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.

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 touchtone 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 make sure to lift your handset before pressing any keys. Your first question comes from the line of Krish Sankar from TD Cowen. Please go ahead.

Thanks for taking my question. I have a few of them, Sherry. Number one, how much is the sales to China's semi-cap customers, the MXPO techs of the world in China? the December quarter and how much was it in all of calendar 24?

Yeah, generally we were about 40 million for the Q4 timeframe. For the year, it was about 215 million.

215?

Yeah.

Got it. And then, you know, obviously some of them have been impacted by the export restrictions in December. Is that factored into your guidance? And if you didn't have that restriction, what did March quarter guidance have been?

No, that wasn't really factored in at this point. But I'm going to turn it over to Chris Cook to answer a little bit more about China.

Yep. Thanks, Chris. Chris Cook here. Yeah, I mean, we have not factored that in. We've seen a very strong 2024 up through the end of Q3. then we started seeing softness in Q4 that extends through kind of the first half of the year of 2025.

Just to clarify, the softness and digestion you're talking about is more with your China semiconductor customers, not your semi-cap customers, right?

The semi-cap customers, there was a combination of two factors. I think we have a customer in particular that continues to have ramp issues at one of their large customers. But in addition to that, we see overall kind of softening in demand partially due to just kind of organic demand and also some buildup in inventory that is well known to have occurred through 2024. We expect to see some recovery in the second half of the year as we work through both those issues and start to get more visibility into greater demand.

Got you. And then just one last question, Chris. Just wanted to check. So, you know, obviously, you know, in December we had that export control restrictions and some of your China Semicap customers were on that NTT list. So I was assuming you cannot ship to them, but are you telling me you're still shipping to them? I'm just trying to wonder if there is a risk to that $215 million that you did last year when you go into 2025.

No, we're not affected by that, of course. As you can imagine, we're all over those developments, but they did not impact our shipments just given our footprint and how we manufacture and deliver those products locally in China.

Yeah, Chris, I'll add on a little bit. We've done extensive analysis surrounding our export control and our shipments within China are encapsulated within China and with the manufacturing and engineering happening in China. So there's no back and forth between the U.S. and China at this point. So as a result, that has allowed us to continue to ship to those specific customers.

Got it. Got it. Thanks, Shadi. Thanks, Chris.

Thank you.

Your next question comes from the line of Charles Shi from Needham. Please go ahead.

Hey, good afternoon. I think so far I heard three, probably three independent issues related to China for China business. One, a little bit of customer specific, seems like one customer has some qualification on ramp issues. Two, you also mentioned that there seems to be some softening of the China demand. But three, I think you said that there's a little bit of inventory access that your Chinese customers are carrying right now. But the third one, I'm not exactly surprised because you guys were pretty transparent last year by saying you thought that some of the customers may be doing a little bit of stockpiling. Can you kind of rank order, I mean, among the top three, which one are the ones that are causing most of the near-term air pockets? And really just want to understand relative to, let's say, a quarter, what has changed? Thank you.

Yeah. So, by the way, thank you, Charles. This is Chris Cook. And I would rank those in order as you described them. Actually, the customer-specific Ramp issue that we expect to be resolved in the second quarter was a hit, followed by a blend of the inventory and demand corrections that we see. Obviously, to the extent that our customers burn through that local inventory, that shows up in reduced demand for us and excess inventory burn. So it's a combination of those three in that order. Got it.

So let's say if we take out that China for China business, what would the guidance be like, I mean, for the ex-China business from Q4 into Q1? Do you still see sequential growth or what's the picture there?

Oh, I would say we're not growing sequentially. We're off. As we expect those things to be resolved, we do expect for recovery in the second half, but we'll continue to see softness through the first half of the year.

No, Chris, I meant the ex-China business, the non-China business I was trying to ask. Yeah, from Q4 to Q1. What's embedded in your guidance? Are you sequential growth?

Yeah, sorry. I misunderstood the question. Yeah, we're flattish.

Okay, maybe last one for me.

The growth margin for Q4 and seems like they imply the growth margin guidance in Q1. Obviously, you don't really guide growth margin. I heard you talk about product versus service mix seems like a little bit lighter than you thought. But the product gross margin alone looks like a little bit lighter as well. What's the reason for that gross margin weakness in the product division?

