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spk04: Good day and welcome to the Ultra Clean Technology second quarter 2021 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Rhonda Bonetto. Please go ahead.
spk00: Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are Jim Schulhammer, Chief Executive Officer, and Sherry Savage, Chief Financial Officer. Jim will begin with some prepared remarks about the business, and Sherry will follow with a financial review. Then we'll open up the call for questions. 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. And with that, I'd like to turn the call over to Jim. Jim?
spk06: Thank you, Rhonda. and good afternoon, everyone. Thank you for joining us today. I'm going to start with a brief review of our second quarter performance while sharing my thoughts on the industry and how UCT continues to increase its value within the semiconductor ecosystem. After that, I'll turn the call over to Sherry for a financial review, and then we will open up the call for questions. By maximizing our current market position and capabilities, and consistently working to meet customer demand, UCT again reached new revenue and EPS milestones. Total revenue for the second quarter was just over $515 million, a 50% increase year over year, and EPS grew 32% to nearly $1. Over the past five years, we have consistently outperformed the markets we serve. This track record, combined with our commitment to investing in our future, paves the way for a very exciting roadmap for growth in 2021 and beyond. As the semiconductor industry continues to be stretched by record high demand, we are leveraging our leading position as a partner of choice to help our customers and their customers accelerate the rapid migration towards next generation devices. The global semiconductor industry has historically been driven by demand from electronics, such as smartphones and computers. More recently, continued enhancements of existing products and the inclusion of emerging technologies such as AI, 5G networks, and high-performance computing applications are creating sustained demand increases across a much broader end market. This megatrend is enabling greater visibility with multi-year, record-breaking industry CapEx plans for leading and trailing-edge capacity to support the extended ramp. UCT's broad spectrum of products and services are increasingly relevant to the success of our customers, and this gives us a significant competitive advantage. We are one of the few semiconductor-focused manufacturers with the proven ability to sustainably support the dynamic product roadmaps and stringent quality levels required for advanced chip manufacturing. To ensure we are ideally positioned to deliver value quickly and efficiently to our customers worldwide, we are making strategic investments to expand our capacity to provide additional leading-edge and specialty capabilities to support our growth strategy over the long term. Our new state-of-the-art facility in Malaysia is on schedule, and customer qualifications are beginning this month. Fortunately, we are located in northern Malaysia, where COVID cases remain low compared to the rest of the country, so we have seen no interruptions to speak of. We remain on track to start initial production in early September and expect to progressively ramp this year and into 2022 to meet our customers' increasing needs. The timing of this additional capacity is ideal as it strategically expands our capabilities on existing and new customer platforms at an optimal time. Our broader capacity expansion program stretches beyond Malaysia and includes strategic investments designed to capture the many significant profitable growth opportunities we see, not only in wafer fab production equipment, but also in service, subfab support equipment, and fab infrastructure as well, as the industry continues to transform at a very rapid pace. We will continue to engage with our customers to design, manufacture, and service the best products in the best way possible to address their needs in a sustainable manner. The global pandemic continues to be a risk factor as the Delta variant is spreading quickly across many regions. Like we have done since the pandemic began, UCT will continue prioritizing the health and well-being of all its employees while ensuring business continuity. All safety protocols in our BCP playbook remain in place at each site and all UCT facilities remain fully operational. We are extremely grateful that we have had zero employee to employee transfers of the virus within our 6,000 plus global workforce since the pandemic began. We continue to work closely with our supply chain to increase resilience and provide business continuity across all our products and service lines. 2021 is shaping up to be another year of outperformance for UCT. Our growing suite of capabilities, additional capacity, A strong balance sheet ideally positions us to capitalize on the robust demand trend, returning considerable value to our shareholders over the long term. Before handing the call over to Sherry, I want to again thank our employees and our suppliers and partners for their commitment and incredibly hard work. And we look forward to speaking with you again in a few months. And with that, I'll turn the call over to Sherry to review our financial activities and performance. Sherry?
