Ichor Holdings Ordinary Shares (ICHR) Q4 2019 Earnings Call Transcript

Ichor Holdings Ordinary Shares (ICHR -1.62%)
Q4 2019 Earnings Call
Feb 05, 2020, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Ichor Systems fourth-quarter 2019 earnings conference call. [Operator instructions] 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.

Claire McAdams -- Investor Relations

Thank you, Darrell. Good afternoon and thank you for joining today's fourth-quarter 2019 conference call. As you read our earnings press release and 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, and 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 Jeff Andreson, our CEO; and Larry Sparks, our CFO.

Jeff will begin with a recap of our results, strategy, and outlook, and then Larry will provide additional details of our fourth-quarter results and first-quarter guidance. After the prepared remarks, we will open the line for questions. I'll now turn over the call to Jeff Andreson. Jeff?

Jeff Andreson -- Chief Executive Officer

Thank you, Claire. Welcome to our Q4 earnings call. Today, we are pleased to report strong revenue growth, profitability, and cash flow generation ahead of expectations for the quarter. Total sales of $189 million were up 23% from the third quarter with incremental improvement across all aspects of our business.

Earnings per share of $0.48 were up 60% from the third quarter. We generated $28 million of free cash flow in the quarter and ended the year with over $60 million in total cash. For the full-year 2019, we generated $45 million of free cash flow and reduced our net debt position by over $40 million. During Q4, we saw strong increases in demand among each of our largest customers and across all of our businesses.

Gas delivery systems ramped significantly in the quarter, and we also saw strong growth across chemical delivery, weldments and precision machining. We also achieved a stronger level of revenues from our market share gains compared to what we expected going into the quarter. We ended the year with $70 million of incremental revenues from the share gains we've discussed across each of our product lines. The beginning of the recovery and industry spending, which we reported on last quarter, accelerated in Q4 and has strengthened into 2020, which is evident in our results and outlook.

The industry upturn started late in 2019, beginning with an increase in foundry and logic spending and the initial signs of a recovery in flash memory. Recent industry reports indicate continued strength in foundry and logic into 2020 along with improving conditions in memory. In January, we provided a preliminary outlook for the first-quarter sales well ahead of expectations. Today, our outlook has strengthened toward the upper end of that range.

With Q1 revenue currently expected to be in the range of $220 million to $235 million, our outlook reflects significant sequential and year-over-year outperformance compared to the overall industry spending environment. Our earnings guidance also demonstrates growth and profitability significantly outpacing our growth in revenues. Now I'd like to review the drivers for this outperformance and why we expect the trend will continue through the year. We believe there are multiple factors driving our relative outperformance this year compared to the overall industry.

The first is share gains. We came into 2019 with a range of incremental revenues expected for the year from our market share gains. In each quarter, we updated you on our progress. As expected, these incremental revenues ramped as we progress through the year, and our Q4 run rate reached an annualized level of around $100 million.

These tailwinds add alone at least $30 million of business on a like-for-like basis in 2020. We will also benefit from the continued ramp of the EUV lithography, with year-over-year growth in shipments expected for both 2020 and 2021. Furthermore, we expect additional share gains in each area of our business that will contribute to our 2020 revenue growth story. In gas delivery, we see opportunities to increase our share with our largest customers, and we also see opportunity to gain share within a relatively underserved customer base in Asia.

In weldments, we continue to work on additional qualifications across our customer base. In precision machining, we expect to finalize our qualifications this quarter and begin to see first revenues next quarter. Another factor driving our relative outperformance in 2020 will be success in penetrating new customers, especially those in Asia, in the area of chemical delivery. The largest growth driver for our chemical delivery business remains our proprietary liquid delivery module or LDM.

The largest opportunity for this business is with customers in Asia to serve the vast majority of the served market for wet processes. In Japan, we are still in the early innings of penetrating new customers, but our partnership is working well, very well. As we are quoting several applications already, our goal is to have first beta units delivered this year that will position us for a meaningful contribution from this region starting in 2021. In South Korea, we are pleased to report that we recently shipped our first LDM beta unit to the region's largest OEM.

This is an exciting milestone achievement for the company and for our strategy to expand our footprint in Korea. Meanwhile, we continue to work closely with our initial OEM customer in the U.S. on qualifying our LDM at additional chip manufacturers. Our proprietary LDM product is just one example of our strategy to increase the engineering and IP content for Ichor in order to drive longer-term expansion of our share of our served markets, as well as to drive the operating model toward increased levels of profitability.

