Ultra Clean Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 8 speakers on the call.

Operator

afternoon, ladies and gentlemen, and welcome to the Ultra Clean Technology Q2 20 24 Earnings Call and Webcast. 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 Thursday, July 25, 2024. And I would now like to turn the conference over to Rhonda Burnetto, Investor Relations.

Operator

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 Sherri 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'll turn the call over to Jim.

Speaker 1

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 Q2, then share some thoughts on the broader industry trends we are seeing. I'll close by highlighting another important award before turning the call over to Sherry for a more inclusive financial review before opening the call up for questions. We continue to perform well in 2024 with 2nd quarter revenue and earnings at the high end of our guided range. We saw strength in both products and services across all geographies and in particular elevated equipment spending within the domestic China market and customers supplying high bandwidth memory and equipment supporting advanced packaging for AI application.

Speaker 2

Over the past several years, we have expanded and diversified our content, broadening the applications and platforms where we participate, providing us with the unique competitive edge to engage in all stages of industry growth from fab construction through equipment build out and supporting the installed base. Our broad engagement in the semiconductor ecosystem and our technical and operational capability has enabled us to participate in some of the early AI hotspots that are front running the next wave of AI innovation. AI servers and AI enabled devices are experiencing elevated demand, leading to increased investment supporting capacity expansion. This surge requires high performance chips for data center training and other leading edge chips, creating a cycle where AI computing requirements drive semiconductor content growth, spurring further industry investments throughout the whole ecosystem. We believe AI will be the most significant technological breakthrough of our era with some of the world's most advanced chips at its core.

Speaker 2

UCT is uniquely positioned to capitalize on this technology migration by driving earlier, deeper and broader collaboration with our customers as they move towards high volume production, particularly at the leading edge. Other metrics pointing to an industry recovery that we are tracking closely include further rebalancing of inventories, increased shipments of high performance computing chips, favorable memory pricing adjustments, elevated data center demand and a meaningful increase in installed wafer fab capacity. The order and speed at which these segments rally will be uneven for the supply chain. However, we are seeing signs of momentum now that indicate a recovery could start later this year instead of early 2025. Our internal marketing intelligence is aligned with the industry belief that wafer fab equipment sales should grow by at least mid teens next year, driven by increasing demand for leading edge technology, the introduction of new device architectures and increased capacity expansion purchases, all of which support UCT supports in one manner or another.

Speaker 2

Our expanded suite of offerings and global footprint position us well to again outperform the markets in the next upturn. Our site optimization strategy including automation and other efficiencies is on track. Part of that plan to shift some production to lower cost regions remains a priority and it's worth noting that revenue from our Malaysia facility has doubled from the 4th quarter as we focus on qualifications and ramping that flagship site in advance of the ramp. The investments we have made in capacity expansion and operational efficiencies support our customers' innovation roadmap and manufacturing of their next generation technologies. Lastly, I'm very happy to announce that in addition to the Intel and Texas Instrument Awards of Excellence we received last quarter, we were the proud recipients of the outstanding partner award from Piotec China last month.

Speaker 2

We started our operations in China 20 years ago and have grown to over 700 dedicated employees who continue to drive our success today. We are honored by this recognition and are thankful for Bio Tech's continued confidence in us. As our list of accomplishments continue to grow, I want to thank all our employees around the world who are executing at a very high level to ensure we are meeting current demand and preparing for the next upcycle. Our ability to persevere has been instrumental in driving customer success and maintaining our position as a leading manufacturer in the industry. In summary, we are capitalizing on some early inflection points in what will be a significant transformation of our industry.

Speaker 2

We are performing at a very high level to meet current demand, while prudently investing to secure future share gains. We are ready to meet major increases in demand throughout the next ramp with the available capacity, operational excellence and quality products and services to ensure our customers' success. And with that, I'll turn the call over to Sherri for our financial review. Sherri?

Speaker 3

Thanks, Jim, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non GAAP numbers only. As Jim mentioned, total company wide revenue was up quarter over quarter across all geographies and major customers, most notably in the domestic China market. We also saw additional revenues supporting high bandwidth memory and equipment for advanced AI packaging, which put us at the high end of our guided range.

Speaker 3

Total revenue for the 2nd quarter came in at $516,100,000 compared to $477,700,000 in the prior quarter. Revenue from products increased to $452,700,000 compared to $418,500,000 last quarter. Services revenue was $53,400,000 compared to $59,200,000 in Q1. Total gross margin for the 2nd quarter came in at 17.7% compared to 17.9% last quarter. Products gross margin was 15.6% compared to 15.8% in the prior quarter and services was 32.7% compared to 32.3% in Q1.