spk05: Thanks, Jim, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. Total revenue for the quarter was $515.2 million, up 23.4% from the prior quarter. Our products division was up 28% to $442.5 million, which includes nearly a full quarter of revenue from Homlet amounting to $58.2 million. Our services division was up slightly to $72.7 million. Total gross margin for the second quarter remains at the high end of our model at 21.2% compared to 21.3% last quarter. Products gross margin was 18.8% compared to 18.2% last quarter. And services was 36.2% compared to 36% last quarter. Margins can be influenced by customer concentration, geography, product mix, and volume, so there will be variances quarter to quarter. Operating expense for the quarter was $48.9 million compared to $38.1 million in Q1 due to the acquisition of Omelette. As a percentage of revenue, operating expense was 9.5% compared to 9.1% in the prior quarter. Total operating margin for the quarter was 11.7% compared to 12.2% in the first quarter. Margin from our products division was 10.9% compared to 11.7% in the prior quarter. And services division was 16.7% compared to 14.3% in the prior quarter. As we mentioned when we purchased Omelette, their operating margins are below our typical products margin range. With synergies, we will continue to improve the product's operating margin over the coming quarters. Based on 44.3 million shares outstanding, earnings per share for the quarter were 99 cents on net income of $43.7 million compared to 92 cents on net income of 38.2 million in the prior quarter. Our tax rate for the quarter was 17.6% compared to 18% last quarter. We expect our tax rate for 2021 to stay in the high teens. Turning to the balance sheet, our cash and cash equivalents were $451.4 million at the end of the second quarter, compared with $264.3 million last quarter. A significant portion of the increase was a result of the equity offering in April 2021. Cash from operations was $51.1 million compared to $65.6 million in the prior quarter. During the second quarter, we made an additional voluntary payment on our Term B loan in the amount of $25 million. Before we review our guidance for the third quarter, I wanted to share a change to our services joint venture in Korea. We have recast our arrangement to purchase additional shares of the JV to remain much more flexible. This change will not impact revenue or operating margin but we'll reduce our reported EPS in future quarters. For the third quarter, we anticipate revenue between $520 million and $560 million, an increase of 5% using the midpoint, and we expect EPS in the range of $0.94 to $1.10. Our EPS guidance includes a $0.03 to $0.04 impact from the joint venture change I just noted. And with that, I'd like to turn the call over to the operator for questions. Operator?
spk04: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Kersh Sankar with Cowan & Company. Please go ahead.
spk08: Yeah, hi. Thanks for taking my question. I actually have three of them. First one for Jim or Sherry. Just a quick housekeeping question. You said Hamlet was $58 million in June. How much is Hamlet in your September guidance? I'm going to ask you other questions.
spk05: We didn't break that out, but I would anticipate it would be similar to up to the amount that they did in the Q2 timeframe.
spk08: Got it, got it. Okay, fair enough. Thanks, Sheri, for that. And then a question for Jin. What is your visibility today? Is it into the December quarter or even into 2022? And the reason I'm asking is that in the past, you're always outgrown WFC. And since the last one, it's called the WC outlet has increased to over 30% this year. So I do the math that basically means that your December revenue has to be flat to up if you want to out, you know, outpace that WC. So I'm just kind of curious what your visibility is and if we can give any color into December outlet.
spk06: Yeah, Chris. Thank you. We, yeah, we certainly are not forecasting out through December or through the March quarter. um but i think it's safe to say that uh all throughout the industry we see a pretty solid forecast out out through the end of the year and into next year um at this at this point it's really a case for the whole industry um more gated by the the ability ability to really produce the wfb tools rather than orders uh orders on hand so i think we see an unusually long, uh, trail of orders, uh, heading out several quarters, which normally, normally we don't see.
spk08: Got it. Got it. And then, uh, a final question for Sherry, take on the operating leverage, you know, clearly revenues increase in June, but margins were kind of flattish and then kind of your guidance based on, uh, September looks like revenue is improving, but EPS is kind of still not that much. So, Is Omelette doing it, or do you think the incremental operating leverage is kind of waning now that the easy move is done?
spk05: Yeah, no, Omelette is definitely accretive to the gross margin, but as I mentioned in previous calls, they're not accretive yet from an operating margin perspective. We anticipate that we'll be able to get them into our products range of 8 to 10% in the next couple quarters. You know, they're adding a specific amount of OPEX, et cetera, and costs that we'll continue to work on along with revenue synergies over the next couple quarters. So that's what will help us see that operating leverage as we continue to move forward with them. So that's really one of the key contributors, as well as we have to continue to, you know, add specific costs so that we can continue to grow. So we will continue to work on that as we move forward.
spk08: Thanks, Shelly. Thank you. You're welcome.
spk04: Our next question comes from Quinn Bolton with Needham & Co. Please go ahead.
spk02: Hey, guys. Congratulations on the results and outlook. Jim wanted to start with the overall industry capacity constraints and specific to UCT. How are you feeling about your ability to manufacture to demand? I know you've got Malaysia ramping in September. But, you know, how tight are things now? And do you feel that your business is constrained through your manufacturing footprint? Or do you think, you know, you should be able to meet demand based on your manufacturing capacity today?
