Q3 2019 Earnings Call

Good day and welcome to the Ultraclean third quarter 2019 earnings Conference call.

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I'd like to turn the conference over to Rhonda Bennetto <unk> Investor Relations.

Please go ahead.

Thank you operator, good afternoon, everyone and thank you for joining with me today, our Jim Scholhamer, Chief Executive Officer, I'm sure salvage Chief Financial Officer, Jim will begin with some prepared remarks about the business and Sherry will follow with the financial review and then we'll open up the goal 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 disclosure in our as he see public 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 GAAP to non-GAAP can be found in today's press release and with that I would like to turn the call over to Jim Jim.

Thank you Rhonda and good afternoon, everyone. Thank you for joining us for our third quarter 2019 conference call and webcast.

First I'm going to highlight a few financial result, Jerry will expand on in her commentary.

Follow that with our current view of the semiconductor industry and how it relates to our products and services businesses.

After that we will open up the call for questions.

Our third quarter showed improvement in both business division, enabling us to reach the top end of our guidance on revenue and earnings per share.

Internal inventory reduction and strong cash flow from operation enabled us to further reduce our debt, resulting in improved leverage and a very healthy cash balance.

We continue to optimize our operation implement new processes and systems and strategically invest for growth.

Recently industry sentiment has shifted to the upside.

Current peer and customer commentary verified by our internal marketing analysis.

Suggest that some elements consistent with the recovery are starting to take shape.

Memory inventory dynamics are stabilizing and there are signs of recovery in the wafer fab equipment spending to support next generation leading edge devices.

Where do you see T has a distinct competitive advantage and products and services.

These factors supported by ongoing strength in foundry and logic, which makes up around 55% of U see TV business.

Those improvement and the WFP market.

When memory spending resumed we expect to see the recovery accelerate.

We continue to see project wins with several account as customer ship from in sourcing to outsourcing during the cycle.

Adding to our overall confidence level for our product division.

As devices become more complex and more functionality needs to be added in a limited space.

Algae advancement supporting Fiveg wireless high performance cloud computing Internet of things and artificial intelligence are leading the way.

The race to advance nodes in our core markets enables us to play an even more influential role in the value chain.

Capitalizing on the modest momentum we are thing and the industry. We are supporting our customers technology Roadmaps further solidifying you'd see t. as a partner of choice.

With overall sentiment more upbeat and constructive heading into 2020, we are well positioned and attractive end markets with multiple levers for value creation to capitalize on the opportunities ahead.

Our services business saw a slight recovery after memory producers increased utilization coming off the reductions implemented and the second quarter.

We anticipate this trend continuing through the fourth quarter as inventory supply and demand a line.

As wafer starts to accelerate and WFP capital equipment invest in rises cleaning and analytical services will become even more critical to our idea and OEM customers.

Our hardly technical and unique service offerings provide a great platform for growth and we'll continue to transform our financial profile.

Our integration and cost reduction initiatives remain on track and we had been successful and adapting manufacturing capacities and capital expenditures to match demand during the slowdown.

With a strong balance sheet and a healthy cash position, we are focused on strengthening our market position by making opportunistic investments in people and capabilities in preparation for growth.

This will ensure we are positioned as a stronger company better able to address the longer term needs of our global customer base as the industry rebound.

In summary, we are more optimistic than we were just a few months ago that the cycle and bottom and the industry is on the road to recovery.

Our goal is to maintain sustainable growth and outpaced the markets we serve.

I want to thank our employees and our shareholders for their continued support and I look forward to updating you on our next call.

With that I'll turn the call over the Sherry.

Thanks, Jim and good afternoon, everyone. Thanks for joining us.

In today's discussion I will be referring to non-GAAP numbers, only we executed well in the third quarter generating total revenue of $254.3 million.

Down slightly over the prior quarter, but at the top end of our guidance.

Our products Division accounted for 200 million and our services Division contributed 54.3 million.

Non semiconductor revenue, which includes display generated $13.6 million or 5.4% of revenue down slightly from the prior quarter.

Favorable mix together with ongoing reductions in labor and material costs brought total gross margin to 19.2% up from 18.8% in the previous quarter.

Our services gross margin was 34.3% and products was 15.1%.

As we've shared before margins can be influenced by customer concentration geography product mix and volume and the timing of our restructuring initiative.

So you should expect to see variances quarter to quarter.

