This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: Good day and welcome to the ultra clean first quarter 2023 earnings call and webcast. 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 a touch tone 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, Investor Relations. Please go ahead.
spk01: Thank you, Operator. Good afternoon, everyone, and thank you for joining us. With me today are Jim Schollhammer, Chief Executive Officer, and Sherry Savage, Chief Financial Officer. Jim will begin with some prepared remarks about the business, and Sherry will follow with the 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. Discussions 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?
spk02: Thank you, Rhonda. And good afternoon, everyone. Thank you for joining us for our first quarter 2023 conference call and webcast. I'll start with a high-level overview of the first quarter that Sherry will expand on in our comments and follow that with the steps we are taking to manage through this downturn and conclude with our view on the longer-term prospects of our industry. As expected, industry demand remained under pressure in the first quarter as OEM customers continue to cancel or push out orders against a backdrop of inventory surplus and ongoing geopolitical and macroeconomic uncertainty. End market demand remains weak. Therefore, UCT's revenue is likely to remain constrained in this environment. Pulling from our playbook from the last downturn, we are focused on aligning our operational efficiencies and cost structure with the prevailing business environment. Our objective is twofold, to mitigate the impact of the downturn as much as possible and prepare to outperform the market again during the next expansion phase. While we are slowing down some of our global capacity expansions in both products and services to align with our customers' roadmaps, we are moving some projects forward to be ready for the inevitable ramp in volume that follows every semiconductor downturn. We saw growth in our fluid solutions business in the first quarter and continue to expand production in our Malaysia plant, which will improve our profitability and deliver performance down the road. In the services business, we are developing higher-value solutions, such as special yield-enhancing part coatings and cleaning methods to support ongoing node transitions. We are one of the few large, purely semiconductor-focused manufacturers with the proven ability to support the dynamic product demand and stringent quality levels required for advanced chip manufacturing. We are extremely confident about the industry's upward trajectory over the long term, driven by emerging key sectors such as automotive and industrial automation, high-performance computing, and especially for artificial intelligence and machine learning. To add some perspective, today's average electric car has doubled the chips of a non-electric vehicle. Even more impressive is the phenomenal growth of Microsoft's AI Chat GPT, which requires massive amounts of memory and data processing chip technology. When launched last November, it attracted one million registered users in just five days, and only two months later, it had registered more than 100 million users. It is by far the fastest-growing chip-dependent consumer application in history. Leading-edge technologies like this are in the very early stages of widespread deployment and have only touched on the exponential growth in commercial use cases, which should drive the semi-industry towards the trillion-dollar mark this decade. While it feels like we are in the doldrums at the moment, we believe it is temporary and we couldn't be more excited about the future. UCT has been enabling technology and supporting the lifecycle of chip manufacturing for over 30 years. We indirectly touch nearly every chip on the planet and are ideally positioned with the expertise and capacity to fully capitalize on opportunities during the next upturn. I would like to thank our employees and our shareholders for their continued support through all our phases, and I look forward to updating you on our next call. With that, I'll turn the call over to Sherry.
spk00: 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 noted, the abrupt industry downturn that started late in Q4 carried over to Q1, as customers continue to push out and cancel orders. We have implemented cost-saving initiatives, and our top priorities are to protect profitability and generate cash on reduced revenue, while keeping in mind the industry will recover. Total revenue for the first quarter came in at $433.3 million compared to $566.4 million in the prior quarter. Product division revenue was $368.6 million compared to $499.5 million last quarter. And revenue from our service division was $64.7 million compared to $66.9 million in Q4. Total gross margin for the quarter was 17.3%. compared to 19.5% last quarter. Products gross margin was 14.7% compared to 17.7% in the prior quarter, and services was 31.7% compared to 33.5% in Q4. The decline in Q1 can be attributed to lower volumes and product mix. We are continuing to focus on cost improvements to strengthen profitability. Operating expense for the quarter was $52.7 million compared with $53.6 8 million in Q4. As a percentage of revenue, operating expense was 12.2% compared to 9.5% in the prior quarter. Total operating margin for the quarter was 5.1% compared to 10% in the fourth quarter. Margin from our products division was 4.1% compared to 9.9% in the prior quarter. And services margin was 10.8% compared to 11.3% in the prior quarter. The reduction in margins was due mainly to decreased efficiencies on lower volume and product mix and some higher year-end related expenses. Many of the cost reduction initiatives we have implemented, some of which were initiated late in the quarter, can take time to be reflected in our financial results. Based on 44.8 million shares outstanding, earnings per share for the quarter were 17 cents on net income of $7.6 million. compared to 93 cents on net income of 42.6 million in the prior quarter. Our tax rate for the quarter was 16% compared to 13.7% last quarter. We expect our tax rate for 2023 to stay in the mid to high teens. Turning to the balance sheet, our cash and cash equivalents were $322.1 million at the end of the first quarter compared to 358.8 million last quarter. Cash from operations was $28 million compared to an outflow of $38.8 million in the prior quarter, driven primarily by improvements in working capital. The effective management of our working capital continues to be an important focus, especially in the current phase of the cycle. During the quarter, we made an additional debt payment of $20 million and repurchased 433,000 shares at a cost of $14.2 million. Given the current dynamic state of the industry, we are keeping our guidance range wide. We project total revenue for the second quarter of 2023 between $410 million and $460 million. We expect EPS in the range of 15 cents to 35 cents. And with that, I'd like to turn the call over to the operator for questions.
spk04: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchdown phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Quinn Bolton with Needham. Please go ahead.