spk06: Yeah, thanks, Glenn. I think overall we're doing a pretty good job of keeping up with demand and making the deliveries that we're expected to make. It's more a case of the ability of the whole industry to really absorb the other parts. You know, if we make a module on time or we make a tool on time, you know, there's other elements to that that have to also be ready. So I think, you know, it's really a case where the whole industry, our customers and our peers are also, you know, kind of hand to mouth right now. So even when we're able to make deliveries, we're a little bit constrained on when the whole tool is ready to go, if you would. But I think we're doing a pretty good job keeping up. But I think one of the few times I've seen in the industry where maybe 20, 30 years ago it happened in the late 90s, where the revenue is really gated not by orders, but by the ability of the whole industry to keep up with things.
spk02: Got it. The second question for me, I know you've only had Homlet under your belt for about a quarter now, but wondering if you could give us any update on your ability to begin qualifying those Homlet components on your gas panels to try to capture additional value in that sale.
spk06: Yeah, thanks for that question. Demand is really strong across the board for Homlet. We're definitely making progress. with all the engineering and drawing changes needed to really set that up. The book to build in that business is really high right now. And so that work where we're doing the qualifications and getting in place is really setting us up for next year. And I think at this point, we're doing everything we can to kind of increase the capacity of Hamlet just to meet the orders on hand. It is definitely, I'd say, fantastic. Around the time that we closed on the business, we saw orders really spike up pretty dramatically in that space.
spk02: That's great. And then, Leslie, for Sherry, maybe I missed it, but can you just walk us through the JV change and why that's dilutive to EPS by $0.03 to $0.04 a quarter?
spk05: Yeah, absolutely. This was something that was put in place by Quantum Clean before we purchased them. And basically there was an obligation to buy up to 86% of the JV. As a result, we were able to consolidate profits up to 86%. So what we're doing is basically taking away the obligation and making it optional. We still own a majority of the JV, greater than 50%. And really what it allows us to do is it gives us, you know, as we continue to look at M&A as core to our strategy, it really allows us to maintain flexibility with our capital so that it's more beneficial to shareholders. And if we decide we want to buy up to that amount, we will, but it just gives us more optionality versus obligation.
spk02: So will you just effectively be recording a higher minority interest so that you historically had 86% of shareholders that JV flowing through your income statement. And now that you don't have the obligation, you'll have a lower than 86% of profits effectively flowing through the income statement.
spk05: Correct. Revenue and operating margin will stay the same. We'll just have a bigger adjustment of profit below the line in other income. So you'll see a little bit larger back out of profit in the other income and interest line. And that's what the effective three to four cents is.
spk02: Got it. Thank you.
spk05: You're welcome.
spk04: The next question comes from Patrick Ho with CIFL. Please go ahead.
spk01: Thank you very much and congrats on the nice quote on Outlook. Jim, maybe to follow up on, quote, the capacity constraint question, I'll look at it from a different angle of supply constraints. Based on your results in Outlook, it looked like you managed that very well. One, did you experience any, I guess, meaningful supply constraints? And secondly, if not, what have you been doing differently or how have you been able to procure the necessary supplies to keep up with your customers' end demand?
spk06: Yeah, thanks, Patrick. We've definitely had some level of constraint happening from some of the kind of built-in OPM to call them, original part manufacturers. So that definitely throttled back our ability. We could have delivered more revenue. Now we met the customer's needs, but we could have delivered more if we had been able to procure more of some of those OPM parts. I think when Kuala Lumpur got hit with a 10-day or two-week shutdown, we were not affected and some of our competitors were. So we were able to pick up some additional business within this quarter and probably this quarter a little bit as well. So, you know, there's some puts and takes. Overall, I would say we've been able to meet the customer's needs. But because of some of those constrictions, we were constrained on delivering the amount of revenue. We could have delivered more revenue this quarter without those issues.
spk01: Great. That's helpful. And maybe a question for Sherry in terms of gross margins. As you mentioned, there's a lot of moving parts to it. But as you get the Malaysia facility ramped up, typically there are startup costs associated with it. But given, I guess, the high demand that we're seeing out there, am I right to assume that you could absorb that capacity faster and, I guess, the normal time startup costs could be a little bit less and you could get gross margins lower? Or I guess you could keep gross margins at these elevated levels because of the high demand.
spk05: Yeah, I do think that we are able to absorb a majority of those costs. You know, Malaysia is going to really be something that's probably more impactful to 2022. But I think as we slowly started up, I don't see there being a huge drag on our margin as a result of that.