Speaker 3

Margins can be influenced by fluctuations in volume, mix and manufacturing region as well as material and transportation costs, so there will be variances quarter to quarter. Operating expense for the quarter was $55,800,000 compared with $54,500,000 in Q1. As a percentage of revenue, operating expense decreased to 10.8% compared to 11.4% in Q1. Total operating margin for the quarter increased to 6.9% compared to 6.5% in the first quarter. Margin from our products division was 6.2% compared to 6% in Q1 and services margin was 11.8% compared to 10.1% in the prior quarter.

Speaker 3

Operating margin improvements were largely driven by holding OpEx relatively flat on higher revenue. Based on 45,400,000 shares outstanding, earnings per share for the quarter were $0.32 on net income of $14,400,000 compared to $0.27 on net income of $12,100,000 in the prior quarter due to increased volumes. Our tax rate increased from 19.7% last quarter to 24.7% this quarter, representing a year to date effective tax rate of 22.5%. Given the growth we've experienced in higher tax jurisdictions like China and the Czech Republic, we now expect our tax rate for 2024 to be in the low 20s. Turning to the balance sheet, our cash and cash equivalents were $319,500,000 compared to $293,000,000 in Q1.

Speaker 3

Cash flow from operations was $23,200,000 compared to $9,800,000 last quarter, driven by improved operating results and timing of payments. For the Q3, we project total revenue between $490,000,000 $540,000,000 We expect EPS in the range of $0.22 to $0.42 And with that, I'd like to turn the call over to the operator for questions.

Operator

Thank you. Your first question comes from the line of Krish Sankar from TD Cowen. Please go ahead.

Speaker 4

Yes. Hi. Thanks for taking my question. I had a couple of them, Jim or Sherry. First one, on the domestic China strength that you saw, is it still kind of low single digits of revenues?

Speaker 4

Or do you expect

Speaker 2

Jim here. Yes, it used to be low single digits, but now we're looking at $40,000,000 to $50,000,000 a quarter coming out of that site for those customers.

Speaker 4

And these are the domestic China semi cap companies, right?

Speaker 2

Correct.

Speaker 4

Got it. Got it. And then the strength in HBM, is that mainly you're seeing on the plating side or like how do you get the color into where the end application is?

Speaker 2

Yes. Definitely plating is the biggest piece, but we've also seen it trickle through in other applications like ALD and other areas.

Speaker 4

Got it. And then last but final question, Jim, it's kind of like better your cycle times or lead times today compared to like 3 months ago? Are they still same?

Speaker 2

I'm sorry, Krish, can you repeat that?

Speaker 4

Where are your cycle times today or your lead times today for shipping these gas boxes?

Speaker 2

Basically right after they order it. Cycle times are very short these days.

Speaker 4

So that hasn't changed, right? So it's kind of pretty much

Speaker 2

No. Yes. No, it hasn't. Yes, it's obviously there's still a lot of inventory in the pipeline, but it's all the way back through the supply chain. So I mean part of what makes us special is our ability to turn things around really quickly as well.

Speaker 2

And so that's really been an enabler for us to take advantage of some of these things.

Speaker 4

Got it. Got it. Awesome. Thank you very much, Jim. Appreciate it.

Speaker 4

Thanks, Jim. Thanks, Sherry.

Operator

Thank you. Thank you. And your next question comes from the line of Charles Shi from Needham. Please go ahead.

Speaker 5

Hi, good afternoon, Jim, Sherria. Congrats on the consistent execution. I'm glad to see the total revenue retaking that $500,000,000 Well, we haven't seen that since, I guess, Q4 2022, right? But I want to follow-up on a few things that Chris just asked. First thing about China, I know that you talked about China.

Speaker 5

That's your direct China exposure, somewhere around 10%, sounds like. Going into the second half of this year, how is that business going to trend? Do you see more consistent half over half growth or any chance to see any inflection, maybe a level off, start to decline? What's the scenario there? What you are seeing in the China business from this point and forward?

Speaker 2

Yes, sure, Charles. As I said last quarter, we expect this level this high level of business to continue in China through the rest of the year. And it's really been a huge benefit for us to have this unusual footprint that we have in China that most suppliers do not have. But we do not see it really tailing off. But I don't think that's the whole story.

Speaker 2

Again, we're also seeing strength in other parts of our diversified business that's really helping us kind of move forward. So when you think about detractors or what might degrade, we're not looking at that. I think we're looking at things pretty much staying how they are and we're looking more at potential upside to certain areas as we go forward.

Speaker 5

Yes, of course, of course. I know that the core part of the UCT business obviously is still with the Lam, with Applied, other SML, those kind of suppliers. So maybe one more follow-up, the HBM, Advanced Packaging side. I'm going to ask the question in a similar fashion. So it has been an upside contributor, to your numbers last quarter and once again this quarter.

Speaker 5

The obvious question is how much more upside do you see from either plating and some of the broaden out opportunities like ALD, I mean for going into the AI related packaging, will still be there in second half? Or do you expect that you're going to stay at this level for those kind of business through the rest of the year or any upside for next year? And anything that you can tell us about this part of the business would be helpful.

