Executive Summary / Key Takeaways

• Ichor Holdings, Ltd. is strategically transforming from a services-oriented provider to a proprietary products company, focusing on critical fluid delivery subsystems and components for semiconductor capital equipment. This shift, driven by significant R&D and internal sourcing, is key to its long-term profitability and competitive differentiation.
• The company anticipates outperforming overall wafer fab equipment (WFE) growth in 2025, fueled by robust demand in advanced logic, DRAM, and a recovering NAND market, particularly in etch and deposition applications. This growth is further supported by industry tailwinds from AI, high-performance logic, and advanced packaging.
• Despite recent "growing pains" impacting gross margins, including operational challenges in internal supply ramp-up and a slowdown in its non-semiconductor (IMG) business, Ichor projects substantial gross margin expansion. The company expects to reach 15-16% in the second half of 2025, exceeding 16% by year-end, with an aspirational long-term target of 20% driven by flow control technology.
• A significant milestone is expected by the end of 2025, with all four of Ichor's largest customers projected to be qualified on its major proprietary product families: valves, fittings, and substrates. This will increase internally sourced content in gas panels from approximately 15% in 2024 to around 25% in 2025.
• The fourth quarter of 2025 is anticipated to be a trough for Ichor, with a recovery expected in Q1 2026 and a stronger, back-half weighted year for 2026, aligning with broader industry forecasts.

The Foundation: Powering Semiconductor Manufacturing with Precision

Ichor Holdings, Ltd. (NASDAQ:ICHR), established in 1999, stands as a critical enabler in the semiconductor capital equipment industry. The company specializes in the design, engineering, and manufacturing of fluid delivery subsystems and components, which are indispensable for various semiconductor fabrication processes. These include gas delivery subsystems that precisely monitor and control gases for etch and deposition, and chemical delivery systems that blend and dispense reactive liquid chemistries for processes like chemical-mechanical planarization, electroplating, and cleaning. Beyond semiconductors, Ichor also provides precision-machined components and advanced welding technologies for high-reliability sectors such as commercial space, aerospace, defense, and medical devices.

The semiconductor industry's inherent cyclicality and the increasing complexity of chip manufacturing have driven Original Equipment Manufacturers (OEMs) to outsource specialized subsystems. This trend allows OEMs to leverage suppliers' highly specialized engineering and production skills, reduce costs, and accelerate development timelines. Ichor has capitalized on this dynamic, evolving its business model under former CEO Jeff Andreson from a primarily services-oriented approach to a strategic focus on proprietary, branded products. This transformation, which began in late 2017, has been instrumental in shaping Ichor's current market position and strategic responses to industry demands.

Ichor operates in a competitive landscape alongside major players like Entegris (ENTG), Applied Materials (AMAT), and Lam Research (LRCX). While these competitors offer broader portfolios or comprehensive equipment solutions, Ichor carves out its niche through specialized fluid delivery subsystems. Ichor's engineering expertise and proprietary technology in precision components offer tangible benefits such as enhanced reliability and integration in manufacturing processes, potentially leading to superior margins through efficient operations and stronger customer loyalty. For example, its precision-machined components could result in significantly higher efficiency in fluid handling, fostering recurring revenue from long-term OEM partnerships. This targeted approach allows Ichor to compete effectively by offering tailored, high-performance solutions, particularly in areas where customization and precision are paramount.

However, Ichor's smaller scale and customer concentration present vulnerabilities. Its narrower focus compared to Entegris's diversified materials solutions or AMAT's and LRCX's comprehensive equipment offerings means Ichor may lag in overall market penetration and R&D investment breadth. While Ichor can achieve strong operational execution and potentially better margins in its specialized fluid systems, it faces challenges in matching the overall growth rates, profitability, and cash flow generation of its larger, more diversified competitors. The company's strategy to expand its proprietary product offerings and global footprint is a direct response to these competitive dynamics, aiming to strengthen its financial performance and strategic adaptability.

