Ultra Clean Q3 2023 Earnings Call Transcript

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October 25, 2023

There are 5 speakers on the call.

Operator

Good day, and welcome to the Ultra Clean Q3 2023 Earnings Call and Webcast. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Rhonda Veneto, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are Jim Scholhamer, Chief Executive Officer and Sherri Savage, Chief Financial Officer. Jim will begin with some prepared remarks about the business For more information, please refer to the Risk Factors section in our SEC filings. All forward looking statements are based on estimates, projections and assumptions as of today, and we assume no obligation to update them after this call.

Speaker 1

Discussion of our financial results will be presented on a non GAAP basis. A reconciliation of GAAP to non GAAP can be found in today's press release posted on our website. And with that, I'd like to turn the call over to Jim. Jim?

Speaker 2

Thank you, Rhonda. Total revenue for the Q3 came in as expected, increasing 3% over the 2nd quarter. Our product business grew just over 5% as some WFE fundamental dynamics began to show small signs of improvement. We believe that some progress has been made for equipment inventory reductions throughout the system and expect several more quarters until normal levels are achieved. We are aligned with our customers and their customers that while we don't know the pace or the timing of the recovery, we believe the fundamentals Slowly setting the stage for the industry to return to growth.

Speaker 2

Our typically high margin service business saw an abrupt decline in revenue due to a sudden and unexpected large reduction in wafer starts at a primary customer. While this pullback had a detrimental effect on our overall profitability and earnings, we believe that production cuts should help rebalance of supply and demand and a recovery of chip prices. For the foreseeable future, we will continue to focus on optimizing our global footprint, driving operational efficiencies and other strategic initiatives to further increase our value for our customers. These efforts will lay the foundation Required to capitalize on share gain opportunities heading into the next ramp. We are in a strong position to increase our semi manufacturing leadership position with the available capacity and geographic flexibility to meet accelerated demand when it returns.

Speaker 2

Along those lines, we are very pleased to report that we have acquired HIS Innovations Group. They provide design, manufacturing, integration of components, process solutions and fully integrated subsystems to the semiconductor sub fab segment. This acquisition has a higher gross margin and value product offering, increases our vertical capabilities and synergies, extends our reach into the sub fab area and expands our addressable market by approximately $1,500,000,000 With over 60 fabs under construction globally, this acquisition aligns with our long term strategy to pursue sustained and profitable growth and will be rolled into our product division. Lastly, we are deeply saddened and concerned by the current events in the Middle East. We are taking the situation very seriously and I'm relieved to say that all our employees are accounted for and we're doing all we can to assist with their safety and well-being.

Speaker 2

Both of our facilities in Israel are running at the capacity required to meet production targets. Our commitment to Our customers worldwide remains a priority. Israel's policy ensures business continuity across the industrial segment, So ports and airports are currently functioning and we can ship and receive the products and raw materials required to meet customer demand. We're also working together with other multinational companies that have substantial operations in Israel to ensure we are aligned and supporting each other. Overall, we are navigating through the demand variability in the current environment.

Speaker 2

Longer term, our increased scale, operational efficiencies, Expanded capacity and new capabilities position us well to maintain our leadership position and outperform the industry. And with that, I will turn the call over to Sherry.

Speaker 3

Thanks, Jim, and good afternoon, everyone. Thanks for joining us. In today's discussion, I'll be referring to non GAAP impacted by a sudden larger than expected reduction in wafer starts in Q3 that impacted our overall profitability and earnings. Total revenue for the Q3 was $435,000,000 compared to $421,500,000 in the prior quarter. Revenue from products increased 5.1 percent to $380,900,000 compared to $362,500,000 last quarter.

Speaker 3

Services revenue was $54,100,000 compared to $59,000,000 in Q2 due to the scale back in wafer starts as I just mentioned. Total gross margin for the Q3 was 15.5% compared to 16.7% last quarter. Although products revenue grew sequentially, Gross margin came in at 13.8% compared to 14.5% in the prior quarter and services was 27.4% compared to 30.3% in Q2. The reduction in margin was due to lower volumes for service and overall mix within each business unit. We continue to focus on cost improvements and operational efficiencies to strengthen profitability.