spk03: Yeah, hi, this is Trevor on for Quinn. Thanks for letting me hop on. So last quarter, you noted that without the $30 million impact, revenue guidance for the first quarter would have been around $450 million and then stabilized around that figure through 23. And now with LAM and ASMI stating that memory is weaker than expected and that foundry logic outlook has slightly weakened as well. Do you see that $435 million guidance midpoint as the new baseline? And then also, how much of that 30 million impact falls into Q2?
spk02: Yeah. Hi, Trevor. Short answer is yes. That's probably a new baseline. What we saw in the first quarter, we were able to make up a lot of that $30 million that we thought was going to move out of the quarter due to that supplier issue. But we did see further drops from two of our customers unexpectedly. That did happen, some push-outs and cancellations within that quarter. So that's why we ended up roughly where we expected in Q1. But that kind of little bit of a notch down that occurred in orders in Q1, we expect that will carry forward. So, yeah, this is roughly the new baseline is where we are right now.
spk03: Okay, I guess based off that, with most of the 30 million falling into one queue, could we possibly see a half over half increase in the second half with most of the demand coming in towards the end of the year? I guess any positioning thinking about 2023 would be helpful.
spk02: You know, as I said on the last call, we expect things to be relatively constant through the year. So that's our expectation. And we're not forecasting the second half. If there were any movements from that, I think it's more likely that it could be up versus down. But our outlook right now is relatively flat through the year.
spk03: Okay, and if I can sneak one more in. So with mature spending continuing to be robust, particularly in China, I'm wondering if you can quantify your exposure to both the leading edge and mature markets. Any color there would be awesome as well.
spk02: Sure, yeah. You know, a lot of the items that we make are – you know, for both leading edge and legacy. So I don't have, I don't, we don't have it broken down by where, you know, when we make a module, it could go on a leading edge tool or the very same module could go on a trailing edge tool. So that's something, you know, we don't really have broken down. What we make and sell directly into China is around 20 million a quarter. But where the customer sends it, which, which, you know, application, you know, that's difficult for us to really ascertain. But obviously, a little bit of that strength has helped stabilize, you know, stabilize where we are at this current level.
spk03: Yeah, that's understandable. Well, thank you. I'll hop back in queue. Thanks, Trevor.
spk04: The next question comes from Christian Schwab with Craig Hallam Capital Group. Please go ahead.
spk05: Hey, thanks. So as we look to the recovery, I assume you kind of think it'll probably run like lamb highlighted where first we have utilization rates go up. You should see that your quantum business and memory, and then we'll do some upgrades and then capital equipment will kick in. Is that kind of the way you guys are thinking about it?
spk02: Yeah, exactly. Christian. And, and, um, And this go around, there's a bit of finished goods inventory on our customer's side as well. So that'll create an additional bit of lag even after wafer starts to go up. I think there needs to be a little bit more flush through of finished goods from our customers, the equipment makers. Okay.
spk05: So if we, you know, get towards the tail end of this year, beginning of next year and begin to see a capital equipment recovery cycle, you would still maybe have a quarter leg or so versus maybe, say, your two largest customers, AMAT and LAM, if we saw a recovery. Is that the right way to think about it?
spk02: Yeah, I think a quarter at the most. We're seeing, obviously, there's efforts on their side to draw their inventory down through this year. So we're seeing some of that impact in our year this year. So hopefully the delay is at most a quarter, but hopefully even less.
spk05: Okay, great. No other questions. Thank you. Thank you, Christian.
spk04: Our next question comes from Krish Sankar with Cowan. Please go ahead.
spk06: Hi, this is Robert Mertens on behalf of Krish. Thanks for taking my question. I guess just in terms of last quarter when you were talking about seeing the industry down to sort of later in the quarter with customers either pushing out orders or canceling, could you just provide a little bit more detail into the timing of these orders or cancellations that you've seen and how those have progressed through the most recent quarter? Is that something that's sort of worsening or you're expecting more of a steady state from your guidance? Thanks.
spk02: Sure, yeah, we saw a bit of a notch down, which we overcame by overcoming some of the supplier issues on the other side. We saw a bit of a notch down in roughly halfway through the quarter. And that was most, a lot of that was from one of the OEM manufacturers that hadn't really done a lot of push outs yet. So it felt more like a delay from the late November actions that took a little bit longer to work through into end of January. Having said that, we've seen things pretty stable since then, so we don't expect a lot of movement on that side going forward.
spk06: Great. Thank you. That's helpful. And then just in terms of inventory levels at your major customers, I know you mentioned a little bit, but just sort of if you had any guidance into when you might expect
spk02: see more of a balance there would that be something that the back half of the year potentially further out yeah typically our customers do not inventory the majority of the things that we manufacture this is kind of an unusual situation given how sudden how sudden this downturn you know hit at the end of November so that's not typically we are not making a things like power supplies or standard components that sit on the shelf. So it's a bit of an unusual situation. So they're drawing some of those things down now, which is impacting our revenue. We expect they'll draw that down through the year. And as I just said to Christian, hopefully by the end of the year, we would expect it to be back to the more normal levels where there just isn't much finished goods between us and the OEM customers. But that's really hard to tell. there's a really good report on Tech Insights showing the inventory levels in the systems, you know, both at the OEM level and also the subsystem level, the suppliers like us. And so you could see the inventory problem pretty clearly in those charts. But that's through the end of 2022. So I'm looking forward to seeing the data as it comes out. But my anticipation would be, that we start to see those start to drop through 23 and hopefully clear out somewhere in the second half.
spk05: Got it, got it. Thank you. That's helpful.
spk04: This concludes our question and answer session. I would like to turn the conference over to Jim Shoalhammer for any closing remarks.
spk02: Thank you, everyone, for joining us today, and we look forward to speaking with you again next quarter.
spk04: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer