jeff will discuss our progress during his prepared remarks. With this trajectory, we really don't need to see much of a recovery in WFE spending in order to see meaningful growth in sales and significant operating leverage as we progress through the back half of the year. Therefore, despite a weak environment for process tools through the remainder of 2019. We are confident in a meaningfully stronger second half, driven not only by share gains, but also by our position in EUV lithography, where we will see volumes bounce back to record levels starting in Q3.
On top of this, we could begin to see a modest replenishment of inventories in our components business later in the year in preparation for improving demand for etch and deposition tools heading into 2020. While we continue to remain cautious given current business conditions, these factors all contribute to our optimism that our revenue run rate as we exit this year should be positive indicator for a much stronger period of financial performance ahead. As we navigate through a challenging business environment in 2019, our strategy is unchanged. We are a semiconductor equipment supplier concentrated on fluid delivery technology. We believe that through the cycle, semiconductor business will continue to grow faster than most other industrial businesses, and that we are very well-positioned with our key customer accounts.
We also have several strategic footholds that will help drive increasing share of our served markets, which in a stronger spending year, add up to $400 billion of total opportunity for Ichor. Over the last four years, we have outperformed the wafer fab equipment 12% annual growth rate with our own annual growth rate of about 25%, and we fully expect that as we execute on our opportunities for share gains, we will continue to grow faster than the WFE market looking forward. Before turning the call over to Jeff, I'd like to highlight his promotion to President. This promotion recognizes Jeff's significant contributions to the success of Ichor over the past year and a half.
Jeff's leadership capabilities and financial and operational expertise will be key factors in leading the company through this next important phase of growth within our served markets, with a focus on continued improvements in operational execution and financial results. My focus as Chairman and CEO is on executing the company's strategic initiatives for growth. In his new role, Jeff now has responsibility for managing all operating aspects of the business, including sales and marketing, R&D, and operations. He will continue to serve as Chief Financial Officer of the company until a new CFO is appointed. As such, I'll have Jeff provide an update of some key highlights of our progress made in the first quarter on our business initiatives before he concludes our prepared remarks with the financial details of our first quarter results and our Q2 guidance. Jeff?
Thank you, Tom. It's been a seamless transition so far in becoming President. I'm already encouraged by the strength and collaborative nature of our customer relationships in my meetings with our key customers so far. Likewise, in the strength and collaborative nature of the leadership team here at Ichor. I am also encouraged by our progress to date in finding strong talent to take over for me in the CFO role. As Tom mentioned, with the bulk of the downward revisions in expected 2019 industry spending behind us, we are on track to achieve the $75 million to $80 million of incremental revenues we are targeting this year for market share gains. We are very pleased with the progress made to date, and in the first quarter specifically, we recognized revenue related to share wins in gas delivery systems, weldments, chemical delivery systems and components, and precision machining.
I should note here that the SAM Tom mentioned earlier is $4 billion, not $400 billion. In our gas delivery business, we have won incremental share at two of our largest customers. The first win came in the fourth quarter and began shipping in Q1. The second win was awarded in the first quarter, with first shipments occurring in late Q1. In our weldments business, we have been qualified on several waves of parts with a new customer and are in process on several more. These phases of qualifications represent well over half of what we are chasing for the year. We now have completed our expansion in Malaysia for both weldments and chemical delivery or plastics products. Our expansion in this low-cost region will allow us to compete more effectively in other segments of the broader chemical delivery market.
In our precision machining business, this qualification has a longer cycle time than the weldment side of our business. While we are seeing some modest revenue for new wins, the first meaningful revenues are expected in the second half of the year. In our chemical or liquid delivery business, we have picked up some additional share that is incremental to our proprietary liquid delivery module, with revenue expected to begin in the second quarter. The largest growth driver for our chemical delivery business remains our proprietary liquid delivery module. We have begun our revenue ramp, and we expect to see more meaningful levels of LDM revenues in the second half. We continue to make solid strides in our geographic expansion strategy.
