Ultra Clean Q1 2024 Earnings Call Transcript

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May 6, 2024

There are 7 speakers on the call.

Operator

afternoon, ladies and gentlemen, and welcome to the Ultra Clean Technology UCT First Quarter 2024 Earnings Call and Webcast Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Monday, May 6, 2024. I would now like to turn the conference over to Rhonda Benetto, Senior Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone, and 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 Sherri will follow with the financial review, then we'll open up the call for questions.

Speaker 1

Today's call contains forward looking statements that are subject to risks and uncertainties. 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.

Speaker 1

And with that, I'd like to turn the call over to Jim. Jim?

Speaker 2

Hello, everyone, and thank you for joining our call this afternoon. I will start with a high level summary of our financial and operating results for the Q1, then share some thoughts on the broader industry and trends we are seeing. I'll close by highlighting a couple of important awards before turning the call over to Sherry for a more inclusive financial review before opening the call up for questions. We reported a solid first quarter on the top and bottom line. The increase in orders above midpoint was driven by ongoing strength in the domestic China market and high bandwidth memory and advanced packaging demand supporting AI.

Speaker 2

Earnings came in above our guided range due to higher volume, favorable mix and our ongoing focus on-site efficiencies. Elevated domestic China demand underscores the importance that the Chinese government and chip industry has placed on becoming self sufficient. Chinese chip companies are rapidly investing in new semiconductor factories to advance the nation's capabilities and address export controls imposed by the U. S. And its allies.

Speaker 2

We recently celebrated the 20th anniversary of our Shanghai facility and are ideally located to support our local customers' growth plans. Based on external analysis and our customer roadmaps confirmed by our internal marketing intelligence, we anticipate demand levels in the region to remain consistent or even increase slightly through the end of this year. The second reason revenue increased beyond our expectations was related to areas of deposition and edge demand in high bandwidth memory and advanced packaging supporting AI. Artificial intelligent models are advancing rapidly so that they can run on edge devices like PCs and smartphones, creating new and compelling capabilities in both the consumer and enterprise sectors. Additional industry investment is required to meet the forthcoming demand for advanced computing, memory and storage.

Speaker 2

So growth is likely to be uneven within the value chain for a while yet. In this landscape, success will favor those who are capable of quickly driving technological progress, while also introducing innovations that disrupt the complexities associated with semiconductor fabrication. UCT supports the world's technology leaders in this sector and our deep relationships with them are helping to advance their roadmaps with positive results. The drive for localized chip manufacturing capabilities happening now in several countries is another tailwind that will support future demand and elevate UCT significance with our customers. In the U.

Speaker 2

S. Alone, the Chips and Science Act has committed $30,000,000,000 to date, supporting $275,000,000,000 in investment by 2,030. As chips become increasingly critical to multiple industries and use cases around the world, the long term outlook for the semiconductor market is very robust. The expansion and diversification of our vertical capabilities over the past several years gives us a distinct competitive advantage to participate at all levels of industry growth from fab construction support to equipment build out to production services like part recycling and refurbishment, cleanliness and analytics. Furthermore, our dedication to manufacturing excellence remains unparalleled distinguishing us from competitors and solidifying our leading position.

Speaker 2

For example, we are honored to have received 2 very prestigious awards recently. First, we were recognized by Texas Instruments areas of cost, environmental and social responsibility, technology, responsiveness and assurance of supply and quality. And for the 2nd year in a row, we earned Intel's 2024 Epic Distinguished Supplier Award for consistently exceeding expectations. As one of only 27 award recipients, UCT stood out among thousands of other suppliers because of our relentless drive to improve and serve as a benchmark for other suppliers across the ecosystem. We believe that supply and demand will incrementally rebalance throughout the rest of this year.

Speaker 2

However, our opinion has not changed and we expect a broader base recovery in 2025. We're performing effectively and have achieved notable advances in streamlining and expanding our capacity to mirror the evolving demands and technology shifts we see coming. Mindful of these trends, we have strategically mapped out our global footprint to ensure a diversified and efficient manufacturing presence supporting all our global customers. We are pleased with UCT's execution and are prepared to outperform again through the next phase of industry growth. And with that, I'll turn the call over to Sherry for our financial review.

Speaker 2

Sherry?

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 in the Q1, we saw an increase in our products business within the China domestic market and some new demand for product supporting AI, which we expect to stay around these levels. Our service business also saw elevated demand from China along with some additional business from a fab relocation.

Speaker 3

Total revenue for the came in at $477,700,000 compared to $444,800,000 in the prior quarter. Revenue from products increased to $418,500,000 compared to $389,700,000 last quarter. Services revenue was $59,200,000 compared to $55,100,000 in Q4. Total gross margin for the Q1 increased to 17.9% from 16.7% last quarter. Products gross margin was 15.8% compared to 14.6% in the prior quarter, and services was 32 point 3% compared to 31.7% in Q4.

