Ultra Clean Q2 2023 Earnings Call Transcript

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July 27, 2023

There are 7 speakers on the call.

Operator

Good day, and welcome to the Ultra Clean Technology Q2 2023 Earnings Call and Webcast. All participants will be in listen only mode. Followed by 0 on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Rhonda Panetto, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are Jim Schulhammer, Chief Executive Officer and Sherri Savage, Chief Financial Officer. Jim will begin with some prepared remarks about the business and Sherry will follow with the financial review and then we'll open up the call for questions. Today's call contains forward looking statements that are subject to risks and uncertainties.

Speaker 1

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. 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.

Speaker 1

Jim?

Speaker 2

Thank you, Rhonda, and good afternoon, everyone. Thank you for joining us today. I'll start with a recap of our Q2 performance and provide some commentary on current and long term industry dynamics before turning the call over Sherry for a detailed financial review. Then we'll open up the call for questions. During the second The semiconductor industry remained challenged in certain segments, while other areas remained strong.

Speaker 2

Grailing edge, servers and China ordering Taking delivery of tools were bright spots. However, DC and consumer end markets that rely on advanced memory and foundrylogic spending remained weak. Headwinds included elevated inventory levels across the supply chain, macroeconomic and geopolitical instability, including interest rates, Here's the recession, inflation and export controls, all of which are likely to influence our industry for a few more quarters. Product mix and lower utilization at some sites and reduced revenue were the overriding factors that affected our 2nd quarter results. UCT's legacy products business performed as expected in this dynamic environment with some adjustments to orders, but no notable push outs or cancellations.

Speaker 2

Although a small percentage of our total products revenue, our non semi business saw some unexpected volatility in the 2nd quarter, particularly in the process technology space where we supply semi like parts to non semi businesses in display, industrial and medical. And lastly, our service business declined from the Q1 as some customers adjusted their schedules to realign with ongoing end market weakness. As anticipated, the cost reduction initiatives we introduced earlier this year have begun to materialize in our financial results. Inventory decreased and OpEx trended down resulting in healthy cash flow. Footprint optimization and site efficiencies to adapt to current demand while preparing for the ramp, are on track, but are much larger in scale, so take time for profitability to be fully appreciated.

Speaker 2

We will continue to reduce inventory and trim expenses throughout the 3rd 4th quarters and are being extremely prudent and When making investments to align with our long term capacity with our customers' roadmaps. A highlight this quarter worth noting is that UCT was awarded Intel's Distinguished Supplier Award, which recognizes partners that exemplify Intel's standard of excellence. To qualify for an Intel EPIC award, suppliers must not only exceed expectations, but meet aggressive performance goals. Receiving this award was a true honor and I want to thank our team for their world class to continuous improvement making UCT widely considered the best of the best. In summary, before turning the call over to Sherry, we are aligned with our customers and industry sentiment that WFE is at the bottom of the trough and expect our revenue and profitability to bounce around these levels for the next few quarters.

Speaker 2

Our view for a ramp in 2024 remains intact. However, there are too many moving parts today to call the exact timing and shape of the recovery. Overall, based on industry estimates and confirmed by our internal marketing team, we are extremely optimistic about the long term growth trajectory of our industry and do see a clear path to a $1,000,000,000,000 chip industry by 2,030. I want to thank all of our employees for their relentless drive to succeed in this Challenging environment. I also want to thank our shareholders for their patience while we adjust our business during this phase of the cycle to ensure stronger growth and profitability during the next upturn.

Speaker 2

And with that, I'll turn the call over to Sherri. Sherri?

Speaker 3

Thanks, Jim, and good afternoon, everyone. Thanks for joining us. In today's discussion, I'll be referring to non GAAP numbers only. As Jim noted, Q2 remained a challenging period in the semi cycle as companies work to reduce and rebalance inventory levels on weak end demand while navigating persistent macroeconomic and geopolitical headwinds. Total revenue for the 2nd quarter came in at $421,500,000 compared to $433,300,000 in the prior quarter.