While our EN Engineering business continues to be negatively impacted by the lower level of memory spending this year, during the first quarter, we completed an extension of our existing supply agreement with our largest customer in Korea, and we are using this slow period to double down on our efforts to penetrate additional Korean OEMs. We are in the early innings, but we continue to see a large opportunity in Korea. In Japan, we continue to make progress on a partnership agreement that will enable us to market our LDM product directly to OEMs in Japan. On the R&D front, we are developing an innovative new gas delivery platform and are in the initial stages of discussions with our customers. This platform will bring both technology and cost improvements to our customers.
To summarize, we are making solid progress across the board on our incremental revenue initiatives, with revenues from these share gains strengthening into the second half. These, combined with the back-end-loaded year for our third-largest customer, position us well for a stronger second half and into 2020. I look forward to updating you each quarter on our progress. Now I'll discuss our financial performance and second quarter outlook. First, I'd like to remind you that the P&L metrics discussed today are non-GAAP measures, unless I identify the measure as GAAP-based. These measures exclude the impact of share-based compensation expense, amortization of acquired tangible assets, non-recurring charges, and discrete tax items and adjustments.
I'd also like to note that a schedule which summarizes our GAAP and non-GAAP financial results, as well as key balance sheet and cash flow metrics and revenue by geographic region, can be found on the investor section of our website. First quarter revenues of $138 million were down 2.5% from the fourth quarter and down 47% from our record quarter one year ago. Our first quarter gross margin of 14.9% declined from the fourth quarter, primarily due to less favorable product mix, as well as slightly decreased volume. Operating expenses of $11.7 million increased from the fourth quarter, and while we had forecast a modest increase driven by the timing of payments for employer taxes and variable compensation, OpEx was slightly higher than forecast due to a lower level of customer-funded NRE.
Operating margin of 6.4% represented a 110-basis-point decrease from the fourth quarter of 2018 as a result of the slightly lower gross margin and increase in operating expenses in a relatively flat revenue environment. Our interest expense in the first quarter was $2.8 million. Our tax rate for the quarter was 7%. The lower rate is primarily the result of a one-time adjustment, as well as a slightly lower tax rate compared to forecast. First quarter net income of $5.6 million was equal to 4% of revenue. Earnings per share was $0.25. I'll turn to the balance sheet. Cash of $31.6 million decreased $12.2 million from year-end, reflecting a reduction in debt of $7.4 million, capital expenditures of $4.9 million, and the $1.6 million in early quarter share repurchases discussed on our last earnings call.
Free cash flow was a use of $5.2 million in the first quarter and was negatively impacted by the back-end loaded shipment profile for the quarter, which also increased our day sales outstanding to 36 days from 26 days in the fourth quarter. Inventory decreased 6% from the fourth quarter, down $7 million to $114 million at quarter end. I'll turn to our second quarter guidance. Our forecast is for revenues in the range of $133 million-$143 million, which is flat ±4% from Q1. Our revenue guidance is better than forecast for new systems for process tools in the second quarter, demonstrating that our market share gains have an increased contribution to sales compared to Q1.
Our earnings guidance of $0.20-$0.26 per share reflects similar operating profitability compared to the first quarter, but with a higher tax rate of 11% compared to 7% in Q1. We expect improvements in gross and operating margins to commence in the second half of the year. Operator, we are ready to take questions. Please open the line.
Thank you. Ladies and gentlemen, if you have any questions or comments at this time, please press the star and then the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, if you have any questions or comments, please press star then one. One moment for questions. Our first question comes from Sidney Ho with Deutsche Bank. You may proceed.
Thanks for taking my questions. My first question is, you talked about increased confidence that the second half 2019 will be meaningfully stronger than the first half. Do you mind giving us a range what you're thinking? Just to be a little more color, are you expecting the core business to be kind of flat, if there's such a thing as core business, to be flat half over half, meaning the incremental revenue is going to come from the share gains and the new opportunities?
