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spk03: Good day, ladies and gentlemen, and welcome to the Ultra Clean Technology Q4 and Full Year 2023 Earnings Call and Webcast Conference. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call, you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, February 21, 2024. I would now like to turn the conference over to Rhonda Benetto.
spk07: Please go ahead. Thank you, Operator.
spk01: 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 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. The 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.
spk00: Jim? Thank you, Rhonda, and welcome everyone to our Q4 2023 earnings call and webcast. I'll start by providing a brief overview of our Q4 results that Sherry will expand on in her commentary and also provide our thoughts on the current state of the industry and our plans to capitalize on the significant opportunity we see over the long term. Fourth quarter total revenue grew modestly as expected from the prior quarter. Visibility remained less than ideal as our product customers continued to shift mix and location to help expedite the normalization of inventory. Our global footprint and ability to quickly flex to meet demand was an advantage in the quarter. Our services business stayed relatively flat as customers maintained current output levels. For 2023, our revenue and earnings largely reflected the overall decline seen across the broader semiconductor market. As we've done in previous downturns, we viewed last year as an opportunity to invest in several strategic actions that best position us to capitalize on the sizable growth opportunities that lie ahead. Optimizing operations and increasing capacity to support the next ramp were top priorities in 2023. In collaboration with our customers to align with their technology roadmaps, we enhanced our global footprint and capability with new, state-of-the-art manufacturing facilities with added capacity optimized workflows, increased automation, and higher levels of vertical integration. For example, in Chandler, Arizona, we've moved six buildings into a single new facility, and in the Czech Republic, we relocated three buildings into one. These two new cutting-edge scalable sites will meet the increasing demands of our growing customer base. We also expanded our footprint in Malaysia to support future demand from the regions. This lower-cost manufacturing center of excellence will have a positive impact on our overall profitability as volumes increase over time. On the services side, we consolidated and modernized two sites into one in Phoenix, and our new facility in Ireland is scaling production to meet the demands of our customers in Northwest Europe. With these value-add enhancements now in place and more ongoing, we have the global presence, capacity, and efficiency to support $4 billion in revenue and grow profitably on a much larger scale heading into the next ramp and beyond. And last but not least, we expanded our suite of offerings with the acquisition of HIS Innovations Group, further expanding our reach into the global sub-FAP market. UCT now offers integrated vacuum systems and ancillary equipment solutions that integrates the subfab ecosystem in a way that is value-add and scalable. As the demand for next generation devices increases with the deployment of new technologies like 5G, AI, and the Internet of Things, the need for advanced fabs capable of producing higher density, faster, and more power-efficient chips will increase. UCT's broad capabilities in design and manufacturing will enable us to continue to develop solutions that simplify installations support, and maintenance of these process tools critical to chip production. With 2024 in its early days, current demand remains tepid, as reflected in our Q1 guidance. However, our internal marketing research is aligned with broader industry sentiment and our customers' overall market dynamics are improving and should help drive a stronger exit to the year. Looking to 2025 and beyond, the business case supporting extensive investment for WFE is very compelling with global semiconductor sales widely predicted to reach a trillion dollars by the end of the decade, requiring nearly twice the current capital spend. We are continuously innovating and introducing new solutions, expanding our market presence, and building momentum at crucial technology turning points, especially in the lithospace, where we are making great strides with a key customer. Some of these module types are valued at roughly five times higher than typical modules, and we are ramping our deliveries over the next several quarters. Our solutions are increasingly gaining attention and will be a significant growth driver in the months and years ahead, as many of the market inflections we are collaborating on with our customers are still in the early stages of adoption. In summary, UCT has emerged as a more valuable, stronger company with greater profitability after each downturn. During the past five quarters, we have been busy setting the stage to further expand our leadership position with a broader suite of offerings as a manufacturing partner of choice for our growing customer base well into the future. And with that, I'll turn the call over to Sherry. Sherry?