spk01: Great, thank you very much.
spk08: Thank you Patrick. Thank you Patrick.
spk04: Our next question comes from Christian Schwab with Craig Hallam, Capital Greek. Please go ahead.
spk03: Hey guys, congrats on another good quarter in Outlook. Can you help us understand what the, remind us probably, how much revenue you could get from the new Malaysian facility in 22? And would it be running at full capacity by the end of 22, or do you think it would take longer?
spk06: Yeah. Hi, Christian. Thank you. Yeah, the full capacity, when it's all built out in two to three years, just the maximum is roughly around $600 million in revenue. There's always some wiggle room in there as well. I think through 2022, I think our estimate is something around a third of that would be utilized. But the $600 million is not, you know, requires some additional, you know, hiring and building out of different clean rooms and things. So we're doing the capacity in different stages. So the ultimate capacity is $600 million, but roughly a third of that is available right now. And we expect to have that kind of filled out by the end of next year.
spk03: Great. And given kind of the tightness and the strength of the wafer front end equipment market in general, are you already securing orders for your September production and into 22 for that facility as we sit here today?
spk06: Yeah. One of the phenomena we're seeing is a lot more – a lot more working together with our customers to secure long lead time POs from them, which therefore we are able to cover those POs back through our supply chain. So we're getting a lot of great cooperation from our customers to really, you know, put the money down and put the orders in, and then we're able to lay out long-term plans orders then with the supply chain. So that's definitely one of the things that, you know, as we're entering our third year of this big ramp, we're seeing a lot of improved cooperation between all parties. So I think we're in good shape.
spk03: And then lastly, would you guys still expect as we go through uh, you know, the way from front end equipment spending cycle for you guys to, you know, outgrow the, you know, WFE by, you know, at least 10 points on a go forward basis. Um, everything you're seeing, um, still suggested that and point to that.
spk06: Yeah, definitely. Absolutely. I mean, obviously this year, um, if you look at, you know, the inorganic, you know, the acquisition of Hamlet, that kind of puts us already in that, you know, in that territory. Um, and then on top of that, we're doing, um, very well with, you know, the organic side of our growth equation, which is, uh, you know, share gain, continued outsourcing that we're seeing from, from our customers, uh, you know, continued, uh, continued penetration of, of, uh, the little space, you know, where we're heavily engaged. So, uh, I think I was very confident that this year we will do, we will, uh, we easily hit the 10 points and hopefully much beyond that.
spk03: Great. No other questions. Thanks, guys.
spk06: Thank you.
spk03: Thanks.
spk04: Our next question comes from Dick Ryan with Cool Years. Please go ahead.
spk07: Thank you. Hey, Jim, can you give us your views on WFE and wafer starts, kind of the second half of this year and maybe some commentary on next year?
spk06: Yeah, I think, you know, WFE, I think a lot of the prognosis is, you know, I think we're in pretty much the same boat as our customers. I think they're looking at roughly, you know, $80 billion, $80 billion plus, you know, perhaps. Yeah, I think we kind of see that there. Wafer starts are a little bit... are a little bit slower just because the fabs are all running full out. So there's no utilization to really soak up. So the wafer starts are growing as the equipment goes in. So we're seeing wafer start growth, but it's really at this point a little bit tapped out due to I think every single fab that we know is running at full capacity. So I think I think we're in pretty much lockstep with what the big OEMs like Applied and LAM are saying, which is roughly $80 to $85 billion. And I think they're also predicting a pretty strong 2022 as well. And I think also the consensus is that the second half of this year will continue to grow.
spk07: Okay. How much revenue was pushed out of the quarter with the constraints that you saw?
spk06: I mean, I think I wouldn't say pushed out. But I would I would definitely term it you know, we probably could have done another 2030 million or so. But I think many companies have the same story.
spk07: Yeah. And then sure, were there any margin hits of, you know, material costs, logistic issues from the supply constraints that hit the quarter?
spk05: I think one of the things that we're still seeing is freight costs being quite high. I think a lot of companies are seeing that as being kind of one of those expenses that have come in higher than we had pre-COVID. So I would say that that's something that I would anticipate probably being ongoing. But I think the margin still did very well despite having such expenses flow through.
spk07: Sure. Thank you.
spk05: Thanks.
spk07: Thanks, Vic.
spk04: This concludes our question and answer session. I would like to turn the conference back over to Mr. Schulhammer for any closing remarks.
spk06: Thank you everybody for joining us today. We appreciate it and we really look forward to speaking with you again next quarter. Thank you very much.
spk04: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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