Yes. Basically, that's exactly right, Sidney. We expect plus or minus the core revenue to be flat. I think last quarter, we used the term bumping along the bottom, and we still feel like we're bumping along the bottom. I think you probably noted that, I think, this past quarter, Lam's Q2 guidance was to be down about 4%.
For the company, that translates into about down about 6% for new systems. We don't know exactly what Applied's going to do, the bottom line is that we don't see a lot of growth out there at this point. Bumping along the bottom is a good way to describe it. There are a couple of exceptions to that. One is, I think you know, and most people know that ASML is expecting a strong second half. We had a good year with ASML last year in the first quarter, I mentioned that the revenue for ASML in the second quarter is down quite a bit for us. If you had listened to their earnings, they talked about actually making some improvements in their first release of the EUV tool, that'll start to be produced in the second half.
We'll see a bump in ASML revenue, the core process tools we think will be bouncing along the bottom. The majority of the share gains, again, we targeted that at $75 million-$80 million. The majority of that revenue will show up in the second half with the third quarter being significantly larger than the second quarter, the fourth quarter being significantly larger than the third. You can kind of draw yourself a linear ramp up and get an idea of what that might look like.
Great. That's helpful. My follow-up question is: previously you talked about you expect customer inventory levels to normalize by the end of Q1.
Yes.
Your comments today seem to suggest that actually happened.
Yes.
I'm curious if you think inventory normalized at your largest customers as well as the other customers? I'm asking because it seems like the data points are still very mixed out there. Maybe just to follow up to that, as you look into your bookings, can you talk about the linearity of Q1 and maybe into April? Was there any noticeable pickup in any of the end markets? Thanks.
Yeah. We believe that, overall, the inventory corrections have about run their course, which is excellent news. By the way, that's not to say it's run its course in every product, in every product line, in every customer, because obviously all of those customers have a number of different products, and they carry different levels of inventory depending upon the product, depending upon where they think things are going for them on a very individual basis. We're not talking about a clean sweep where everything happens at once. It's some get better, then others get better, then others get better.
In general, we're seeing a situation where a lot of those inventory corrections have taken place, which means that, again, if Lam's shipments are going to be down 3% or 4%, theoretically our shipments should be down 3% or 4% as well, and not more than that because they're taking it out of inventory. Now, we told you our second quarter shipments are going to be flat. They're not going to be down 3% or 4%. We also told you that we expect ASML to actually be down quite a bit as they do their improvements on their product. Therefore, that's why the market share gains are so important as they bring those downward headwinds back to a flat level for us in Q2.
Thank you very much.
You're welcome.
Sidney, you had a question about bookings. Just keep in mind, our bookings are a couple of weeks long, so it's not a strong indicator of a huge backlog or anything. I'd say our visibility on the business kind of remains about what it was last year.
Okay, great. Thank you.
The last quarter, sorry.
Yep.
Thank you.
Our next question comes from Tom Diffely with D.A. Davidson. You may proceed.
Yes, good afternoon. I guess first, when you're talking about the $75 million-$80 million of incremental, is that a dollar amount or is that a run rate that you expect by the end of the year?
That's a dollar amount, meaning that the run rate at the end of the year will be at a higher level than that, obviously. As kind of Tom says, it's ramping through the year, and we talked about it being in single digits and then in double digits. You can infer from that it'll be pretty heavily weighted to the back half, and then we'll exit the fourth quarter at a much higher level than what the ramp was through the year.
Okay. When you look at the new business that you're adding, is there a meaningful difference in the margin structure between gas panel work and weldments and precision machining?
Yes. Some of the share gain obviously is gas panels, but I would say that in the weldments and the precision machining, and even later in the year with the LDM, they're all at higher margins than you're seeing in the business today. Probably in general, we've talked about our weldments being around the 20s, the low 20s, and the precision machining around the low 30s or so, and LDM will be somewhere in between those. They'll be incrementally accretive for us.
