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spk08: Good 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. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Monday, May 6, 2024. I would now like to turn the conference over to Rhonda Binetto, Senior Vice President of Investor Relations. Please go ahead.
spk09: Thank you, Operator.
spk01: 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 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. Discussion of our financial results will be presented on a non-GAAP basis. A reconciliation of gap to non-gap 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?
spk04: 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 first quarter, 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 lines. 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. 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 US and its allies. We recently celebrated the 20th anniversary of our Shanghai facility, and are ideally located to support our local customer's growth plan. 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, 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 demands and elevate UCT's significance with our customers. In the U.S. alone, the Chips and Science Act has committed $30 billion to date, supporting $275 billion in investment by 2030. 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. For example, we are honored to have received two very prestigious awards recently. First, we were recognized by Texas Instruments with their 2023 Supplier Excellence Award. This award is reserved for an elite group of suppliers with exemplary performance in the areas of cost, environmental and social responsibility, technology, responsiveness, and assurance of supply and quality. And for the second 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. However, our opinion has not changed, and we expect a broader base recovery in 2025. We're performing effectively and have achieved notable advancements 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. 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, in the first quarter, 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. Total revenue for the first quarter came in at $477.7 million compared to $444.8 million in the prior quarter. Revenue from products increased to $418.5 million compared to $389.7 million last quarter. Services revenue was $59.2 million compared to $55.1 million in Q4. Total gross margin for the first quarter 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 32.3% compared to 31.7% in Q4. 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 $54.5 million compared with $51.3 million 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 fourth 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. Margin improvements were largely due to higher revenue and operating efficiencies. Based on 45.1 million shares outstanding, earnings per share for the quarter were 27 cents on net income of $12.1 million, compared to 19 cents on net income of $8.5 million 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 expected to stay in the high teens for 2024. Turning to the balance sheet, our cash and cash equivalents were $293 million compared to $307 million in Q4. Cash flow from operations was $9.8 million compared to $35.3 million last quarter. The change in cash flow from operations was due to year-end compensation payments and increase 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 upside the offering by $29 and reduce our interest rate by a quarter point. In conjunction, we extended the maturity of our revolving credit facility to August, 2027. For the second quarter, we project total revenue between $465 million and $515 million. We expect EPS in the range of 16 cents to 36 cents. And with that, I'd like to turn the call over to the operator for questions.
spk08: 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 telephone, and 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 on a speakerphone, please lift the handset before pressing any keys. Your first question comes from the line of Charlie from Needham. Please go ahead.
spk05: Hey, good afternoon, Jim and Sherry. Congrats on the solid results and very strong guidance. I think, Jim, in your prepared remarks, I got the 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 them as applied, seems to have seen the most amount of growth. It gets a little bit hard for me to reconcile because China revenue has been like a single digit percent of your total revenue. So how do I think about your actual exposure to the Chinese OEMs at this point?
spk04: Yeah, Charles. Hi. Yeah, you're right. The Chinese revenue is directly to the OEMs is relatively small, but it's actually You know, doubled, I think, over the last two or three quarters and then nearly doubled again. 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.
spk09: Got it.
spk05: So it sounds like the HBM or AI side is probably largely dominated by deposition type of tools, probably electroplating, if I have to take a guess.
spk06: That's a good guess. Thanks, Jim.
spk05: So maybe another question about service. Sherry, you mentioned about... FAP relocation as part of the reason for the revenue strength, what do you mean by that, FAP relocation?
spk02: Yeah, 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 service at P&L.
spk05: Got it. That's not a China customer, no? No.
spk02: 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 volume flowing through there.
spk05: Got it. So maybe your two largest, I mean, VAP 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?
spk04: Yeah, me again, Charles. So positive would be optimistic. It's definitely inching up. It has inched up a little bit, as you saw. It's not an extremely strong recovery, but we are seeing signs of realization starting to increase. and some of the idle systems started to be put back and getting ready for scaling up. So yeah, it is getting a little bit better, but it's not extremely steep curve yet.
spk06: Thanks, Jim and Sherry. Congrats on the results. I'll hop back to the queue.
spk08: Thanks, Charles. Thank you. Your next question comes from the line of Krish Sankar from TD Cowen. Please go ahead.
spk03: Yeah, thanks for taking the question and congrats on the strong results. I have a couple of questions. One is to follow up on Charles' question. On the China revenues, you mentioned the domestic China strength. Is that comment related to what you're seeing from China's Semicap OEMs or is it also tied to your US Semicap customers? My understanding was that you might not have the visibility with the U.S. Semicap customers who the end customer is.
spk04: Yeah, you're right, Krish. We don't usually have the visibility. Or 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. 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, you know, grow from single digits to double and then double again. And we expect that to continue throughout the year. And as we As we look into what's going on with it and where it's going, we estimate about, anticipate your next question, Chris. We anticipate about half of it is going directly into 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. These customers are picking up new applications and are starting to grow much faster than we've seen over the last 15 years.
spk03: Got it, got it. It's very helpful, Jim. And then like a follow-up, you know, obviously one of your U.S. Semicap OEMs, you have pretty good exposure to to some of their 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?
spk04: I'm sorry, non-China what demand? Lagging edge. Lagging edge. Yeah. Oh. The lagging edge demand is also as bad as strong, if that's what you're asking about. But it's, I think that strength, you know, up here, you know, maybe a quarter or two ago and it's starting to maybe temper a little bit, but it has been elevated.
spk03: Got it. Got it. And then the one final question, you know, obviously I think you've spoken about ASML exposure in the past, the EUV, my understanding is more than probably for more of the high pressure components. Was ASML a greater than 10% customer or is it still too small for you folks?
spk04: It is not. It's a mid single digits, and on its way, we believe, within a few years. But yeah, and I think Charles mentioned the other. The other has ASM, ASML, KLA, as well as the Chinese OEM. So that's where you see a lot of the numbers pile up.
spk09: Thank you very much. Very helpful.
spk08: Your next question comes from the line of Christian Schwab from Craig Helm Capital Group. Please go ahead.
spk00: Congrats on the good quarter. Jim, when would you anticipate your memory customers utilization to improve enough to show up in the cleaning business?
spk04: We're anticipating, we've been pretty consistent about You know, 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, you know, we'd see that start to tick up, you know, in the latter half of 2024 to start to see the equipment orders coming in in 2025.
spk00: Okay. Okay. And what is your, you know, your kind of baseline thoughts of, you know, what you would anticipate, you know, WFE growth to be in 25? And then the next question to that would be, you know, what type of growth rate, you know, would you anticipate you'd be positioned for to outgrow WFE on a go-forward basis, similar to what you did the last upcycle?
spk04: Yeah, I think our current view, which we're always updating, is low double digits in 2025 growth in WFE. And of course, you know, 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, you know, 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? You know, the HIS acquisition has a lot of growth expected in that segment with all the fab build-outs and their strong position there that we're making stronger. From our fluid solutions acquisition as well, I mean, we have a great product line but a relatively small product market share versus the two industry leaders, but we've been working on getting those qualified in our main customers that, you know, prior to our acquisition, there was a slower slog for Hamlet, the company that we bought. So we're seeing that accelerate as well as I think with, you know, I would say we're pretty well penetrated at our largest customer, but I think when you look at the second, third, and fourth, there's a lot of opportunity there for for market share growth within those customers.
spk09: Okay. No other questions. Thanks, guys. Thanks, Christian. Thank you.
spk08: There are no further questions at this time. I would like to hand the call back to Jim Schulhammer for closing remarks.
spk09: Thank you, everyone, for joining us today. We look forward to speaking with you again next quarter.
spk07: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.
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