Hi, Charles. Yeah, really the key thing is the mix of the products that got shipped and where they got shipped from. So obviously with China being a little bit lower, we started to see that in Q4, and that's a high margin business. We also saw some of our other higher margin products be a little bit lighter for the quarter. So also being at year end, we did have some additional expenses surrounding just truing up some of our inventory and things like that. So that's what really affected it. We see it somewhat flat going into Q1. And we will continue to be looking at our cost structure with a close eye and make sure that we continue to help that as we move through the year as well.

All right, thank you. Thanks.

Your next question comes from the line of Christian Schwab from Craig Hallam Capital Group. Please go ahead.

Great, thanks. Sherry, I think you kind of implied, you know, anyway, so the second half is stronger than the first half, but you kind of implied kind of Plattish type of revenue, I didn't know if you were applying for the year, so if we kind of take Plattish revenue in the first half and pick it up in the second half, are you assuming then that revenue year over year, 24 to 25 then, is flat-ish? Is that what you were trying to say?

No, I think we're assuming right now that the first half is somewhat flat. We obviously don't have a crystal ball and don't know the second half, but I think we're basing it on everything else that everybody else is putting out there that hopefully the second half is a little bit higher, but obviously we'll continue to track that quite closely and look at our cost structure as we move through that. But for now, we think the first half is going to be somewhat flat.

Okay. And then as far as like the AI growth drivers that you mentioned, is there one, you know, segment or another inside that value chain that is more important to you where you have design wins with leading customers in the United States that would more possibly impact your revenue versus, say, growth in another? In other words, you know, is leading boundary logic, you know, no shrink a big deal? Is, you know, You know, as Dan, high bandwidth memory, et cetera, is there, you know, what should we be monitoring to see if it shows up in your business, if it shows up elsewhere?

Hi, Christian. This is Cheryl. Obviously, we've seen a benefit from the high bandwidth memory, both from the packaging side as well as from the expansion in DRAM. So we continue to see that as a contributor. And we also see the transition for gate all around and the transition to two nanometer as a benefit to us as well as those have higher deposition and etch than the previous node.

Great. All right. Perfect. No other questions. Thank you.

Thank you. Your last question comes from the line of Edward Yang from Oppenheimer. Please go ahead.

Hi, Sherry. You mentioned a comment about balance sheet alternatives. I was wondering if you could clarify that.

Yeah, we're just – obviously, the market has been pretty open with remaining open from a debt and equity perspective for us in general. But we are continuing to look at our capital structure. We want to have flexibility with our working capital, obviously making – other M&A potentials in the future and increasing our cash flow through lower interest rates. So we're just really taking a look at different options just to be able to, you know, add more to our balance sheet as well as for our shareholders to have more EPS going through. So we're just taking a look at the options.

Okay. And On China, you mentioned for the year it was $250 million of revenue, so back into $44 million of fourth quarter revenue for your China for China business. Is that the sustainable run rate that you see for the first half, or were you exiting at a lower run rate than that $44 million you saw in the fourth quarter?

Yeah, we see it being a little bit lower going into Q1 and staying somewhat flat there for Q1, Q2. And as Chris mentioned, it would hopefully recover somewhat in the second half, maybe not to the peak levels that we saw, but seeing it going back up in Q3, Q4.

Okay. And just final question, back in January, you'd updated your view on WFE growth and was looking to outperform that by about 5% to 10%. And so has that changed? What's your updated WFE? And what would the range of outperformance be at this point?

So for WFE, at this point, we're looking at about five points of growth in 2025. And we are looking to outperform. Obviously, last year, we outperformed quite a bit. So with potentially having a little bit pulled in with the upheavals in the U.S., we may see a little bit of balancing of that across the two years. So we will continue to look at that. Our target is to outperform by 5% to 10%. We certainly believe that's a possibility, but we will continue to have to monitor what the mix is across the various products.

All right. Thank you. Thank you.

There are no further questions at this time. I'd like to turn the call over to Sherry Savage for closing remarks. Ma'am, please go ahead.

Thank you, everyone, for joining us today. We will talk to you again next quarter. Thanks a lot.

This concludes today's conference call. Thank you very much for your participation.

You may now disconnect.