Technological Edge: The Engine of Margin Expansion

At the core of Ichor's investment thesis is its commitment to technological differentiation and vertical integration. The company's proprietary technology in fluid delivery systems and components is designed to offer distinct advantages in semiconductor manufacturing. Historically, approximately 90% of the bill of materials for Ichor's gas panels was sourced externally. Through strategic R&D investments and internal manufacturing, Ichor successfully reduced this external reliance by about 5% in 2024. The company aims to further decrease external supply to approximately 75% of the bill of materials in 2025, marking significant progress in its vertical integration strategy.

The benefits of this technological push are tangible and quantifiable. Ichor's next-generation gas panels, for instance, are designed with roughly 70% internal parts and 30% external, incorporating proprietary flow control technology. This substantial increase in internal content is expected to be the primary driver of gross margin expansion. The company is making steady technical and operational progress on two additional proprietary component products, designed to expand addressable markets for both flow control and valves, with the first beta unit targeted for customer evaluation in early 2026. These next-generation offerings are poised to serve a broader range of applications and customer needs, further increasing Ichor's value across the semiconductor supply chain.

Significant milestones have been achieved in qualifying these proprietary components. In Q2 2025, Ichor successfully qualified its flow control product at a key end-user, marking its first end-user qualification for this critical product line, which is targeted at advanced logic opportunities. The company also secured a third customer qualification for its high-purity valve product line in Q2 2025 and is actively working towards a fourth, with production volumes already shipping. By the end of 2025, Ichor anticipates having all four of its largest customers qualified on its three major product families: valves, fittings, and substrates. This widespread adoption of internally developed components is crucial for Ichor's competitive moat, enabling higher Average Selling Prices (ASPs), lower manufacturing costs, and ultimately, better margins. The long-term aspirational gross margin target of 20% is largely predicated on the increasing penetration of these flow control products.

Strategic Evolution and Operational Execution

Ichor's journey has been marked by strategic evolution and a continuous focus on operational excellence. The company's shift from a services-heavy model to one centered on proprietary products has required substantial investment in R&D and manufacturing capabilities. While most of the incremental R&D investments are now behind the company, the focus has moved to optimizing production and ensuring smooth transitions to volume.

However, this transformation has not been without its "growing pains." In Q1 2025, gross margins were negatively impacted because Ichor purchased more external supply than forecasted for internally sourced products, leading to lower-than-expected flow-through. This challenge was exacerbated by hiring and retention issues in its U.S. machining operations in Q2 2025, particularly for off-shift and cleanroom roles, which limited the output of machine components. The company has since addressed these hiring targets in its Minnesota factory and plans to expand capacity by leveraging its Malaysia and Mexico footprints for certain products, aiming to duplicate resource requirements in lower-cost regions.

In Q3 2025, Ichor initiated a Consolidation Restructuring Plan to align its global footprint and cost structure. This plan included $18.3 million in GAAP restructuring costs for inventory impairment, fixed asset charges, personnel transition, and facility shutdown costs, with additional charges expected through 2026. As part of this, the company exited its refurbishment business in Scotland in Q1 2025 due to declining demand. The newly appointed CEO, Phil Barros, a long-time CTO instrumental in Ichor's product strategy, has outlined strategic priorities for 2026, emphasizing improved product margins, smoother execution of customer qualifications, and expanding the high-contribution margin machining business across both semiconductor and non-semiconductor markets.

Financial Performance and Liquidity: A Path to Recovery

Ichor's financial performance in 2025 reflects a period of transition, with strong revenue growth juxtaposed against margin pressures from operational adjustments. For the nine months ended September 26, 2025, net sales increased to $724.046 million, up 18% year-over-year from $615.749 million in the prior-year period. This growth was primarily driven by increased customer demand in the semiconductor capital equipment spending environment, particularly in etch and deposition applications.

Despite robust top-line growth, gross profit for the nine months ended September 26, 2025, decreased to $66.793 million from $76.342 million in the comparable period of 2024. The gross margin declined to 9.2% from 12.4%. This reduction was largely due to $18.30 million in inventory write-off costs associated with the Consolidation Restructuring Plan and the planned exit from Scotland operations, along with additional employee expenses. In Q3 2025 alone, gross margin was impacted by a 1 percentage point decline from the non-semiconductor (IMG) business due to lower revenue volumes. Selling, general, and administrative (SG&A) expenses also saw an increase, reaching $68.515 million for the nine months ended September 26, 2025, up from $59.253 million in the prior-year period, driven by restructuring costs, increased employee salaries, share-based compensation, and other operational expenses. The company reported a net loss of $36.820 million for the nine months ended September 26, 2025, compared to a net loss of $16.877 million in the same period of 2024.