Speaker 2

Sure. We definitely see the levels that we're operating at. For example, one of our factories, which is one of the major contributors to the wet systems that do a lot of the interconnect layers, is at a level 3 to 4 times higher than it was a few years ago. And we see that continuing through this year. And if you're watching what's going on in the chip market and where things are going, I think we only see upside into next year.

Speaker 5

Great. Only see upside. This is what we want to hear as well. Okay. So it does seem like your revenue numbers from I mean from Lam, from Applied, I mean that's in your PowerPoint.

Speaker 5

I know this doesn't include some of the OEM related service revenue there, but it seems like your top two customers are buying already are buying a little bit more in Q2 than in Q1. Seems like some sign of growth there. But going tying back to what you said in your prepared remarks about the WFE, it sounds like you are thinking maybe Q4 you should see a little bit of more pickup in the general market. Because the reason the only reason why I asked you this is you did guide the Q3 to be flat relative to Q2, but it sounds like Q4 expecting some pickup?

Speaker 2

Yes. I think we are seeing early indications that Q4 in a broader area could be better for sure. And of course, we remain ready. I mean, we've done a lot of work to get I think anyone who's been in this industry for a long time knows that when the gas gets hit, it goes up fast, it goes up hard. So we've done a lot of work to bring up our capacity to take advantage of when it starts to go.

Speaker 2

So what are we seeing in Q4? We're seeing early signs of some broader improvement, but yes, still slight. But we all I think many of us know that when it does come, it comes back. So we're very encouraged by the fact that we're seeing some bottoms up small improvements in the Q4 and we're kind of anticipating what that might turn into.

Speaker 5

Thanks. And maybe lastly from me, I do want to ask you about your litho business. I kind of recall that you said the customer used to have a little bit more aggressive build plan, but that they walked that back. And it has been rather stable, consistent. But do you see any sign of pickup for the litho business yet?

Speaker 2

So maybe I'd break that into 2 parts. I think litho and maybe I can flip that over to Cheryl Deppler, our marketing expertise, what she sees for the whole litho market. But what we have been talking about UCC in particular, we have made nice share gains in the new equipment going out. So what we are seeing is as the new equipment and our contribution to that, we are seeing that uptick through the 3rd and the 4th quarter for us in particular. But as far as the whole litho market in general, maybe I would turn it over to Cheryl to talk a little bit more deeper about that.

Speaker 6

Yes. So as we look overall, we know that DRAM is expanding their litho. The timing is coming in as they're qualifying and as different processes are coming in. So we are seeing that being a little bit dynamic and are seeing things slowly translate into more firm orders going forward. So we do expect that to be a solid business for us going forward.

Operator

Thank you. And your next question comes from the line of Christian Schwab from Craig Hallum Capital Group. Please go ahead.

Speaker 7

Great quarter, guys. So on the 15% mid teens type of WFE growth that you're looking for as well as other third party experts who get paid to make those type of expectations are also in line with that. But given the fact that the WFE then would be north of $110,000,000,000 a year, Is there any reason should that play out exactly that way that you wouldn't be approaching 2022, your previous 2022 revenue type of numbers potentially in 2025? Or do you think there was some over ordering in that, that you want to see a little bit more clarity before suggesting that could be the case?

Speaker 2

Yes, Christian. So yes, I think if the market does go up and like we think, I mean, we've already been in 2 years of the doldrums, right, since November of 2022 in not every segment of WFE, but the majority of segments. So if we do see that kind of broad growth in WFE in 2025 and also we have always traditionally outgrown that growth by a significant margin. Absolutely, I have a lot of confidence that we could meet and potentially significantly exceed the numbers that we had in 2022.

Speaker 7

Fantastic. No other questions. Thanks guys.

Operator

Thank you. That concludes

Powered by Quartr

Key Takeaways

  • Q2 Financial Results: Revenue reached $516.1 M and non-GAAP EPS was $0.32, hitting the high end of guidance amid strength in domestic China and AI-related advanced packaging.
  • Management sees AI-driven demand fueling semiconductor content growth, projecting wafer fab equipment sales will rise by at least mid-teens next year and expecting a broader industry recovery to start in late 2024.
  • Operational improvements, including site optimization, automation and a ramped Malaysia facility (revenue doubled since Q4), are boosting capacity and cost efficiency ahead of the next upcycle.
  • For Q3, Ultra Clean guided revenue in the range of $490 M–$540 M and EPS of $0.22–$0.42, reflecting continued strength tempered by market uncertainties.
  • The balance sheet remains robust with cash and equivalents of $319.5 M, operating margin rising to 6.9%, and cash flow from operations improving to $23.2 M, supporting further investment.
AI Generated. May Contain Errors.
Earnings Conference Call
Ultra Clean Q2 2024
00:00 / 00:00