Okay, great. Then when you look at the different segments out there, memory, logic, foundry, is there a meaningful content difference that you have on the different system types or the different end markets that they're serving?
No. It's well known that our three largest customers are Lam, Applied, then ASML, quite a bit lower than Lam and Applied. Yes. Lam is obviously tilted towards memory. I believe most people would argue that Applied has a little more tilt towards logic or foundry. Then, of course, with ASML, they're used kind of across the board. With all that added in, I would say, just because the industry might have a skew towards memory over logic and foundry, we would probably follow the industry segmentation pretty closely.
Okay, good. Finally, when you talk about an opportunity in Korea, do you have to ramp a facility there, or do you have to buy a local company, or how do you penetrate that market?
Well, we did an acquisition basically a year ago, at this time called EN Engineering. It came with a footprint. It has a clean room. I would say that for us to significantly grow that business, we will have to do a level of investment in there to increase the capacity.
Okay. Thanks for your time.
You bet.
Our next question comes from Karl Ackerman with Cowen. You may proceed.
Hi. Thank you, gentlemen. If I could just go back to a previous question. I appreciate all the color on your opportunities to expand from EUV adoption and the $75 million of incremental design wins this year, as well as some longer-term prospects of targeting the equipment suppliers in Japan and Korea. Going back to the previous question, when should we expect to see meaningful revenue from equipment subsidiaries in Japan and Korea? Is that something of a 2019 event or more of a 2020 event?
Well, Japan is certainly a 2020 event. I think if you recall what we had said, we're actually moving very close now to have an agreement. We're now in the second quarter of this year. While we knew this was going to take a reasonable amount of time, we're kind of right on schedule. We believe we'll start seeing some amount of revenue in the beginning of 2020, as we start doing different kinds of qualification units and such. Korea, we're seeing revenue now. The question is, more is what is meaningful. I think you need to recall that the company we bought, we basically bought for $4 million up front and then an earn out. It's not a terribly large company, although the revenues that we achieved, they'll definitely be double-digit revenues as we move forward.
Well, to be blunt, our timing wasn't very good on that acquisition in that, as Jeff correctly said, we bought them about a year ago. It's just maybe a year ago, May or June, when people began talking about Samsung dropping their spending on memory pretty dramatically. The revenue took a hit as we reported, I think on a couple of calls, and is not at the level we had first thought. There is ongoing revenue stream there. There are a couple of large customers in Korea, including over $1 billion of revenue customers. They're our main customer, and we continue to get revenue from them. Finally, we continue to work with our smaller potential customers there as well.
That's helpful. Going back to Sidney's question, I think you mentioned that the core business will be flat in 2019.
Yes.
I guess if I recall correctly, I think you're more levered toward memory spending than logic and foundry. How do we think about the demand or capital intensity of your gas and chemical modules, as the memory producers shift from greenfield investments to conversions, in 2019 and perhaps 2020?
Well, a couple things. First of all, when we said this year will be flat, we mean flat from where it began. Wafer fab equipment, as you know, is down 20% or so year-over-year. And the wafer fab equipment associated with memory is down more than that. I didn't want to imply that we were flat year-over-year as far as wafer fab equipment. I meant starting from the first quarter and moving through the year, we don't see a big recovery at this point in time, whereas we had thought earlier in the year there might be some recovery in the second half in the core business. I wanted to be clear about that. I also think that'll become clearer too.
I believe that'll be the case, and if so, we'll probably be seeing people lowering their total wafer fab equipment numbers for the whole year because most of that original downside number for WFE included some ramp, some increase in the core business in the back half. Having said that, back to the memory and foundry and logic front. No, our connect rate, if you will, on those tools and the spending per tool is about the same. There's not a huge difference. We're not too worried if memory is high and, say, logic is low, and we're not too worried if it's vice versa. We're just happy if someone's buying tools and putting in more process equipment. We're also not too concerned whether it's a greenfield or whether it's technology improvements or add-ons to a current factory.