Speaker 3

Margins can be influenced by fluctuations in volume, mix and manufacturing region as well as material and transportation costs, but there will be variances quarter to quarter. Operating expense for the quarter was $54,500,000 compared with $51,300,000 in Q4. As a percentage of revenue, operating expense remained flat compared to Q4 at 11.4%. Total operating margin for the quarter increased to 6.5% compared to 5.2% in the 4th quarter. Margin from our products division was 6% compared to 4.6% in Q4 and services margin was 10.1% compared to 9.5% in the prior quarter.

Speaker 3

Margin improvements were largely due to higher revenue and operating efficiencies. Based on 45,100,000 shares outstanding, earnings per share for the quarter were $0.27 on net income of $12,100,000 compared to $0.19 on net income of $8,500,000 in the prior quarter due to favorable product mix and factory utilization. Our tax rate for the quarter was 19.7% compared to 16.4% last quarter. We expect it to stay in the high teens for 2024. Turning to the balance sheet, our cash and cash equivalents were $293,000,000 compared to $307,000,000 in Q4.

Speaker 3

Cash flow from operations was $9,800,000 compared to $35,300,000 last quarter. The change in cash flow from operations was due to year end compensation payments and increased inventory to meet elevated demand. In early April, we amended our Term B debt facility to extend it to February 2028. Strong demand from existing and new high quality lenders enabled us to incrementally upsize the offering by $20,000,000 and reduce our interest rate by a quarter point. In conjunction, we extended the maturity of our revolving credit facility to August 2027.

Speaker 3

For the Q2, we project total revenue between $465,000,000 $515,000,000 We expect EPS in the range of $0.16 to 0 point 3 $6 And with that, I'd like to turn the call over to the operator for questions.

Operator

Ladies and gentlemen, we will now begin the question and answer Your first question comes from the line of Charles Huang from Needham. Please go ahead.

Speaker 4

Hey, good afternoon, Jim and Sherry. Congrats on the solid results and very strong guidance. I think, Jim, in your prepared remarks, I got a sense that your strength in Q1 seems to be primarily due to some of the upside you see with your Chinese OEM customers. And I did notice that in your PowerPoint that the category called other OEM, meaning outside of MEM and supplied, seems to have seen the most amount of growth. But it gets a little bit hard for me to reconcile because China revenue has been like a single digit percent of your total revenue.

Speaker 4

So how do I think about your actual exposure to the Chinese OEMs at this point?

Speaker 2

Yes, Charles. Hi. Yes, you're right. The Chinese revenue is directly to the OEMs. This is relatively small, but it's actually doubled I think over the last 2 or 3 quarters and then nearly doubled again.

Speaker 2

So and if you think about our overdrive on revenue, I mean that was about half of it. The other half was on deposition tools that are used in the AI applications.

Speaker 4

Got it. So it sounds like the HEM or AI side, it's probably largely dominated by deposition type of tools, probably electroplating if I have to take a guess?

Speaker 2

That's a good

Speaker 5

guess.

Speaker 4

Thanks, Jim. So maybe another question about service. Sherry, you mentioned about the fab relocation as part of the reason for the service revenue strength, what do you mean by that, FAP relocation?

Speaker 3

Yes. We had a customer that moved some of their parts that needed to be cleaned to a different location. And as a result, we had some additional revenue flow through the services P and L.

Speaker 4

Got it. That's not a China customer, no?

Speaker 3

No, no, it is not. And with every incremental dollar that we put into service, basically it really helps bring that margin up with the volumes going through there.

Speaker 4

Got it. So maybe your 2 largest, I mean, fab customers, I would guess it's Intel and Samsung, but how are the business there trending so far? Is it still looking quite positively so far?

Speaker 2

Yes. Me again, Charles. So positive would be optimistic. It's definitely inching up. It has inched up a little bit as you saw.

Speaker 2

It's not an extremely strong recovery, but we are seeing signs of utilization starting to increase and some of the idled systems starting to be put back and getting ready for scaling up. So yes, it is getting a little bit better, but it's not extremely steep curve yet.

Speaker 4

Thanks Jim and Sherry. Congrats on the results. I'll hop back to the queue.

Speaker 2

Thanks, Charles. Thank you.

Operator

Your next question comes from the line of Krish Sankar from TD Cowen. Please go ahead. Yes.

Speaker 5

Hi. Thanks for taking my question and congrats on strong results. I had a couple of questions. One is to follow-up on Charles' question. On the China revenues, you mentioned the domestic China strength.

Speaker 5

Is that comment related to what you're seeing from China semi cap OEMs? Or is it also tied to your U. S. Semi cap customers? Because my understanding was that you might not have the visibility with the U.

Speaker 5

S. Semi cap customers where who the end customer is?

Speaker 2

Yes, you're right, Krish. We don't usually have the visibility. We have it, but it's in thousands of pieces on where we're shipping everything. But this is direct business from our Chinese factory directly to Chinese OEMs We've been servicing several of these OEMs for over 15 years. We have long relationships with them.