spk02: 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, demand for our product improved moderately in the fourth quarter with a dynamic environment as customers adjusted their mix and location to help rebalance inventories. Our service business remained steady as customers maintained utilization levels. Total revenue for the fourth quarter came in at $444.8 million compared to $435 million in the prior quarter. Revenue from products increased to $389.7 million compared to $380.9 million last quarter. Services revenue was $55.1 million compared to $54.1 million in Q3. For the full year, total revenue was $1.7 billion compared to $2.4 billion in 2022, reflective of the broader industry downturns. Total gross margin for the fourth quarter increased to 16.7% from 15.5% last quarter. Products gross margin was 14.6% compared to 13.8% in the prior quarter. And services was 31.7% compared to 27.4% in Q3. 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. Total gross margin for 2023 was 16.6% compared to 20.2% in the prior year. Operating expense for the quarter was $51.3 million compared to $48.6 million in Q3. As a percentage of revenue, operating expense was 11.5% compared to 11.2% in the prior quarter. For the year, operating expense as a percentage of revenue was 11.6% compared to 9.3% in the prior year. Total operating margin for the quarter improved to 5.2% compared to 4.4% in the third quarter. Margin from our products division was 4.6% compared to 4.5% in the prior quarter. And services margin was 9.5% compared to 3.7% in the prior quarter. The improvement in services margin was due to increased site and overhead efficiencies. For the full year, operating margin was 4.9% compared to 11% in the prior year due to lower overall revenue levels and decreased efficiencies typical during an industry trough. Based on 44.9 million shares outstanding, earnings per share for the quarter were 19 cents on net income of $8.5 million. compared to 4 cents on net income of $2 million in the prior quarter. Current quarter earnings per share were above guidance from better factory efficiencies and discretionary spending management and favorable other income and expense due to foreign exchange benefits and government grants. For the full year, earnings per share were 56 cents on net income of $25.2 million, compared to $3.98 on net income of $181.9 million in 2022. Our tax rate for the quarter was 16.4% compared to 37.3% last quarter, when our tax rate was chewed up for year-to-date expense. For the full year, our tax rate was 18.9%, and we expected to stay in the high teens for 2024. Turning to the balance sheet, our cash and cash equivalents were $307 million compared to $342 million in Q3. We used cash on hand to acquire HIS and make strategic capital investments to support our growth plan into the next ramp. Cash flow from operations was $35.3 million compared to $36.2 million last quarter. For the full year, cash flow from operations was $135.9 million compared to $47.2 million in the prior year. During the quarter, we repurchased 239,000 shares at a total cost of $5.7 million, bringing total repurchased shares in 2023 to 1,009,000 shares at an aggregate cost of $29.4 million. leaving $108 million remaining on our three-year repurchase program. We are pleased with the execution of our plan to optimize our capital deployment strategy throughout 2023, despite the challenging environment. Generating nearly $136 million in cash flow from operations enabled us to invest for future growth, pay down $39 million in debt, execute on our share repurchase plan, and complete the strategic acquisition of HIS Innovations Group. Turning to our guidance, we project total revenue for the first quarter of 2024 between $430 and $480 million. We expect EPS in the range of $0.03 to $0.23, reflecting higher expenses usually seen in the first quarter of every year. And with that, I'd like to turn the call over to the operator for questions.
spk04: Thank you.
spk03: Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from the line of Krish Sankar from PD Cowan. Your line is now open.
spk05: Hi, thanks for taking my question. Jim, a question for you. I think, you know, a couple of quarters ago you said revenue levels are going to be bouncing around this range and it looks like that is coming true. I'm just kind of curious. You know, many semi-cap companies have spoken about a second half inflection. You said more like exiting calendar 24 is going to be inflection. I want to make sure that are we on the same page or do you think there's more inventory drawdown from your customers before you see a benefit for all chip teams?
spk00: Yeah. Hi, Chris. Thanks for the question. Yeah, I think there's several factors going on. We do expect, you know, some improvement in the second half on the chip side, but very incremental. I think the other factors where, you know, we're hoping for things to improve, you know, not just the exit, but, you know, starting in the second half is that the inventory situation will be better. As well as the demand is now coming from areas where our footprint is stronger. So, you know, in 2023, there was a lot of demand in the ICAPS, which is mostly 200 millimeter, which is not an area of heavy contract manufacturing. There's also very strong litho, which although we have a growing footprint there, it's still in the single digits of our total revenue. you know, as well as some other factors, you know, kind of affecting, you know, where the investments were coming. So we're still seeing, you know, in this last quarter, we're still seeing instability, I would say. So areas that we thought we would be shipping from, some of those orders got pushed around in areas where we didn't expect, you know, the orders. We got kind of drop-in orders. So it's still a bit unstable, but the end result is, The end result is, you know, we're incrementally seeing a little bit better results. So we're hopeful in the second, we'll start to see it earlier in the second half as these factors come into play. But I think, you know, the safest conservative assumption is that, you know, the chip demand won't really start taking off until, you know, near the end of the year. Got it, got it.