We are also very excited about the potential for our next-generation gas panel. We continue to make good progress in the development of this novel and proprietary gas delivery solution. We have fully integrated our acquisition of a flow control technology and engineering group, and we will continue to invest in this area in 2020 as we drive for having beta units available by midyear. The addition of this technology, combined with our expanded manufacturing capabilities, will serve to expand our value-add and margins as this next-generation gas panel is adopted.

The next driver for our relative outperformance will be evident in our increasing gross margins and operational leverage. In early stages of the industry recovery during the second half of 2019, we faced some gross margin headwinds, starting with the higher per unit overhead costs. Margin started to improve from Q3 to Q4, but not as much as anticipated due to costs associated with enabling the steep increase in output. These included factors such as increased overtime, hiring costs and expediting fees.

Looking forward, we expect gross margin improvement of about 100 basis points in Q1 and continued improvement thereafter. We believe these improvements, along with continued control of our operating expenses, will drive strong operational leverage through the year. Consistent with our stated objective to grow profits faster than revenue, we expect to more than double the growth in earnings compared to revenue as we look at our Q1 expectations compared to the same period last year. We also expect this performance to be evident in our year-over-year increase in profitability for 2020.

Before turning the call over to Larry for additional details on our fourth-quarter results and our first-quarter outlook, I want to offer a few comments on my recent transition to CEO. With the industry entering a strong period of growth in 2020, along with the positive trajectory of our strategic initiatives to expand our offering of differentiated and proprietary technologies and to expand our share of our served markets, it is a very exciting time to be leading Ichor. I'd like to acknowledge the tremendous support and mentorship I've received from Tom Rohrs, who is transitioned to executive chairman. Tom and I will continue to work closely together on executing our strategies to solidify Ichor's position as a premier company in the semiconductor equipment industry.

Larry?

Larry Sparks -- Chief Financial Officer

Thanks, Jeff. 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 intangible assets, nonrecurring charges, and discrete tax items and adjustments. I'd also like to note that a very helpful schedule, which summarizes our GAAP and non-GAAP financial results, including the individual line items for non-GAAP operating expenses, such as R&D and SG&A, can be found in the Investors section of our website for reference during this conference call.

Fourth-quarter revenue of $189.4 million, increased 23% from the third quarter and was up 34% from the fourth quarter of 2018. This was our third straight quarter of sequential revenue growth. Gross margin in the fourth quarter was 13.8%, an increase from Q3, but still negatively impacted by the overtime expediting fees and hiring costs associated with the steep ramp in output, as Jeff described earlier. With operating expenses increasing 6% to support new product development and ramp execution, operating margin improved 130 basis points over Q3 to 7.1%.

Our interest expense in the fourth quarter declined as expected to about $2.5 million. Our tax rate for the quarter was 0.2% due to our geographical mix of revenue being higher in Singapore, where we have a tax holiday. Our planning rate for the tax over the next couple of years continues to be in the range of 10% to 13%. Fourth-quarter net income of $10.9 million was equal to 5.8% of revenue and $0.48 per share.

Now I will turn to the balance sheet. Cash increased to $60.6 million at year-end as a result of strong free cash flow generation during the fourth quarter. Days sales outstanding were 41 days, an improvement compared to 45 days in Q3, but higher than average, reflecting the rapid ramp in revenues late in the quarter. Inventory levels increased 20% in the fourth quarter to support the strong increase in business levels, while inventory turns further improved to 5.6.

Now I will turn to our first-quarter guidance. Our forecast is for revenue in the range of $220 million to $235 million, which is up 16% to 24% from Q4. At the midpoint, our Q1 revenue outlook indicates 20% growth sequentially and year-over-year sales growth of 65% compared to the first quarter of 2019. Our earnings guidance of $0.64 to $0.74 per share reflects strong operational leverage during this rebound in industry spending, with revenue 60% to 70% higher than the year-ago period, earnings per share are expected to be up in the range of 150% to 200%.