Speaker 3

Products division revenue was $362,500,000 compared to $368,600,000 last quarter and revenue from our services division was $59,000,000 compared to 64 point $7,000,000 in Q1. Total gross margin for the Q2 was 16.7% compared to 17.3% last quarter. Products gross margin was 14.5% compared with 14.7% in the prior quarter, and services was 30.3% compared to 31.7% in Q1. The reduction in margin is due to lower volumes driving decreased efficiencies. As we continue to optimize our footprint and increase efficiencies, we expect to see incremental improvements in gross margin.

Speaker 3

However, as Jim noted, these initiatives are complex and larger in scale. Therefore, it will take some time for the benefit to be fully realized. Operating expense for the quarter was $49,400,000 compared with $52,700,000 in Q1 and decreased as a percentage of revenue to 11.7% compared to 12.2% in the prior quarter as some of our initial cost control initiatives began to materialize. Total operating margin for the quarter was relatively flat from the prior quarter at 5% compared to 5.1% in the Q1. Margin from our products division was 4.3% compared to 4.1% in the prior quarter, and services margin came in at 9.3% compared to 10.8% in the prior quarter.

Speaker 3

The fluctuations in margin were mainly due to decreased efficiency on reduced volume, partially offset by lower operating expenses. Efforts are ongoing to align our cost structure with current demand levels. Based on 45,000,000 shares outstanding, earnings per share for the quarter were $0.16 on net income of $7,100,000 compared to $0.17 on net income of $7,600,000 in the prior quarter. Our tax rate for the quarter was 16%. We expect our tax rate for 2023 to stay in the mid to high teens.

Speaker 3

Turning to the balance sheet. Our cash and cash equivalents were $320,800,000 at the end of the second quarter compared to $322,100,000 last quarter. Cash from operations increased to $36,400,000 compared to $28,000,000 in the prior quarter, driven primarily by the reduction of inventory and management of cash flows cash outflows. As we navigate through the current cycle, we will continue to to manage our working capital to ensure sustained financial stability. During the quarter, we purchased 337,000 shares at a cost of $9,500,000 For the Q3, we project total revenue between 405 and $455,000,000 We expect EPS in the range of $0.08 to $0.28 And with that, I'd like to turn the call over to the operator for questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Krish Sankar with TD Collins. Please go ahead.

Speaker 4

Yes. Hi. Thanks for taking my question. Jim, the first question I had is, I understand you said revenue profitability to bounce on these levels for the next few quarters, which kind of makes a Thanks. I'm just trying to triangulate that some of your customers have spoken about reducing their inventory levels.

Speaker 4

So How do we like kind of handicap that given the fact that as they reduce their inventory level, it's kind of a slight negative for you in the short term? And then I had a couple of follow ups.

Speaker 2

Okay. Yes. Hi, Krish. Absolutely. I think we've been pretty consistent the last few times we've gone on these calls.

Speaker 2

There is a significant amount of inventory and also deferred revenue that is between us and our customers. Yes, we are seeing as we guided up a bit in the next quarter, we are seeing a little bit of improvement, but there is still After the great supply chain post COVID crisis, we saw inventory levels that were really at kind of Levels that we haven't seen in a long time. So that is the reason why we're kind of being Somewhat conservative in our approach and that it's going to take another few quarters to clear this out. However, I think we're optimistic that things could get will probably get better before they get worse.

Speaker 4

Got it. Got it. And then I have one other question for you and then one for Sherry. Jim, the second question for you is, I remember in the past you kind of shipped to some of the China semi cap companies like MEC or Fear Takeover with this. I'm just kind of curious, are these can you still ship to them?

Speaker 4

Are they still part of your customer base? Any color there would be helpful. And then I had a follow-up for Sherry.

Speaker 2

Yes. We have been able to ship to them on more of the trailing edge investment that's going on in China. So we have seen some pretty Good movement there. It actually was relatively strong. So we were initially concerned that it was Kind of inventory hoarding because they were afraid of new restrictions.

Speaker 2

But I think we've now confirmed that they're actually just Seeing more business at the trailing edge. So we've actually seen our business with AMEC and Piotec continue to be strong.

Speaker 4

Very helpful, Jim. And then a final one for Sherry. You've done a really good job at managing the cost during these challenging times. If the revenues of these levels, you guys mentioned profitability should be around these levels too. How easy is it to scale up or scale down if things get Worse or better from here onwards?

Speaker 3

Yes. No, I mean, we have certain cost initiatives in place. So for a scale down, We're ready to go on that and we are continually looking at our cost structure. Scaling up is sometimes can be actually This is hard because trying to hire people quickly and making sure that we have the enough capacity, etcetera, in place to be able to manage Customer demand is quite key. So we're looking at both really because both Jim and I feel that this could turn on very quickly when it does.

Speaker 3

So and that's what our experience has been. So we will continue to almost look at both scenarios to make sure that We can react to either.

Speaker 4

Got it. Thanks a lot, Sherry. Thank you very much.

Speaker 3

Thank you.

Operator

Our next question comes from Prane Bolton with Needham and Company. Please go ahead.

Speaker 5

Hey, Jim. I guess I just wanted to follow-up on Chris' question. Lam last night talked about canceling POs to a number of its component vendors. And the near term, they were having to take some excess component inventory to cancel those orders, but it certainly made it sound like beyond the September quarter, they may be taking Gained significantly lower deliveries from component vendors to try to work down the inventory. And I guess, 1, are you seeing that?

Speaker 5

And 2, is that sort of incorporated in your outlook for sort of stable revenue through the certainly year end and maybe even into early next year?

Speaker 2

So one, we have been seeing that actually for Q1 and Q2. We have been dealing with that.

Speaker 6

And

Speaker 2

there are a lot of Puts and takes because what they have in inventory isn't always what they need for whatever is being ordered. So Obviously, they're still ordering things. And that's why when I say flattish for the rest of the year, bouncing around these levels, Maybe up a bit. We've already taken that to your second question, we've already taken that into account. But we do think there is opportunity for upside as these things start to clear out.

Speaker 5

Got it. Thanks for that additional color. And then I guess in terms of your services business, revenue looks like it was weak just utilization rates have been throttled back. Based on the latest information you have, do you think those utilization rates are now at Sort of a trough level and the services business may start to see a rebound in the second half of the year As utilization rates begin to recover, do you think we're going to stay at this lower utilization rate and therefore services revenue in the second half It's probably going to be around that $59,000,000 level, in that you saw in Q2 for the rest of the year.

Speaker 2

Yes, Quinn. So I would say I would characterize it as we don't imagine them going any We've certainly seen weakness in Korea, which we hadn't seen until the Q2. Korea had remained strong in the Q1. We've seen a lot of delays on node changes, the overs in North America. And if I were to characterize it, it's we're assuming it doesn't move.

Speaker 2

We definitely we can't see it moving down from this level. We're assuming it's going to be flat, maybe slightly up, but there We think there might be some potential for it to move up a little bit more by the end of the year.

Speaker 5

Excellent. And then Sherry, the gross margins at 16.7%, it seemed to be a little bit lower than what we were thinking without a Meaningful change in the revenue. So I guess anything in particular to call out? Was there Particular mix shift, it looks like both product and service margins were lower this quarter. I was just wondering When do you think do you think margins kind of stay at these levels to the extent that revenue is flattish?

Speaker 5

Is sort of a flattish gross margin the right way to be thinking about gross margin until revenue recovers?

Speaker 3

Yes. And we I think the key thing that affected this quarter was really the services side, as you mentioned earlier. Obviously, that has A very nice margin profile. So as a result of that, that really assisted with the margin coming down a little bit as well as Our Hormelts Fluid Solutions business was also lower than anticipated. So those feed into the overall margin on Product side, the fluid solutionshomlet and then obviously services.

Speaker 3

So I think as we start to see those recover over the course of the year, as Jim mentioned, Surrounding services, we should be able to see some of that margin come up as a result of that, along with the fact that we have cost initiatives in place that we're looking at as well Hopefully affect that depending upon how long this cycle goes so that we can ensure that we manage our margin as we move forward.

Speaker 5

Perfect. Thank you very

Operator

much. Thank you. Our next question comes from James Trelaude, Craig Hallum Capital Group. Please go ahead.

Speaker 6

Hey, thanks for taking my question. I guess, more on the more optimistic side on when we come Out of this, we have a very large footprint that you expanded in Asia during the upturn. Should we assume that you're out there aggressively looking to capture market share? These cycles always run the same. We order too much.

Speaker 6

We take a pause. And then all of a sudden, as you talked about, it turns on faster than people think and everyone scrambling again, Inventory correction, a strong growth. So should we assume on the backside of this that you think you might have aggregate More market share that you did going into the downturn or should we not think that?

Speaker 2

Yes, Christian, Yes. So yes, you followed us a long time. So we've picked up market share on both the upside and the downside. And I could say And almost all accounts were holding share or improving share even during this down cycle. And I think a big Part of that is many of the OEMs are making a much stronger move to Southeast Asia where we've really set ourselves up really well.

Speaker 2

So we are seeing a lot of new program wins that were and these things take 2, 3 quarters For a program win to show up as revenue as you move these things over to those sites. So we are doing really well in that stage. We're a little bit we're kind of heavier in etch And heavier in CMP and other areas, we're doing well with litho, which is doing really as you know for WFE, but we don't have the biggest footprint there yet. So we're a little bit disadvantaged right now when you look at total WFE because the Segments where we're stronger are down a little bit. But if you look at program and market share wins, we're actually doing very, very well.

Speaker 2

And I think one other point, not to run on, one other point to make is, as part of the cost reductions that we're doing is we're consolidating And moving factories that are that we're kind of doing 2 things at once. And this has been our playbook for many years. So we're moving factories into like One larger location so that we'll actually end up with more capacity, but more efficiency by moving these factories together in like Texas and in Arizona as well as In Malaysia. So we're kind of got a double playbook of like getting more efficient in our factory space At the same time, increasing our capacity for the next big run up. So yes, I mean, A short answer to your question is we're doing really, really well in our accounts.

Speaker 6

Great. And then Jim, Looking at the upturn in the CHIPS Act here in the United States and in some of your very large customers expanding manufacturing capacity here, Do you think you'll get any government funds to help in Expanding or growing different facilities where the customers want them, Texas, for example.

Speaker 2

Yes. Not in the near term. The money Hasn't really been we have people working on this, but the money has not been allocated towards the supply chain yet and those investments have been more R and D or Large fabs. So we have not been able to see any of that. But I think downstream, When Intel goes into Ohio and we build a fab in 2025 or 26 to service them, For example, I think that will be where our opportunity is.

Speaker 2

So right now, the CHIPS Act is not benefiting sub suppliers in any way. So but it's definitely something we are looking into.

Speaker 6

Great. No other questions. Thanks guys.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Joe Hammes, any closing remarks.

Speaker 2

So thank you everyone for attending today's conference call and we look forward to

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Key Takeaways

  • Ultra Clean reported Q2 revenue of $421.5 million, down from $433.3 million in Q1, with gross margin slipping to 16.7% as weak memory and foundry/logic markets offset strength in leading-edge, servers and China trailing-edge segments.
  • Cost reduction initiatives and footprint optimization have begun to lower inventory and operating expenses, driving $36.4 million in operating cash flow, though full profitability benefits will take more quarters to materialize.
  • UCT was honored with Intel’s Distinguished Supplier Award, reflecting its performance excellence and continuous-improvement culture.
  • Management views wafer fab equipment spending as at the “bottom of the trough,” expects revenue and profitability to remain around current levels for the next few quarters, and still anticipates a ramp in 2024 amid long-term industry growth towards a $1 trillion market by 2030.
  • The balance sheet remains strong with $320.8 million in cash, a $9.5 million share buyback in Q2, and Q3 guidance of $405–455 million in revenue and $0.08–0.28 in EPS.
A.I. generated. May contain errors.
Earnings Conference Call
Ultra Clean Q2 2023
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