All of it, on a tool basis, is more or less the same for us.
Very helpful, Tom. One last one if I may, and I'll cede the floor. Now that the market has softened, do you think valuations for bolt-on deals have receded, or are they prohibitively elevated? Secondly, how do we think about just the level of buybacks, given where the stock is today? Thank you.
On the buyback side, we bought back about $90 million of shares last year at an overall average price of just about $20. From an economics perspective, that's reasonably successful. In terms of what we see this year right now, buybacks are not on the top of our list of things to do. With regard to the deals that we see, that's kind of a tough one, because every one's a little bit different. We've seen all of the deals that have been consummated in recent times by people in the industry. To be honest, we've passed on them. When we look at a deal and the financial capabilities, if you will, of the company, we like to see a deal where the P/E ratio of the company is at or below our P/E ratio.
While in M&A, a lot of people like to talk about EBITDA for a lot of good reasons, and everyone in the private equity field talks about EBITDA, we tend to talk about P/E ratios because that's what we deal with. You guys are very interested in earnings per share, and I have to be honest, in four and a half years of being a public company, no one's ever really asked me on an earnings call how's my EBITDA doing. We tend to look at things from a P/E perspective. If people are paying 20 times P/E or people are asking 20 times P/E and somebody else is willing to pay 20 times, say, 2018 P/E, knowing this is a depressed year from 2018, that's a deal we would pass on.
Thanks for the color. I appreciate it.
Our next question comes from Patrick Ho with Stifel. You may proceed.
Thank you very much. Tom or Jeff, in terms of the incremental market opportunities that you've talked about, the $75 million-$80 million. You've talked about in the past, it's very broad-based from your fluid delivery systems to weldments to precision machining. Can you give a little bit of color of where you may have been most surprised, whether you're seeing maybe faster gains than you thought, and how some of the gains that you've made in 2019 can also, I guess, expand or carry over into 2020?
Yeah. I guess, surprise, I think we're actually tracking quite well. I'd say the one area that's maybe moving faster than we initially thought was weldments. I think we have a very strong pull there from our customer base on weldments, and I would say that even today and even in this quarter, we're seeing additional kind of strengthening in that area that will probably be a little more 2020, as you go through qualifying and stuff. I'd say, the gas panel share wins, we had a very good feeling of that, but that actually accelerated a little bit in Q1. I said we won another piece of share, and it executed within the quarter, that's been a bit more positive. That brought some of this forward a little bit, lessening the back-end spike, but it's still going to be very heavily weighted to the back end.
In essence, we're really happy with where we're at and the opportunities we're continuing to work, and we're actually seeing more opportunities, I would say today than we actually initially saw as we entered the year.
Yeah. Patrick, I would add just the precision machining is probably the late bloomer. The qualifications there are just more strenuous. It's not just qualifications around the precision measurements that you make the actual part with and meeting them all. There are all sorts of special coatings going on inside the precision machined parts, especially as they come in contact, say, with process critical gases, et cetera. That just takes a little more work and a little more time on the qualification process to try a myriad of different gases through the passageways, if you will, within a precision machined part.
Great. That's helpful. Maybe as my follow-up question, your model has shown the resiliency you've talked about in the past in its ability to deliver profitability. Gross margins have actually held up also pretty well, right around this 15% level as revenues have declined. As we look on a going-forward basis, is absorption going to be the biggest influence for gross margins on a going-forward basis, or are there still issues of product mix and things like that that could impact gross margins on a going-forward basis?