Our earnings guidance reflects improved operating profitability as a result of the increased revenue volume and higher gross margin. As Jeff described, we see gross margin improving by about 100 basis points in Q1 as we return to the more typical gross margin flow through, historically in the 20% range. We also expect to achieve continued gross margin improvement through 2020. We expect to see about a 10% sequential increase in non-GAAP operating expenses in Q1 over the $12.6 million level in Q4, largely as a result of the typical seasonal increases related to U.S.

employee taxes and audit fees, as well as an increase in variable compensation spending as a result of increased levels of profitability. Together, these are expected to add a little over $1 million of operating expense compared to the fourth quarter. We expect operating expenses to fluctuate around this roughly $14 million level for the remainder of 2020, given the increased amount of engineering spending related to continued development of proprietary products and technologies. Also reflected in the first-quarter EPS guidance ranges are interest expenses in the range of $2.30 million to $2.4 million, a tax rate of around 10%, and approximately $23.5 million diluted shares outstanding for the quarter.

Operator, we are ready to take questions. Please open the line.

Questions & Answers:

Operator

Thank you. [Operator instructions] The first set of questions come from the line of Mitch Steves of RBC Capital Markets. Please proceed with your questions.

Mitch Steves -- RBC Capital Markets -- Analyst

Hey, guys. Thanks for taking my question. Obviously, a great guide there. I'm just trying to get an understanding for 2020.

Really, you guys can't give annual guidance. We had a top customer talk about WFE being, let's call it, 23% or so for fiscal year '20. And then you guys are going to gain some share in some markets. So, is there any kind of qualitative view you guys can give us and what the full year should look like as you consider going to come off what looks like a 65% growth quarter in March? Just trying to understand the seasonality in the revenue line.

Jeff Andreson -- Chief Executive Officer

Yeah. Hi, Mitch. Good question. We figured it would come out fairly quickly.

Yes, obviously, our largest customer came out and had a very strong outlook for WFE next year, also indicated that they believe, given the strength in foundry and logic in the front half of the year, that maybe in the back half of the year might be -- maybe relatively front half-loaded, I guess. I mean, obviously, it's pretty difficult for us to see through to the second half of the year. We understand what others have said, but maybe I'll just offer a few areas. So, one is we see a relatively strong Q2, so we don't see a Q1 to Q2 fall off or anything like that.

So, we see the front half is relatively strong. In the back half of the year, we talked about on our call is we still think that we're seeing the initial waves of memory spending improving. We can see that through our Korean operation, obviously, directly. I think as that continues into the second half that will have a large impact on the second half.

Given our largest customers' outlook, I think they have some confidence that that will continue through because we're seeing the initial wave of that today. We also benefit from EUV. And then our third largest customer, obviously, is ASML, and they're seeing kind of the year progressed quarter-over-quarter growth. So that helps a little bit with the back half of the year, plus our share gains that we will expect to get.

We'll probably be a little more back end-loaded. Whereas the ones we have this year, they're already in our run rate largely as we go. So, hard to really give you an absolute, but our largest customer, which is over half of our business, has indicated that it might be slightly front-end half -- or front end-loaded. Does that help?

Mitch Steves -- RBC Capital Markets -- Analyst

Yes, it's helpful. I mean, I don't want to put words in your mouth. So, qualitatively, it sounds like if Lam is right, you guys would probably do a little bit better because you guys are benefiting from EUV. Am I getting the message correct? I'm making the assumption that Lam's number is correct.

Jeff Andreson -- Chief Executive Officer

Yes, I think that with the EUV ramping kind of through the years, you're correctly reading that, and then the share gains just take a while to build up. And then similar to this year, they'll be obviously larger in the second half of the year than the first half of the year for new share gains.

Mitch Steves -- RBC Capital Markets -- Analyst

OK. And then just my second one. So, obviously, AMEC and Lam have been something like 88% of revenue for you guys. And how you're talking about kind of new wins outside of these two players? Is there any sort of order of magnitude you can give us for 2021 or any sort of, I guess, further-out number? And how much the new customers should take up as a percentage of revenue? Is it material enough to call out, say, 5% to 10%? Or is it really just going to be a small kicker for you guys in '21?

Jeff Andreson -- Chief Executive Officer

Yes, that's a good question. Very difficult to quantify. I think if we had won some positions in Korea or through our Japanese, we could give you a little more color, but we're in the very, very early innings. Obviously, it can be quite material if we win one of the large Japanese OEMs that have some of the wet processing tools.