Speaker 3

Operating expenses for the quarter was $48,600,000 compared with $49,400,000 in Q2 and decreased as a percentage of revenue to 11.2% from 11.7%. Total operating margin for the quarter was 4.4% compared to 5% in the 2nd quarter. Margin from our products division was 4.5% compared to 4.3% in the prior quarter and services margin was 3.7% compared to 9.3% in the prior quarter. The drop in services margin was due to lower volumes and mix. Based on 45,000,000 shares outstanding, earnings per share for the quarter was $0.04 On net income of $2,000,000 compared to $0.16 on net income of $7,100,000 in the prior quarter.

Speaker 3

Our tax rate for the quarter was 37.3 percent due to a shift in profits by geography. Our tax rate was trued up in Q3 for year to date expense and we expect our tax rate for Q4 and 2023 to be approximately 20%. Turning to the balance sheet. Our cash and cash equivalents were $342,000,000 an increase of $21,200,000 over Q2. Cash from operations was $36,200,000 similar to last quarter at $36,400,000 As we navigate through the current cycle, we will continue to manage our working capital.

Speaker 3

Given macroeconomic and geopolitical uncertainty and current industry dynamics, We are keeping our guidance range wide. With the addition of HIS Innovations Group, we project total revenue for the Q4 of 2023 between $420,000,000 $470,000,000 We expect EPS in the range of $0.02 to $0.22 This includes approximately $10,000,000 of revenue and $0.01 of EPS for 2 months of operations from the acquisition. And with that, I'd like to turn the call over to the operator for questions.

Operator

The first question comes from Krish Santhakar with TD Cowen. Please go ahead.

Speaker 4

Hi, this is Robert Mertens on behalf of Krish. Let's see. 1st, just in terms of the service sales this quarter, I know they're a bit weaker on utilization rates last quarter and You mentioned the sudden reduction in wafer starts impacting in September. Was there was that the Main qualifier for this quarter, was there anything else? And maybe just in terms of the mix that goes into the service division,

Speaker 2

Yes. Hi, Robert. The first part, We have seen reductions in wafer starts across the broad spectrum of fabs prior to this last Quarter, what we saw early in the Q3 was one particular chip maker ratchet down Mostly, they're memory fab pretty dramatically. They've been holding that up for half the time And others had already brought their utilizations down. So that was, I guess, you'd say, the last ones that really fall.

Speaker 2

So that was the main impact there. As far as your second question around the mix, I think maybe my answer on the first might answer that. The service is typically more dependent on logic than memory, but this is a rather large memory fab and it had an outsized impact.

Speaker 4

Great. Thank you. And then maybe just real quick in terms of the timing of Seeing the ramp down at that one customer, is there any indication of maybe when the sales would pick back up? Is that something you think services would be growing next quarter or something more into calendar year 2024? Thanks.

Speaker 2

Yes, really difficult to predict. We're starting to see some of the fundamentals of supply and demand of these chips start to Move towards a better balance. I expect to see some ASP on some of these chips start to recover a bit. So things are moving in the right direction. But As far as when the customers will start ramping up the supply side of the chips and use the pull their utilizations up, It's still unclear, but I would say it's doubtful to see anything meaningful within this year.

Speaker 4

Great. Thank you. That's helpful.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Key Takeaways

  • Product revenue grew 5.1% sequentially in Q3, driven by early signs of improvement in wafer fab equipment (WFE) fundamentals.
  • Service revenue declined from $59.0 M to $54.1 M due to a sudden reduction in wafer starts at a primary memory customer, pulling down overall profitability.
  • Q3 non-GAAP gross margin compressed to 15.5% (from 16.7%) and EPS fell to $0.04 from $0.16 in Q2 amid lower service volumes and mix.
  • The acquisition of HIS Innovations Group adds higher-margin subsystem capabilities, expands the addressable market by about $1.5 B, and enhances vertical integration.
  • Q4 guidance is for $420–470 M in revenue and EPS of $0.02–0.22, reflecting macro and geopolitical uncertainty as well as two months of contribution from the new acquisition.
AI Generated. May Contain Errors.
Earnings Conference Call
Ultra Clean Q3 2023
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