Yeah. Obviously, product mix can swing you within a quarter. If you look within gas, it could be between chemical and gas and stuff. That's not going to be the biggest swinger for us. Once we lever up, we're going to get the fixed cost infrastructure that we have with leverage. We've focused a lot on our non-call it direct labor people in our operations, and they're doing a really good job at driving process improvements and things like that. Largely, as we kind of continue to grow these, and I think this goes back to one of the earlier questions is, the new market share gains are generally at higher gross margins than the core business today. That's going to be accretive as well.
Great. Thank you very much.
Thanks, Patrick.
Our next question comes from Quinn Bolton with Needham. You may proceed.
Hi, guys. Jeff, congratulations on the promotion. I apologize if the question's been asked. I got bumped from the conference call about halfway through the Q&A. Just wanted to first ask on the weldment side of the business, your biggest competitor in gas panels recently acquired a weldments business, wondering what you think that potentially does to the competitive landscape in the weldments business. Then I've got a follow-up question. Thanks.
Yeah. Of course, we're aware of that. We know that company reasonably well. We had spent, I had personally spent a reasonable amount of time talking with them previously. There are a couple of things that are important there from our perspective. It has nothing to do with how other people would view the deal. There are a couple of things here. One is that, in the weldment space, what we see now is, what we're taking advantage of is the idea that customers are beginning to understand that weldments come in a number of different flavors. To make it simple, there's orbital welding, which is largely done with a machine and is a low kind of technical requirements in terms of the labor force, pretty easy to do. Then there's more hands-on.
It's called TIG welding, but it's a hands-on, very skilled operators, more difficult to do. Our strategy became, when we saw the opportunity to add weldment capacity through an acquisition, we decided not to do that. What we decided to do was build capacity for ourselves in Malaysia. We decided to have it dominated mostly by the low-end orbital welding, which would have been the bulk of the capacity we would have been purchasing if we chose M&A. We believe we were able to add about $50 million, if you will, of capacity for about $5, $6 million of capital. Then what we'll do is take orbital welding where we can gain share, and put it there, knowing that the labor cost in Malaysia is probably 25% of what the labor cost is in the United States.
The customers are seeing these low-end weldment things as being a little more price competitive. We wanted to be in the area where we could compete that way and still make even more margin for ourselves. We chose to put our money to work in building capacity instead of buying it.
Thanks, Tom. Then the second question, it sounds like in the prepared script, you said that you're starting now to ship first delivery of the liquid delivery module to your sort of lead customer. I believe you said that there may be some expansion in that business. Just wondering if you could clarify. Is that tool now being shipped to multiple device manufacturers, or is the ramp still sort of with the lead customer? Thank you.
It's still with the lead customer. I suspect it'll be that way through almost the end of the year. In the third and fourth quarter, we'll start qualifying at new customers, which takes a little bit of time. The good news is the lead customer is a big customer with a big appetite, and it could end up being a lot of tools. Normally it's a little strange in that you normally don't go the first dance isn't usually with the best player in town. But in this case, it is. We're happy about that, and we're not concerned about it. To answer your question, it means for the most of this year, we'll be dealing with one customer.
Thank you, Tom.
Our next question comes from Mitch Steves with RBC. You may proceed.
Hey, guys. Thanks for taking my question. I had two, and the first one is just as it relates to your two biggest customers. My understanding is that Lam benefits more from the transitions from 96 layers they're probably spending earlier. How do I kind of compare that to your comments now about how the back half is going to be similar, even though we had comments from Lam saying that's going to start picking up in 2H?
First of all, I hope the comments from Lam that they're going to start picking up in the second half are absolutely correct, because if they do, then we'll benefit. I'd be very happy to be wrong about that because we would definitely benefit if the core business of Lam picks up in the second half. I will only tell you that I'm not seeing it yet. We'll kind of keep our eyes peeled, and we'll probably be amongst the first to actually start seeing it, since we have good insights into their build plans, et cetera. I hope you're right, and I hope Lam has a great second half.