As I said in my prepared remarks, we're really happy with our partnership in Japan. So, having said that, it takes quite a lot of revenue to kind of surpass the 10% level. And so, I think if you look back over the last couple of years, you'll see that the percentage of our two largest customers has come down a bit, and that's really with the growth of our third largest customer. And we also support ASM to some degree as well.

But I think what will turn the needle as success in Japan and then in Korea, where we'll see that kind of other category grow a bit, but it's hard to quantify now, Mitch.

Mitch Steves -- RBC Capital Markets -- Analyst

Got it. Perfect. Thank you.

Operator

Your next set of questions come from the line of Sidney Ho with Deutsche Bank. Please proceed with your questions.

Sidney Ho -- Deutsche Bank -- Analyst

Great. Thank you. And I'll add my congratulations to a strong quarter and guide. In terms of Q1 guide, clearly, things have gone better since a month ago, when you gave that initial guidance.

But you gave the guidance prior to the coronavirus becoming a bigger concern. Curious how you think about -- how do you size that risk and in what ways you may get impacted directly or indirectly? And operationally, are you making any changes to accommodate that?

Jeff Andreson -- Chief Executive Officer

Good question. So, the coronavirus is a very fluid situation right now, obviously. We don't have an employee base in China, just to let you know. The first thing we did as a company was to ensure that we protected our employees, and we've put some travel restrictions on.

And anybody that's traveled to China, we've asked them to stay home for a week and things like that, so our employee base is protected. I think right now, as we look at it, they'd extended the Chinese New Year by a week. We plan for Chinese New Year for a full week. So, we front-load our material receipts to keep the factories flowing.

We have three or four suppliers that are impacted by this, but right now, it's hard for us to quantify it. I would say we have a larger revenue range this quarter. So, to some degree, we can accommodate some delay in shipments. Having said that, we aren't seeing any demand reduction from our customers, so they will take everything that we can build, obviously, in these kind of ramps.

So, at this stage, it's hard for us to tell you oversize it. If we get new news, obviously, and it's material, we would let you know.

Sidney Ho -- Deutsche Bank -- Analyst

Great. So maybe as my follow-up, I just want to follow up with the previous question. You talked about you expect the business to be relatively strong in Q2. I'm not sure if you mean revenues will be higher or flat.

But if I look at the strength that you're seeing in the first quarter and even second quarter, will all that strength show up in your customers' tool shipment in the next one to two quarters? Or will some of that goodness kind of show up later in the year?

Jeff Andreson -- Chief Executive Officer

Well, I don't want to be too specific about customers, but what I will -- so I'll answer that by talking about our lead time. I would suspect that we ship gas panels somewhere between four and six weeks before a tool ship. So certainly, some of what we see can hit in a quarter that will obviously materialize in our customers next quarter. With EUV, for example, it's almost six-month lead time.

And then in our component side of the business, it's probably somewhere in that level of four to six weeks, too.

Sidney Ho -- Deutsche Bank -- Analyst

OK. Maybe if I can squeeze in one more on the gross margin line. You talked about some of the headwinds in your prepared remarks and also in the past, and it's great to see you expect an improvement in Q1 by about 100 basis points and continued improvement throughout the year. But based on your improving mix, how should we think about a normalized level of gross margin at the current revenue level, maybe put that in context relative to last time you were at a similar revenue level, that would be great.

Jeff Andreson -- Chief Executive Officer

I'll take that. So, I think there's a few things that we have done this year. One is we've added capacity that's coming online in '19, that's still obviously not fully utilized, so that impacts us a little bit. The second thing is our plastics business is still not at the levels of revenue and margins that it was in, say, 2018.

So, that business is very linked to memory and to specific customers and product mixes. So, we're seeing still that's lagging behind the gas and other businesses that have ramped in the last couple of quarters, which is one reason why we feel confident that we can say our margins will be improving through '20 because we do see as memory comes back, that business should improve as well. The last thing that we mentioned in the prepared remarks, which I'll just reiterate here, is we are doing whatever it takes to get products to customers, which is including higher levels of overtime that we expected included bonus programs around the holiday season on top of just normal holiday pay-type things. We have recruiters.

We've been using outsourced labor companies. We're pretty much doing -- as the difficulty that we have now in the just general hiring marketplace with the strength of the unemployment in some of our key factory areas, we've had to go do some things that do drive up our cost, which we'll still see some of that in Q1. But I think, as we mentioned, we expect by Q2, Q3, this will sort of works its way out and will be at a kind of normal trajectory.