From a liquidity perspective, Ichor maintains a solid position. Cash and cash equivalents totaled $92.5 million as of September 26, 2025. Operating cash flow for the nine months ended September 26, 2025, was $20.70 million.

The company successfully refinanced its credit facility in Q3 2025, reducing its revolving credit facility to $225 million (with an accordion feature) and extending its term by five years, while maintaining its term loan at $125 million. This resulted in a net debt coverage ratio of 1.5x, well below covenant thresholds.

Capital expenditures for 2025 are projected at approximately 4% of revenue, above the historical average, to support the build-out of a new Malaysia factory and global operations consolidation.

Outlook and Guidance: Poised for Accelerated Growth

Ichor anticipates the fourth quarter of 2025 to be a trough for its business, with revenues projected in the range of $210 million to $230 million. Gross margins for Q4 2025 are expected to be between 10% and 12%, with approximately half of the reduction from earlier expectations attributed to lower IMG revenues and the other half to reduced demand from the third and fourth largest semiconductor customers. Operating expenses are forecast to remain consistent at around $23.7 million, and the company expects a net loss per share between $0.14 and $0.02.

Looking ahead to 2026, Ichor projects a year of transition and growth. Management expects year-over-year revenue growth in 2026, with a stronger performance anticipated in the second half of the year. This outlook aligns with broader industry expectations for a back-half weighted WFE recovery and a stronger 2027. The company's strategic initiatives, particularly the ramp-up of proprietary products and operational efficiencies, are expected to drive gross margins into the mid-teens at a $250 million revenue run rate. Ichor aims for second-half 2025 gross margins in the 15% to 16% range, exceeding 16% by year-end, with an aspirational long-term target of 20% gross margin, primarily enabled by its flow control technology. The assumed effective tax rate for 2026 is expected to be between 15% and 17%.

Risks and Challenges

Despite a compelling growth narrative, Ichor faces several risks. The semiconductor capital equipment industry is inherently cyclical, and macroeconomic and geopolitical conditions, including high inflation, interest rates, and global conflicts, could impact demand. Customer concentration remains a significant vulnerability, as reliance on a small number of OEMs exposes Ichor to shifts in their spending patterns. Operational challenges, such as effectively managing manufacturing and procurement processes, and dependence on a limited number of suppliers, could affect production and costs. Furthermore, the uncertain global trade environment, including potential new tariffs and export controls, could materially affect material costs, product pricing, and demand, despite current exclusions for semiconductors and USMCA exemptions for Mexican operations. The company's ability to attract, hire, and retain key personnel, particularly in specialized machining operations, is also critical for executing its internal sourcing strategy and achieving margin targets.

Conclusion

Ichor Holdings, Ltd. is at a pivotal juncture, transforming its business model to leverage proprietary technology and vertical integration in the dynamic semiconductor capital equipment market. The company's strategic focus on fluid delivery subsystems and advanced components, coupled with its engineering expertise, positions it to capture significant value from the ongoing expansion in advanced logic, DRAM, and NAND, driven by secular trends like AI and high-performance computing. While recent operational "growing pains" have impacted short-term profitability, Ichor's commitment to internalizing component production and expanding its global manufacturing footprint is expected to drive substantial gross margin expansion in the coming quarters.

With the fourth quarter of 2025 anticipated as a trough, Ichor is poised for a recovery in 2026, supported by a robust demand environment and the increasing adoption of its proprietary products by key customers. The successful qualification of its valves, fittings, substrates, and flow control technology represents a significant competitive moat, enabling Ichor to differentiate itself from larger, more diversified rivals. Investors should closely monitor the company's execution on its internal sourcing initiatives, the ramp-up of its new product lines, and its ability to navigate macroeconomic and geopolitical uncertainties, as these factors will be crucial in realizing Ichor's long-term growth and profitability potential.