Okay, got it. In terms of the kind of WFE expectations, I think people were kind of already expecting it to be around $40 billion. Can you maybe help me walk through what you mean by people having to take their numbers down more than that? Because I think that most people are already at $40 billion or even a bit less, even though they may not be in print there yet.
I think $40 billion or $40.5 billion or whatever the number is exactly where everyone is today. Basically, when I do the math, if there's no upturn in the second half in terms of the core business, in other words, if the second half is exactly equal to the first half, I believe if you do the math on that scenario, WFE will be down a little bit more than it'll be a little bit below $40 billion. The wild cards in that are ASML, and once again, I hope ASML blows the roof off the numbers in the second half because we'll be a beneficiary of that. In the absence of at least some kind of an uplift in the second half, I think it's going to be hard for WFE to hit $40 billion.
Okay, got it. Then last one for me, just in terms of, I don't need any numbers or anything like that. Qualitative is perfectly fine. When I look at your 10-K, you said that Lam was about a 56% customer for the full year. If I look at March and June, are you saying that you think that Lam was less than that in March quarter in addition to June, based on the implied guidance?
No. It wouldn't be much different, actually.
Interesting. Okay. Thank you.
Our next question comes from David Duley with Steelhead. You may proceed.
Thanks for taking my questions. Many of them have been answered, but I wanted to kind of address the first half, second half revenue issue here. You've guided the first half revenue to basically two quarters of $138 million. That's like $275 million or so for round numbers. You've talked about this $75 million-$80 million incremental opportunity, and it sounds like $15 million or so is going to happen in the first half. That would leave, let's say, $60 million in the second half. I'm trying to check my math. That sounds like your revenue would grow in the second half by 20% or so versus the first half. Is that the way we should think about the ramp-up in these market share gains that you're referring to?
Well, it's the right way, but you're a little low on the first half side. When I said single digits in the first quarter and double digit in the second quarter, that doesn't mean five and 10 necessarily, but you're on the right track, and that's exactly what it does mean.
Yeah.
If you actually said that the first half was 20 or 25 or 15 or any of those numbers, and you subtracted it from 75, that would be the number that we'd be plugging into the second half as incremental revenue.
Correct me if I'm wrong, but I don't think the ASML revenue was part of the $75 million-$80 million, so wouldn't it be a little bit higher?
No, there's no part of ASML in that number. Yeah.
Yeah. If ASML does turn on, then you should have second half growth that's more than 20% higher than the first half.
Well, I think, Dave, we're not being overly specific, but you're a little light in the front half.
Okay.
Indirectionally, you're-
Correct
thinking about it correctly, but-
You're on the right track.
for now, we don't want to be any more specific, yeah.
Okay. I haven't heard you guys talk about this before, so I just wanted to broach the question. As far as your overall cost structure, what percentage do you think is fixed, and what percent do you think is variable?
Well, if you take the material content, we're very highly variable. In other words, I'm not going to give you exact percentages, but it's going to be 80-ish is pretty variable, and the rest is either fixed infrastructure or the operations that you need to run the business, so in broad numbers.
Okay, great. Thank you.
Okay.
Our next question comes from Graham Tanaka with Tanaka Capital Management. You may proceed.
Yes. Hi guys. On market share gains, what might you end the year at as a per annum rate, in this market share gain? Well, I guess we're all trying to guess the ramp, but really the important thing for 2020-
Yeah. Hey, Graham, I know you're trying to guess the ramp, we're not going to be overly specific. I think what we're alluding to is you kind of know that we're kind of seeing single digits, so somewhere between five and 10 in the first quarter, we'll be in the double digits. If you imply that ramp, you'll kind of see that it's a pretty strong exiting rate for those new share gains. I wouldn't say it's like a super big hockey stick in the fourth quarter. Third quarter is going to grow on top of the second quarter, it'll grow again.
Okay. Great. Just to get a feel for next year, what big picture changes might there be incrementally or maybe decrementally for next year? Are there any other big? You mentioned Japan and Korea.