Larry Sparks -- Chief Financial Officer

And then, Sidney, I might just add. You mentioned strengthening mix, and when we come into these kind of ramps, it's really the gas panel side of the business that ramps and out-ramps the component side. And you know our gas panel is kind of versus the average of our gross margin products is lower. So that has a little bit, too.

Once that kind of levels out, and then we get some inventory replenishment by our customers and growth in the component side of the business, that will be helpful as well as we go through the year. Right now, you can assume there's almost little to none of inventory build. In other words, what we're building is going into tools and on. So, there's not a replenishment to any material degree at our customers for the component side of the business inventory.

Sidney Ho -- Deutsche Bank -- Analyst

Great. Thanks on this, and congrats.

Jeff Andreson -- Chief Executive Officer

Thank you.

Operator

Our next set of questions come from the line of Craig Ellis of B. Riley & Company. Please proceed with your question.

Craig Ellis -- B. Riley FBR, Inc. -- Analyst

Yeah. Thanks for taking the questions, and congratulations on the strength in the business and executing to such strong revenues. Jeff, I wanted to ask a follow-up question to some of your prepared remarks. You gave us a nice long list of factors that were going to drive relative outperformance in calendar '20.

I won't repeat them all, but the question is really on their magnitude. Was your intention as you started with the $30 million that you mentioned from last year's share gain down through things like next-gen gas panel betas that could hit midyear? Are those in order of magnitude? Or should we think about them in a different way than that?

Jeff Andreson -- Chief Executive Officer

Yeah. I wouldn't want you to walk away thinking I listed them in order of magnitude. Last year, because we were -- in '19, we were in a downturn versus '18. We thought it was very important to provide you guys with more clarity on our market share wins.

And so, we updated you every single quarter just because it was quite material to this year. This year, we will have another round of market share wins. Some of what I talked about in my prepared remarks really is setting the stage for some 2021 and a lot of that is in liquid delivery that I talked about. Anything that we do in Japan will be 2021.

More than likely, the Korea will be either late this year into 2021, so not all of what I talked about will affect 2020, exactly. But it needs to get in place to drive yet again more share gains as we go into 2021.

Craig Ellis -- B. Riley FBR, Inc. -- Analyst

That's helpful. And then just following up the points on both Japan and Korea. Can you just help us understand what the steps are after you're working and shipping in beta? How can things play out from there? What milestones would you be watching, and how quickly could they evolve?

Jeff Andreson -- Chief Executive Officer

Yeah. I think you think of a fast qualification of six to nine months and a more typical ones, probably nine months, 12 months, 14 months, something like that. So, you could think of it as a year lead time. They have to run these -- they transition to liquid delivery from something they've built and designed themselves, and there'll be a long qualification, and then there'll be qualifications by customer.

And so, obviously, we're qualified at one customer. We're looking to proliferate that at our U.S. OEM that's adopted this, and that's taken longer than we had expected, too. So, I'd say think of it in nine- to 12-month bucket.

Craig Ellis -- B. Riley FBR, Inc. -- Analyst

Great. That's helpful. And then lastly, you mentioned, as one of the growth drivers and expansion in EUV shipments year on year, we can certainly see that from that European supplier. The question is, should we think about Ichor's revenue wrapping fairly linearly with any of the unit action that we see? Or is there a change in content or materials are work coming that would cause there to be variability either way?

Jeff Andreson -- Chief Executive Officer

One of these are pretty complex units that we build, much more complex on a process tool gas panel, so their lead time to build is a lot longer. I would say we're slightly back end-loaded to map to our customer's need. But anything we generally ship in the last six months is going to be in the first six months of the next calendar year or fiscal year for our customers because we deliver about five months before they can deliver a tool. So, we do see kind of ratable increases, but we don't see any step functions during the year.

Craig Ellis -- B. Riley FBR, Inc. -- Analyst

That's helpful. Thanks, guys.

Operator

Our next set of questions come from the line of Karl Ackerman of Cowen and Company. Please proceed with your question.

Karl Ackerman -- Cowen and Company -- Analyst

Hey, good afternoon. Larry and Jeff, two questions, please. Of the $30 million like-for-like increase from the programs you called out in 2020, relative to '19, is the LDM the largest component of that? I ask so we just might have a better understanding what the opportunity might be if you were to expand your LDM module to that South Korean customer and presumably customer in Taiwan in late 2020 and 2021.

