So I think those are all positive indicators that show we have some momentum in this market and that our design wins are having some impact on our revenue already. I think the second thing that gives me confidence is that if you take a look at the industrial medical market, we were still chasing parts through the first half of last year, so there’s still a fair amount we closed out those delinquencies in the second half of last year. And so what’s happening is the customers have different levels of inventory because there are a lot of different parts in the systems that they build. And so they’re working through the inventory and doing the inventory rebalancing. The other big change our customers are dealing with is lead times. And again, the lead times have contracted significantly, and that creates a bit of an air pocket.
So that’s why I made the statement that we believe second half were back to normal from a demand standpoint.
Steve Barger: And as you think through all that, do you think that I&M can show positive growth for the year versus 2023?
Steve Kelley: Steve, we’re not sure. We haven’t gone through that model yet, but I hope so.
Steve Barger: And one quick one for Paul. Decremental margin in the back half averaged high 30% range. Is that how we should be thinking about 1Q and 2Q if revenue is down? Or can you do better than that?
Paul Oldham: I think when you look at going from Q4 to Q1, we feel pretty good about holding margins at the 35% range. We think that’s going to be a floor. If revenue does tick down again, which we don’t anticipate, then I think that’s probably a reasonable range for decremental margins, maybe a little bit less because we’ll still have some improvement on the material costs, and we continue to reduce our manufacturing footprint as we go. I think the important thing, though, as margins start to recover or revenue start to recover, is that the incremental margins on the upside ought to be well north of 40%. And in some quarters could be well over 50% as we get the benefit of these various factors coming together. So we’re actually pretty excited as we’ve continued to work this that we believe we’ve been able to reduce the revenue point at which we can get to 40% gross margin to this mid-$400 million range per quarter.
And look, if we’re able to do that and we get to mid-$400 million our peak earnings, our earnings on that level will be substantially higher than our prior peak. And that’s not even getting back to peak revenue levels. So we’ve done a lot of good work. I think we’re getting the foundation in place on gross margin. Obviously, the environment, the last 1.5 years has been challenging with parts that’s abated where you’re now in a bit of a market subpoint. But the underlying setup for gross margin, we feel is very good as we go forward.
Steve Barger: Appreciate that color. But just to level set, I think you earlier said that you might exit the year at a $400 million run rate. And so what you’re talking about — I mean, that would be the earliest that you’re running an incremental most likely, right?
Paul Oldham: Yes. I think over the course of the year, we’d see some pickup in volume, and that would lead to some incremental. But you’re right. Our projections at this point was that we would expect revenues to recover back to the $400 million level exiting this year. And at that level, we ought to be able to deliver gross margins 250 to 300 basis points higher than Q1. So that would put you in the 37.5% to 38% range on roughly $400 million. And just to calibrate that with Q4 that would be a 200-plus basis point improvement off of the Q4 levels at the same revenue level. I think that’s what we’re talking about is we see fundamental ability to improve gross margins and lower the revenue levels that it takes to deliver those gross margins.
Steve Barger: Great details. Thanks.
Operator: Our next questions are from the line of Mehdi Hosseini with SIG. Please proceed with your question.
Mehdi Hosseini: Yes thanks for taking my questions. A couple of follow-ups from my end for Steve and Paul, just going back to your commentary how this year is looking to be more weighted towards the second half. That’s well understood the beauty of low-spot numbers. But how should I think about second half of this year 2024 compared to second half of 2023. And I have a couple of other follow-ups.
Paul Oldham: Yes. I think what we said is we’re seeing early signs of improvement or that suggests there will be improvement across most of our markets. So we do anticipate things picking up as we go through the year. And our best view is that we believe we can get back to revenues at $400 million or higher exiting the year, which would be Q4. I think that’s the best visibility that we have at this point?
Mehdi Hosseini: Sure. I guess we got the March quarter guide, we got a feel for June flat to up. We got the December at 400 plus. We just need some more color on the September quarter is what I was trying to figure out.
Paul Oldham: Well, there’s not that many numbers in between there, Mehdi. So I don’t think we have perfect visibility to what the pattern will be during the year. Look, semi continues to bounce around the bottom. This is a bit lower than Q1 than Q4, but we think that’s going to improve. I think there’s early signs of data center improving that can be lumpy. That could come sooner and it could come in a bump, right? I think Industrial & Medical will be more paced, as Steve said earlier. And telecom is going to sort of glide path down a little bit. So it’s hard to say exactly how the quarters will play out. I think in the near term, we have pretty good visibility. And as we look out towards the end of the year, we have — we see enough factors that give us confidence to get back to the $400 million or higher, but it’s a little hard to project each quarter.
Mehdi Hosseini: That’s fair. And I appreciate all the details. One follow-up here, and I think it will be very helpful if you could give us some thoughts around ASP. Obviously, two years ago, industry was faced with sufficient supply, and there was a significant price increase for all semiconductor components. And I believe some of that price increase was passed on to the end customer. As we go through this inventory correction and the weaker end market demand, how are you positioning the company for a pricing leverage, especially in this core semi cap could your customers wait to last minute to get any kind of concession? And I’m just wondering how we should think about it.
Steve Kelley: Yes. So let me just kind of retrace our steps over the past couple of years during the supply chain crisis. Many of our customers chose to pay premiums. So it wasn’t a price increase per se, but we would go out on the third-party market to find these scarce chips and then they would pay the premium that we had to pay for those particular ICs or MOSFETs. And so I think, as Paul explained during his presentation, most of those premiums have gone away. We had some other customers who preferred price increases. In those cases, we’re working with them. The first step is to get the price decreases from our IC suppliers and MOSFET suppliers. And quite frankly, that’s been a bit of a challenge. So we’re working hard to move our IC and MOSFET costs down, but they went up a lot faster than they’re coming down.
Mehdi Hosseini: Okay thank you Steven. A quick follow-up for Paul. OpEx in 2024, should we assume that it’s kind of flattish from here on?
Paul Oldham: I think sort of flattish or certainly, that’s what we guided to for Q1. I think Q2 will be similar, and flat means it could bounce around a little bit, plus or minus, because we get in the second half, we’ll see how revenues recover. There could be a little bit of increase in the second half, more based on inflation and other factors. But in any event, we don’t anticipate operating expense going up. We have a good cost structure. We’ve worked hard to get it down from where we exited a year ago. We want to try to live within that cost structure. We’re funding our priorities are making great progress on our NPI and other strategic initiatives. So I think we’re going to try to stay in roughly within this envelope, but I’d say maybe a little bit of increase in the second half just based on normal factors.
Steve Kelley: And Mehdi, let me just quickly answer on the pricing issue. Can I just add a little more color because I think your question was more about what leverage we might have moving forward on the price. And I think it’s really about new products. In semi, in I&M, even data center. We’re bringing products to market now. They’re not for more value to the customers and offer more profits to us. And that’s how we plan to move our profitability together with the actions we’re taking manufacturing.