spk05: I think that's very helpful and makes a lot of sense. Then quickly on the EUV side, you kind of mentioned, so my understanding is you guys have more of the high pressure part of the EUV versus no pressure. I'm just kind of curious, is there a possibility of you gaining share on the no pressure side, or are you just mostly focused on high pressure EV at ASMO?
spk00: Yeah, I think, yeah, we are on the high pressure side, and especially a lot of the new products that they're rolling out, and that's where we're starting to see the volumes ramp. We are in different smaller pockets. I don't know if it's low pressure or not, but definitely on the CYMR side, you know, the laser areas and some of the older tools. So we have a kind of scattered footprint throughout the ASML tool set, but the majority of what we're working on are the new tools, and that's where we're seeing the large modules start to roll out and increasing in numbers.
spk05: Got it. And then just like a quick housekeeping question for Sherry. I understand you said RPEC would be or the expenses would be higher in March quarter. How do you think about gross margin in March relative to December?
spk02: Yeah, I would say it's going to be fairly flat. You know, obviously it's really dependent upon where we ship out of. Things kind of shifted quite a bit during Q4, and I think it just depends on if anything shifts during Q1. But we still see it being, you know, in the same zone as we saw in Q4 for gross margin.
spk07: Thanks, Sherry. Thank you. Thank you. Thank you, Chris.
spk03: Your next question comes from the line of Christian Schwab from Craig Callum Capital Growth. Your line is now open.
spk06: Hey, guys. Hey, Jim, on, you know, with revenue being down, you know, 27% year over year, when, you know, WFD was obviously down much less than that year over year, So I understand the ICAPS commentary or mature node commentary, but as this inventory cleans up, is there an opportunity for a material ladder step up in the second half? I guess it wasn't clear to me in the before question, or do you just expect a modest recovery from where you are in Q1?
spk00: Yeah, I think a ladder step could happen, but I think our assumption is that it will be more of a gradual incremental improvement. We do not have a lot of visibility in what our customers have in inventory, and even their demand is shifting around, as we saw in the last quarter. We know the inventory levels are high. We don't know how much they still have of what we made and our competitors made, so it's very difficult for us. to say, you know, the inventory issue that we've had will be completely gone and there'll be a step function up. Obviously, it's improving. But so we're just assuming kind of, you know, some incremental moves up. And at some point, you know, the cork will come off the bottle and then demand will more better reflect the WFD numbers. As you mentioned, you know, the inventory was a headwind. The deferred revenue was a headwind. you know, the strong ASML and ICAPS. And MDP, metal deposition, was really strong for applied. So those are areas that are not very gas intensive. And so those were all headwinds we had in 2023, as well as, you know, NAND affecting depth and edge quite a bit as well. So a lot of those headwinds will start to abate, but it's very difficult to predict the timing. But I think we're just assuming incremental improvement As we go along and at some point, you know, there will be a step up as things clear out, but it's very hard for us to predict that.
spk06: Okay. And then on the backside of this, you know, when the inventory correction is over and, you know, 25 and beyond, would you expect for you guys to outgrow WFE like you did in the previous, you know, upcycle? Or do you think that previous upcycle – growth above WFE, you know, in some cases double digits, was just an inventory build?
spk00: No. I mean, we've outgrown on the upturn multiple times. In an upturn, the inventory disappears pretty quickly as well. And so the inventory buildup only happens when the market just suddenly, you know, shuts down like it did in November of 2022. That's where the inventory piles up. from everything in the float. So yeah, we have a lot of factors. We've been picking up share at multiple customers. We're doing very well, especially with these new modules for Litho that are starting to ship in larger quantities. Our Malaysia factory, we're putting some new wind into that factory. So we're still growing share, and I expect we'll do what we've done the last, since I've been here the last three upturns, that we'll outgrow again.
spk07: Fantastic. No other questions. Thank you. Once again, as a reminder, if you wish to ask a question, please press star followed by the number one. There are no further questions at this time. I will now hand the call over to Jim Schallhammer.
spk04: Please continue.
spk00: Thank you all for attending this conference call. We look forward to speaking to you again in April.
spk03: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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