Jeff Andreson -- Chief Executive Officer

Well, I won't be specific about it, but I would tell you that it's not LDM that's the largest component of the carryover. I mean, if you think about it, we exited about $25 million in share gains versus what we entered the year at. So, when you think of the $30 million, I think a lot of it is some of the gas panel business that we won and weldments and to a lesser degree some precision machining and then LDM. So, I'm not to quantify it, but LDM is not the biggest portion of the $30 million.

Karl Ackerman -- Cowen and Company -- Analyst

Got it. Maybe going back to gross margins for a moment. It's certainly nice to see a recovery in your business on the top line. But if we go back to the last upcycle in late '17 and '18, your implied gross margin for the March quarter, while good and improving, still a couple of hundred basis points below what we were at like two years ago.

Obviously, you've made some acquisitions in the process. But we've also come down these $70 million of incremental share gains achieved this year. So, I guess as we think about 2020, first, where are we in the process of fully integrating Cal-Weld and Talon if those are not yet completed? Second, if plastics have been margin-dilutive, are all of your product businesses sacrosanct, where, perhaps, we might say, OK, let's try and reposition the business toward maybe more profitable areas, like precision machining? And then third, I guess what level of revenue would probably give us -- allow us to be comfortably within our long-term gross margin model?

Jeff Andreson -- Chief Executive Officer

One long one. I'll start, and maybe Larry can come in. So, one of the things that you're -- obviously, you'll refer back to probably 2018 kind of levels of gross margin. Since then, we've added about capacities for about another $100 million, so you could think of the capacity that we have in brick-and-mortars, probably takes us into the $1.1 billion, $1.2 billion range.

So, that has a cost to it until you grow into that. So, that's kind of one of the headwinds. Larry talked about the plastics business, which is not growing in anywhere near the rate of the other businesses. And once it does, then we'll see that margin accretion.

But to get back to '18 and like-to-like, we'll need a higher component of our weldments and precision machining business. And right now, in the initial front half of, I'd say, of the year, the gas panel business is outgrowing now.

Karl Ackerman -- Cowen and Company -- Analyst

Understood. I really appreciate that. Maybe last one, if I may just sneak one last one in. Just tax rate, I think you mentioned 10% for Q1.

What do we think is the right level for the full year? Thank you.

Larry Sparks -- Chief Financial Officer

I think 10% is a good. We said between the 10% and 14% range, but I think 10% for now is pretty good. It depends on the mix, obviously, a product between the Singapore and U.S. space, but I think 10% is good for now, Karl.

Operator

Our next set of questions come from the line of Patrick Ho with Stifel. Please proceed with your question.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Thank you very much, and congrats on the nice quarter. Jeff, maybe first off to start with some of the comments you made about the liquid delivery systems and penetration into both Japan and Korea. As you well know that those are two very insular regions who tend to prefer dealing with local suppliers or even have their own internal supply. I guess what's been the key differentiator that one is allowed you to put in the door? And two, how long do you believe it will take before they sign-on on a going-forward basis on higher volume buys?

Jeff Andreson -- Chief Executive Officer

Yes, that's a good question. So, you're right. I mean, the Japanese market is a difficult one to penetrate, which is why we've taken the tactic of partnering with somebody. It's a very well-known company and supplier to the OEMs in Japan, it's a company called K.I.T.S.

We recently were in Japan SEMICON with them. And so, they're making very good progress. And as I said in my prepared remarks, we're now getting requests for, call it, quotes, which really is a design, why there's interest is because it's much more modular, it's a much smaller footprint, and it brings actually some improved technology, not to mention much easier maintenance as it's been designed. So that's the attractive nature, which is bringing forward technology and the cost reduction for the customers.

First beta unit went out to our largest customer and the largest Korean OEM, and so that went out very recently. And hopefully in the next month or so, it will be up and running on a tool. And then, as I think I said earlier on one of these questions is, you kind of got to think of the qualification of nine to 12 months. And then that's how you get qualified on the tool, and then they'll go into a qualification at the customer level.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Great. That's helpful.