Speaker 2

And we're pretty unique in the supply chain to have that where we're directly supplying into the OEM in China and have been doing that for a long time. We've seen a significant, like I mentioned earlier to Charles, we've seen that business grow from mid single digits to double and then double again. And we expect that to continue throughout the year. And as we look into what's going on with it and where is it going, we estimate about anticipate your next question, Krish, we anticipate about half of it is going in directly in the line and going into production and the other half is a little bit pre ordered in anticipation of perhaps some more rules coming down on the trade restrictions. So not all of it we think is being driven directly as an immediate need, but it's been a very healthy growth and we think it's not just stockpiling.

Speaker 2

These customers are picking up new applications and are starting to grow much faster than we've seen over the last 15 years.

Speaker 5

Got it. Got it. That's very helpful, Jim. And then like a follow-up, obviously, one of your U. S.

Speaker 5

Semicap OEMs, you have pretty good exposure to some of your lagging edge products, nodes eventually they sell into. I'm just kind of curious, I understand China demand is very strong, which is lagging edge. But how do you see the non China lagging edge demand?

Speaker 2

I'm sorry, non China what demand? Lagging edge. Yes. The lagging edge demand is also as been strong, if that's what you're asking about. But it's I think that strike was appeared maybe a quarter or 2 ago and it's starting to maybe temper a little bit, but it has been elevated.

Speaker 5

Got it. Got it. And then the one final question, obviously, I think you've spoken about ASML exposure in the past EUV. My understanding is more than probably for more of the high pressure components. Was ASML greater than 10% customer?

Speaker 5

Or is this still too small for you folks?

Speaker 2

It is not. It's mid single digits and on its way. We believe within a few years. But yes, it's and I think Charles mentioned the other. The other has ASM, ASML, KLA as well as the Chinese OEM.

Speaker 2

So that's where you see a lot of the numbers pile

Speaker 5

up. Got it. Got it. Thank you very much. Very helpful.

Operator

Your next question comes from the line of Christian Schwab from Craig Hallum Capital Group. Please go ahead.

Speaker 6

Congrats on the good quarter. Jim, when would you anticipate your memory customers' utilization to improve enough to show up in the cleaning business?

Speaker 2

We're anticipating we've been pretty consistent about the WFE side of it, the product side probably not improving until 2025. And I think we are sticking with that. On the services side, it's difficult to predict. It's definitely outside of our bottoms up window. But you would anticipate from the past that we'd see that start to tick up in the latter half of twenty twenty four to start to see the equipment orders coming in, in 2025.

Speaker 6

Okay. Okay. And then what is your kind of baseline thoughts of what you would anticipate WFE growth to be in 2025? And then the next question to that would be what type of growth rate would you anticipate you'd be positioned for to outgrow WFE on a go forward basis similar to what you did the last sub cycle?

Speaker 2

Yes. I think we're our current view, which we're always updating, is low double digit in 2025 growth in WFE. And of course, it's always difficult to predict and things tend to be stronger than you expect and weaker than you expect depending on where we are in the cycle. As far as outgrowing, I think it's the same formula we've been following for years that have led to our outgrowing WFE. We have a lot of, I'd say, where is a lot of the runway or the green pastures or the opportunities.

Speaker 2

The HIS acquisition has a lot of growth expected in that segment with all the fab build outs and the strong position there that we're making stronger. From our fluid solutions acquisition as well. I mean, we have a relative we have a great product line, but a relatively small market share versus the 2 industry leaders. But we've been working on getting those qualified in our main customers that prior to our acquisition, there was a slower slog for Hamlet, the company that we bought. So we're seeing that accelerate.

Speaker 2

As well as I think with I would say we're pretty well penetrated at our largest customer, but I think when you look at the second, third and 4th, there's a lot of opportunity there for market share growth within those customers.

Speaker 6

Okay. No other questions. Thanks guys.

Speaker 2

Thanks, Christian. Thank you.

Operator

There are no further questions at this time. I would like to hand the call back to Jim Schulhammer for closing remarks.

Speaker 2

Thank you everyone for joining us today and we look forward to speaking with you again next quarter.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Key Takeaways

  • We delivered Q1 revenue of $477.7 M (up from $444.8 M) and EPS of $0.27, exceeding guidance on higher volume, favorable mix, and ongoing efficiency initiatives.
  • Elevated demand in the domestic China market, driven by government‐backed self‐sufficiency efforts and a 20th anniversary expansion in Shanghai, is expected to remain consistent or grow slightly through year‐end.
  • Strength in high‐bandwidth memory and advanced packaging deposition tools for AI and edge applications contributed significantly to upside, reflecting broader industry investment in advanced computing.
  • For Q2, UCT projects revenue of $465 M–$515 M and EPS of $0.16–$0.36, reflecting confidence in ongoing demand tailwinds and operational leverage.
  • UCT was honored with supplier awards from Texas Instruments and Intel, underscoring its manufacturing excellence and deep customer relationships.
AI Generated. May Contain Errors.
Earnings Conference Call
Ultra Clean Q1 2024
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