Mehdi Hosseini: Got it. Thank you Steve.
Steve Kelley: Thank you.
Operator: The next question is from the line of Scott Graham with Seaport Research. Please proceed with your question.
Scott Graham: Hey good evening, thanks for taking my question guys. I wanted to maybe talk a little bit more about the gross margin. Are you guys saying that the premiums had no effect on the fourth quarter gross margin?
Paul Oldham: Yes. No. What I said is that it did have some effect. We think that’s sort of in the 50 to 100 basis points. So that’s continued to come down every quarter. And I think what we said as we ended the quarter, it was approaching normal levels. So I think our very end of the quarter, exit rate was pretty small, but that just means that those costs largely just need to roll through inventory now. So expect that same whatever 75 basis point improvement kind of flow through over the next quarter, 1.5 quarters. That’s part of how we protect staying at 35 as part of it in that baseline as we go forward that those premiums are largely washed out. But there will be a little bit more in the first few months. But in terms of an ongoing activity, we think that’s largely normalized.
Scott Graham: Okay. Okay. So is there a case here, Paul, where I think you just answered it, but I’m not sure on the math. Are you saying that like sort of in the second half of the year, as we roll through sales and the gross margin should start to naturally move up because the sales are no longer burdened by the premiums of the gross income dollars goes up in the gross margin dollar gross margin percent goes up with it. Is that the right way to look at it?
Paul Oldham: Yes. Said another way, the headwind that we’ve had over the last year, which has been dying down, but a headwind nonetheless, that dissipates completely after, say, the first quarter or a little bit into the second. So that’s — that means that going forward, we don’t have that headwind. But — so as volume picks up and other things improve, then we get that all the way to the bottom line. But I think the other thing is the improvements that we’re making in the factories and efficiency from a cost perspective and even a little bit of mix is we’re getting some product benefit from a sole source perspective, sole source mix towards the end of the year. All of those things really start to fall through. And that’s why on similar revenue levels in the fourth quarter to what we had this year in the fourth quarter, we ought to be doing roughly 200 basis points better or, as I said, 250 to 300 basis points better than where we’re starting the year.
Scott Graham: Okay. Thank you. Steve, I was hoping you could tell us a little bit more about sort of this seems like another push to the right in semi because the numbers that we’re hearing for WFE. Obviously, they started six months — a year ago, they were in the down 20s and then they came in from that to down 10s and 15s, and I’m just wondering why with market conditions is still difficult, but seemingly less difficult. Why is it kind of going the other way for you?
Steve Kelley: Yes, Scott, I think if you take a look at the data, we sell into etch and deposition applications, ion implant applications. So more conventional applications within the semiconductor process universe. We do not sell in to litho. So if you extract the litho WFE, then I think you’ll find that we’re actually gaining share in that particular part of the market. I think what’s important to realize though is the share gains are going to happen with the next-generation processes. So that’s why I spend so much time talking about eVerest and eVoS because those are two new flagship technologies, which have been eagerly embraced by the customers and we think they are going to drive real share gain for the company over the next three to five years.
Scott Graham: Okay. Last question, promise. The debt offering that you did last fall kind of sitting and waiting for an acquisition to deploy that on. Could you just give us an idea how the funnel is looking? Is this sort of a modest setback in earnings here is does that slow that process down? Or is that still full speed ahead and you’re getting closer and closer to something? Just maybe sketch out kind of where you’re at.
Steve Kelley: Yes. Just let me just give you some context. This is a modest speed bump for us and it doesn’t really impact any of our activities. So we’re going full speed ahead on development. We’re going full speed ahead on M&A. And our M&A approach hasn’t changed. We’re basically looking at two tracks. The first track is technology tuck-ins. Those will be primarily for semiconductor applications. And the other track is basically larger acquisitions. And we are in contact with our targets, and we certainly have the money to deploy when we reach agreement with one or more of these targets. But we’re in no hurry. We want to make sure that the deals we engage in make strategic sense, make financial sense for the company. And then we’ll basically deploy the same playbook we used with SL Power, we’ll integrate quickly and maximize our synergies as fast as we can.
Paul Oldham: And I’ll just remind you — I’ll just remind you, Scott, also that — when we did the debt offering, one of the beauties of that was that it gives us optionality as well. So we don’t have to be in a hurry. We can be patient. There’s other things we can do to deploy that cash that add value to the company, including arbitraging our debt next fall, if that’s something that makes sense at the time. So we have a lot of options, and that I think gives us flexibility to be smart to be patient and make sure we’re doing the right thing.
Scott Graham: Okay, thank you.
Operator: [Operator Instructions] The next question is coming from the line of Jim Ricchiuti with Needham & Company. Please proceed with your question.
James Ricchiuti: Hi, thanks. Most of the questions were answered. I was just curious, as we think about 2024, the way you’re describing the year, if that plays out that way. I’m wondering as you layer in some of the e-commerce activity, you’ve talked about working more on the distributor front. Is there — does any of that have the potential to add incrementally to the revenues in a meaningful way this year? Or is that more in 2025?
Steve Kelley: It’s a good question, Jim. I think we have the ability to add incrementally to revenues this year and next year. We actually launched the website in August of last year, and we saw an immediate uptick in engagement and downloads and so forth. So I think some of that work is already underway. So I’m encouraged by what I’ve seen so far. And that will continue throughout this year, right? So it’s much easier for customers now to engage with us than it was six months ago. And as we add e-commerce to our website later this month, they’ll be able to get samples of our products very quickly and make their decision more quickly. So I’m encouraged by that. And also by the enthusiasm within our distributors, they’re seeing how popular our products are — and they also are encouraged because they tend to make more money selling our subsystems than they do selling ICs. And so that certainly makes a difference.
And we’re seeing a lot more enthusiasm for both power and advanced energy through our distributor channel.
James Ricchiuti: Thanks a lot. Good luck.
Steve Kelley: Thank you.
Operator: Our next question is from the line of Duksang Jang with Bank of America. Please proceed with your question.
Duksang Jang: Hi, thanks for taking the question. I want to go back to an earlier semis question. So you said excluding litho [ph], you’re potentially gaining share in some of the areas. But if we look at one of your lead edge customer, they posted a strong December. And even looking into March, they’ve had flattish outlook, whereas I think your semis outlook is a little bit falling behind. So I just want to understand that disconnect between you and your — some of your customers?
Steve Kelley: Yes. Basically, there’s two issues there. One is inventory that some of our customers are still carrying, right? And the second is timing because typically, we’ll be shipping products into a customer the quarter before they ship their products to their end customers, sometimes it two quarters before. And so it’s very hard to correlate our results with our customers’ results on a quarter-by-quarter basis.
Duksang Jang: Got it. Got it. And then on to gross margins. So I think exiting this year, you’re targeting 57% to 57.5%, but you still have that another 200 to 300 basis points in order to reach the 40% mark. So what other kind of tailwinds do you have now? You don’t have that inventory normalization anymore. Potentially, you have the factory optimization but is that really enough to get you that 200 to 300 basis points? Thanks.