Jeff Andreson -- Chief Executive Officer

On Japan and Korea, we'll make, hopefully make very good progress this year that sets up a much stronger 2021 impact.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Great. And maybe a follow-up question for Larry in terms of the operating model. Obviously, you've given some guidance and an outlook of improving gross margins, and then that will be a key variable to improving the earnings leverage. On the opex side of things, given some of the investments you mentioned, it's going to be up $1 million quarter over quarter.

And I guess some of the investments that you're doing, whether it's in Japan and Korea, as well as new product development, can you give a little bit of color in terms of opex? How you're going to manage that and how you're going to drive leverage on that metric on top of the improvements you'll see on gross margins?

Larry Sparks -- Chief Financial Officer

I think in general, as I said, we expect to be in this $14 billion range. I mean, you have the seasonality of the taxes and other things in Q1. We'll continue to spend money where we need to on the R&D. It's a high priority, as Jeff mentioned, not only for this year, but it has long as the longer-term benefits in 2021.

And as far as the sales and G&A line, we're watching that very, very tightly. We will be in the process of our ERP implementation that doesn't hit the P&L probably until 2021 as we kind of start using the system. But in general, I think keeping in that kind of mid, low $14 million range is where we want to be. I think it's the right place to be and still allows us to make the investments in R&D that we absolutely need as we hopefully get this penetration successfully executed here.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Great. Thank you very much.

Larry Sparks -- Chief Financial Officer

Thanks, Pat.

Jeff Andreson -- Chief Executive Officer

Thanks, Pat.

Operator

The next set of questions come from the line of Tom Diffely of D.A. Davidson. Please proceed with your question.

Tom Diffely -- D.A. Davidson -- Analyst

Yeah. Good afternoon. So, sticking with the cost questions. I'm curious, how long does it take to find and train an employee, so they can replace someone running over time right now? And then how do you balance creating a lower-cost workforce that way versus having the flexibility you get through just the OT?

Jeff Andreson -- Chief Executive Officer

Yeah, it's a good question. So, I'd say the area that we're obviously most challenged in finding employees, and we've been doing a pretty good job. But generally, the U.S. unemployment rate is pretty low.

These are also skilled workers. There's different levels of these skilled workers certainly on the weldment side of the business. There's a portion that can come up relatively quickly in weeks. There's advanced hand welders, for example, that need to just have experience.

Similarly, on the machining side, there's very few kind of pure entry-level jobs. So, we do have to find machinist with experience, and we have to find some welders with experience. And we've been ramping fairly well. We will not eliminate overtime, Tom.

We will keep a certain amount of overtime because we do need to have some flexibility, so we are willing to carry some level over time. Right now, it's very, very high in certain areas of the business.

Larry Sparks -- Chief Financial Officer

So, I think, Tom, just to follow on. I think to the extent that in most of our factories now, we are going all-out hiring, so it is -- as Jeff mentioned, the overtime rates are really too high, which do two things. One is just the economics of it, but the other is just the employee level of strain we put on employees. So, everybody is committed to getting the product out to the customers, they need it, and we're doing that.

Almost every factory now, we are all out hiring with extra recruiters and hiring bonuses and other things. So, we're committed to getting to a more normalized view around headcount, and that does involve some temporary workforce and some level of overtime, but clearly, not to the levels we're sitting at today.

Tom Diffely -- D.A. Davidson -- Analyst

Yes. Well, that sounds like a high-class problem there. So, Jeff, curious, you talked a lot about how right now, you're just really scrambling to meet the customers' demands for their shipments. At what point do you think will get to a stage where you start to build inventory at your customers as well?

Jeff Andreson -- Chief Executive Officer

Yes, I would say we would expect very little of that this quarter. I think we'll start to see that next quarter. And as kind of we've been alluding to, the ramp is very steep. So, everything that we kind of deliver is getting put on a tool.

But eventually, we'll catch up our capacity, and we'll be able to replenish the inventories that our customers want to have on site at their businesses. But I think any meaningful effect of this will probably be in the second quarter.

Tom Diffely -- D.A. Davidson -- Analyst

OK.

Jeff Andreson -- Chief Executive Officer

Beginning.

Tom Diffely -- D.A. Davidson -- Analyst

Larry, you said that you had been adding capacity. I'm just curious, are you adding capacity across the board, or are there certain areas where you've added capacity?