No, the big picture change next year is that after, well, literally by next year, it'll be six quarters of slowdown. We fully expect to see a very strong rebound in the, what we've been calling the core business, but in wafer fab equipment spending. I don't mean if that means it goes back to $50 billion or not, that would be very big and very significant, I think we fully expect to see that.
Right. You would expect share gains next year as well?
Well, we would expect the share gains that we made this year. Obviously, Jeff already said, the run rate of those gains coming out of the end of this year multiplied by four is going to be a lot higher than $75 million. We would expect to see them carry through, and we have every reason to believe that we'll continue to work very hard to have additional share gains on top of that.
Right. Great. Just want to ask you a more minutiae-type question, how are cost increases going in terms of purchase materials versus your price increases for a change in whether it's steel or anything else? Thanks.
Yeah, we're not really seeing any steel in particular. It's not going up for us. We're not seeing a bunch of commodity pricing increases today.
Great.
Yeah, we've been reasonably well isolated from the, or insulated, I should say, from the tariff wars up till now, so that's a good thing.
Great. Thank you.
Thanks, Graham.
Thank you.
Our next question comes from Sidney Ho with Deutsche Bank. You may proceed.
Thanks for taking my follow-up question. I only have one. Just wanted to circle back on this gross margin question earlier. If I look at last time you were at these revenue levels, your gross margin was about 100 basis points higher. Yet with the product mix that now mixing in weldment and precision machining, which I don't know how big these are, in these businesses today, can you help us bridge the gap between then and now? The follow-up to that is maybe more forward-looking. At what revenue level and what kind of mix do you see gross margin going to, say, the low end of your target range, which I believe is 19%-20%, is the long-term range?
Yeah, honestly, going back, Sidney, there's a lot of obviously moving pieces. I do recognize it's a little bit different than pure gas back in those days. Since then, we got a higher content. We've got a few businesses that have been affected more by the fixed overhead rate, and that's in our precision machining, some of our plastics machining, and some of our weldments. Those are kind of the ones that as we lever out of this and grow, you'll see the bigger increment. We haven't put a revenue target on when we get into the model. Like for like, we were almost at a billion-dollar run rate in the first half of last year. Gross margin was just a hair under that in total, less than a margin point or so in that.
When we get back to those similar levels, we're going to have a higher mix of our weldments and precision machining and some of the other market share gains that will help us get there, hopefully. If next time we're at that kind of billion-dollar run rate, we would hope that we would be in that gross margin range.
Yeah, I think there are a couple of things, if I could add to that. It's a good question. Normally, the last time we were at that level, we were headed up. It's normally the case that when your business is growing, as you grow through certain revenue levels, your margin is actually going to be higher than when you hit those same levels on the way down. The reason is that on the way up, you're stressing the organization more so in terms of squeezing more output out of a particular property or particular asset or particular tool. You do that with all sorts of crazy amounts of overtime, et cetera.
When all is said and done, you're slightly more productive on the way up than you are on the way down, regardless of how much you try to right size on the way down. It's just kind of how it is. The real analysis behind that is, I think Jeff was saying this, as we headed up, we did add fixed costs. While the margin on all those items will be higher at certain levels of loading, all of those levels of loading are now about half of what they had been. When all is said and done, it's not that surprising to us that we would be, say, 100 basis points below, and that some of the items that would normally have higher margins aren't quite as high as they would be, simply because they're the ones with the higher fixed costs.
Sidney, I think that makes some sense.
Yep, it does. Thank you.
Thanks, Sidney.
Thank you. Ladies and gentlemen, this now concludes our Q&A portion of today's conference. I would like to turn the call back over to Tom Rohrs for any closing comments.
Well, thank you very much for joining us on the call this quarter. Once again, we look forward to updating you on our second quarter call in August.
Ladies and gentlemen, thank you for attending today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.