Ultra Clean Holdings, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Ultra Clean Technologies fourth quarter and full year 2024 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. 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, February 24, 2025. I would now like to turn the conference over to Rhonda Mineto, Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us this afternoon. With me today are Sherry Savage, Chief Financial Officer, and Chris Cook, President of our Products Division, and Cheryl Knessler, our VP of Marketing. Our CEO, Jim Schulhammer, is unable to join our call today as he's suffering from a temporary flare-up in his back and senses sincere regret. Sherry will begin with some prepared remarks about the business and follow that 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 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 Sherry.

Sherry? Good afternoon, everyone, and thank you for joining our call today. I will begin with a brief summary of our 2024 financial and operations highlights and then outline our thoughts on the short- and long-term state of the industry landscape. After that, I'll provide more detailed financial review information and then we will open the call up for questions. UCT executed at every level in 2024, growing 21% over the prior year and significantly outperforming our customers, our closest competitors, and the overall WFE market. Our unique and extensive suite of vertically integrated offerings, global manufacturing footprint, and ability to quickly flex to meet customer demands enabled us to capitalize on several windows of opportunity throughout the year. Areas where we played an instrumental role included growth at the leading edge, driven by investments our customers made and continue to make, within the artificial intelligence space through our Czech Republic site, and our long-established In China for China manufacturing business, supplying domestic Chinese OEMs in-country. Overall, UCT was specifically positioned with our largest customers to quickly align and support their technological roadmap at every turn throughout the year. As the world demands higher quantities of chips, chip manufacturers demand more and higher quality manufacturing equipment and processes. As technology evolves, UCT is evolving with it. The drivers of our industry, currently led by artificial intelligence, will play a profound role in transforming economies, businesses, and societies over time. We are in the dugout and the first inning of this new world in overall spend. To see mass adoption of radical new technologies, we need to see large enterprise use cases and integration at scale. AI will not affect the entire value chain equally or at the same time. UCT is in this for the long haul and will benefit through the various growth stages, albeit in waves and to varying degrees at first. To measure success one quarter time would not truly reflect the overall value of the contribution we will make over the long term. We know that initial proliferation of AI use cases will require more chips in smartphones and personal computers to run applications. UCT's unique portfolio of vertically integrated product and service solutions are critical catalysts in helping our customers manage the expanding complexity and growing demand for all manner of devices and applications. Turning to the semiconductor industry as a whole, Advancements are progressively enabling innovations in materials, science, and engineering, where our customers have clear leadership. Additionally, our customers are seeing opportunities in advanced depth and edge applications that are set to encompass the growing share of WFE. And as leading-edge logic transitions to gate-all-around nodes, the total available market expands dramatically for our customers and for UCT. Our innovative technology has expanded our engagement beyond hardware into supporting our customers' recipe development and optimization. In the shorter term, as reflected in our guidance, we are experiencing some air pockets after an extraordinary growth year. AI represents incredible opportunities, but as noted, until such use cases reach enterprise scale, there will be ups and downs. We are experiencing some unexpected demand softness from our in-China-for-China business relating to extended qualification timelines and some inventory digestion. Right now, our focus remains on driving efficiencies and keeping a close eye on our cost structure to ensure we continue delivering value to our stakeholders. We are very energized by the many opportunities we see heading our way. UCT's longstanding leadership role in the semiconductor equipment manufacturing space will play a pivotal role in advancing the industry to new heights in the coming years. And now I'll switch to a review of our financial performance and outlook, where I will be referring to non-GAAP numbers only. For the fourth quarter, total revenue came in at $563.3 million, compared to $540.4 million in the prior quarter. Revenue from products increased to $503.5 million from $479 million last quarter, due to increasing demand for advanced packaging applications and other AI-related processes, including CMP, which offset some softening from the domestic China market. Services revenue was $59.8 million compared to $61.4 million in Q3. For the full year, total revenue was $2.1 billion compared to $1.7 billion in 2023. Total gross margin for the fourth quarter was 16.8% compared to 17.8% last quarter. Products gross margin was 15.2% compared to 16.1%, and services was 29.8% compared to 30.5% 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 2024 was 17.5% compared to 16.6% in the prior year. Operating expense for the quarter was $55.3 million compared to 56.5 million in Q3. As a percentage of revenue, operating expense decreased to 9.8% from 10.5% in Q3. For the year, operating expense as a percentage of revenue decreased to 10.6% from 11.6% in the prior year. Total operating margin for the quarter came in at 7% compared to 7.3% in the third quarter. Margin from our products division was 6.6% compared to 7%, and services margin was 9.7% compared to 10.1% in the prior quarter. The overall margin decrease was largely driven by higher mix of our products revenue. For the full year, operating margin increased to 6.9%, from 4.9% in the prior year due to higher overall revenue levels and increased efficiencies. Our tax rate was 14.5% this quarter compared to 27.1% last quarter as we finalized our full-year tax rate at 21.1%. Our mix of earnings between higher tax jurisdictions and lower tax jurisdictions can cause our tax rate to fluctuate throughout the year. For 2025, we expect our tax rate to be in the low to mid-20s. Based on 45.4 million shares outstanding, earnings per share for the quarter were 51 cents on net income of $22.9 million, compared to 35 cents on net income of $15.9 million in the prior quarter, primarily due to the lower tax rate and lower operating expense on increased revenue. For the full year, earnings per share was $1.44 on net income of $65.2 million, compared to 56 cents on net income of $25.2 million in 2023. Turning to the balance sheet, our cash and cash equivalents were $313.9 million compared to $318.2 million in Q3. Cash flow from operations was $17.1 million compared to $14.9 million last quarter, primarily due to higher net income and a decrease in inventory. For the full year, cash flow from operations was $65 million compared to $135.9 million in the prior year. As mentioned earlier, the growth we saw last year supporting AI build-outs should stay around current levels with some up and downs as the industry prioritizes its spending patterns. We are seeing a reduction in demand from our domestic China customers as qualification periods are taking longer than originally planned. and we presume they are consuming inventory purchased in 2024. Recognizing these are likely short-term headwinds, but with limited visibility and no clear indication that the industry is in full recovery mode, we are taking proactive approach to maintaining our profitability and long-term growth. As part of this effort, we are conducting a comprehensive review of our expense structure and evaluating balance sheet alternatives to optimize financial performance. We project total revenue for the first quarter of 2025 between $505 million and $555 million. 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.