Larry Sparks -- Chief Financial Officer

Well, when you talk capacity in brick-and-mortar, we're adding very little of that. But there's some fixed assets in welding stations and some CNC machines, things like that for machining, but brick-and-mortar buildings were OK. It's people that is what will increase our capacity.

Jeff Andreson -- Chief Executive Officer

So, I think, yes, people sort of across the board and then machines in the weldment area and precision machining.

Tom Diffely -- D.A. Davidson -- Analyst

Thank you.

Larry Sparks -- Chief Financial Officer

Thanks, Tom.

Jeff Andreson -- Chief Executive Officer

Thank you.

Operator

And next set of questions come from the line of Auguste Richard of Northland Securities. Please proceed with your question.

Auguste Richard -- Northland Securities -- Analyst

Yes, thanks for taking my question. Just a quick housekeeping one. What was your share gain revenue in 2019?

Larry Sparks -- Chief Financial Officer

We said $70 million for the year was the full run rate of about $100 million, which means we're going to see about $30 million of that on a year-over-year basis increase into 2020.

Auguste Richard -- Northland Securities -- Analyst

OK. So, kind of plug in that number in your business before the share gains was down about 33% in 2018 versus your big customers, which were down, can calendarize about 22%, 23%, you know [Technical difficulty] in 2020 from this perspective. So, if you're aligned with your largest customer who set WFE up about 20%, so I mean, plus/minus, and a little bit front half-loaded. When I think about your gross margin, thus, I mean, it looks to me maybe there's some headwinds for your gross margin profile if we look into the second half of the year.

But when I think about the WFE mix in the second half, it's probably a little bit more memory loaded than foundry logic. Do you see any kind of a tailwind for your gross margin? And from that aspect, maybe there's a little bit difference in terms of your customer mix, product mix, if memory is stronger than logic in the second half.

Larry Sparks -- Chief Financial Officer

Yeah. Well, I'm not going to talk specifically about customer-level pricing, but there's obviously different gross margins for different parts of our business. I'd say the gas panel business is generally the lower-margin business versus weldments, precision machining and our plastics business. So, from a tailwind, I think what we've tried to delight you guys know is we will see gross margin improved this quarter.

We expect it to improve again next quarter. And then given the revenue levels, I think we have plans in place to continue to improve the gross margin for the year. We don't have a gas panel that goes on a tool destined for foundry or logic versus edge. It's more about how many gases they use versus a difference between the customers, like we price them all the same.

It doesn't matter who the customer is, the end customer to our customer.

Auguste Richard -- Northland Securities -- Analyst

Do you see like the higher content of high-margin business like components, some machining weldments, going a little bit higher, yet, memory ramps up in the second half? Or is that...

Larry Sparks -- Chief Financial Officer

Well. Yeah, I'd say we would expect kind of our higher-margin component businesses to probably grow a little faster by midyear. To the point we made is right now, the gas delivery side of our business is ramping clearly the fastest, and so it is kind of outstripping some of the other components from a mix perspective. So, once those kind of normalize, and we get the inventory rebuild, that would be a nice headwind, I think, as we cross midyear.

Auguste Richard -- Northland Securities -- Analyst

All right. Thank you very much.

Jeff Andreson -- Chief Executive Officer

Yeah.

Operator

We have reached the end of the question-and-answer session. I would now like to turn the call back over to Jeff Andreson for any closing remarks.

Jeff Andreson -- Chief Executive Officer

Thank you for joining us on our call this quarter. I'd like to thank our employees and suppliers for their tireless efforts and tremendous support of Ichor during the steep ramp in business. I'd like to thank our shareholders for their continued appreciation for our business execution and strong earnings and cash flow performance through the industry cycles. We look forward to updating you on our Q1 call in early May.

Thank you.

Operator

[Operator signoff]

Duration: 53 minutes

Call participants:

Claire McAdams -- Investor Relations

Jeff Andreson -- Chief Executive Officer

Larry Sparks -- Chief Financial Officer

Mitch Steves -- RBC Capital Markets -- Analyst

Sidney Ho -- Deutsche Bank -- Analyst

Craig Ellis -- B. Riley FBR, Inc. -- Analyst

Karl Ackerman -- Cowen and Company -- Analyst

Patrick Ho -- Stifel Financial Corp. -- Analyst

Tom Diffely -- D.A. Davidson -- Analyst

Auguste Richard -- Northland Securities -- Analyst

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