Investing in people and manufacturing optimization via the S.A.P. implementation in preparation for the industry upturn resulted in operating expenses, increasing to 34.2 million compared to 33.6 million last quarter as a percentage of revenue opex was 13.4% versus 12.7%.

This quarter.

Total operating margin for the third quarter was 5.8% compared to 6.2% in the previous quarter.

Arjun contributed from services was 9.8% and products contributed 4.6%.

Based on 40 million shares outstanding earnings per share for the quarter was 21 cents derived from net income of 8.5 million.

This compares to $8.2 million.21 last quarter.

Had we excluded share base share based compensation in our non-GAAP reconciliation, which we plan to do in the first quarter of 2020, our earnings per share would have been 28 cents for the quarter.

Our tax rate for the quarter was 23% compared to 18.9 last quarter due to increased profit in a higher tax region, along with exchange rate movements.

Turning to the balance sheet, we ended the quarter with $158.7 million in cash and cash equivalents.

Cash from operations was $23.2 million.

Along with our scheduled loan payments, we made additional loan payments a $15 million on our long term debt and 10 million on our revolving loan.

Based on increased demand, we are projecting total revenue for the fourth quarter between 260, and $280 million and EPA us in the range of 20 to 30 cents.

If we exclude stock based compensation S would be between 26 and 36 cents.

And with that I'd like to turn the call over to the operator for questions.

Thank you.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone fan.

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At this time, we will pause for a moment to assemble roster.

And our first question today will come from Christian Schwab of Craig Hallum Capital Group. Please go ahead.

Great. Thanks for taking my question.

Great start this quarter.

In guidance is your is you're looking to I know, we're only looking one quarter at times, but can you talk to about what you're seeing and the quantum business. It what you'd expect over the next few quarters there.

Yeah, Chris you and.

Yeah as as expected you know we had the drop in business, mostly driven by DRAM, especially Korea.

And Ah we saw that continue into the third quarter and then we started to see that bottom out in <unk> and to begin to recover is 'cause wafer starts started to increase.

So we're still expecting in that in the fourth quarter, it's going to return back to the level at this be will return back to the levels, but we had enough in the first quarter. The year and then I think next year or can't really project, obviously, it's going to depend on a continued growth of wafer starts and there's always a lag between when equipment.

So then and when the wafer starts or you know taken so I expect there to see be a little bit more like a in that business growth behind the well, we would see on the a sps to or the equipment side.

Yeah, I think we're seeing signs of life in the NAND, apart or and feeling very confident on that side.

Memory DRAM memory is still the timing question, obviously, we expect there will be.

In improvement and the and the DRAM spending, but it's still a question of when that way.

Great no other questions. Thank you.

Thanks Christian.

And our next question today will come from Patrick Ho Stifel. Please go ahead [noise].

Oh, Thank you very much I congrats on a nice quarter, Jim maybe first off on the product side of things given your leading customers or I guess change in.

They're sentiment and their outlooks on a going for basis can you just discussed you know from a broader perspective, how they manage their inventories and how much you believe or some of the the emerging sizable recovery a wheel Todd or is there still a lag that you may see.

See from one or both customers or that you deal with.

Oh, yeah on difficult question to answer I mean, there there is always a delta between how center and the OEM.

A couple of factors one I think you pointed out sometimes there's inventory I believe in special cases, there still is some inventory left but that's that's eroding quickly it in the upturn.

The bigger factor between bridging between us and the Oems a rate of acceleration is is a kind of the shipping times, sometimes we ship directly to our customers customers in which case, our revenues line up pretty well.

In other cases, we shifted their factory would do it doesn't have the lag so often there's a quarter to quarter shift.

In the revenues you know the revenue growth between us and the OEM due to that effect as well, but I think the inventory pieces, there's still a piece of that but I don't think it's a nearly the size. It has been through through the you're obviously, but I think it's relatively small.

Great that's helpful and maybe as my follow up question in terms of some of the the market share gain opportunities and some of your other businesses that you've talked about.

Whether it's on the Weldment size on the machining side of things how do you look at 2020 as a recovery starts to emerge how those potential market share gains may contribute maybe not wanting to based on a qualitative basis, how how do you expect that to kinda give you an extra tail wind and I guess.

The above average growth you're looking.

Yeah, Yeah. Good question, there's a lot of elements in the market share. The Weldment side, we made a you know a step function improvement in market share with the acquisition of Dms.

And at this point I think.

We're pretty well penetrated and those accounts. So I think Holden holding those shares is definitely kind of a reasonable assumption.

I think that will grow the weldment side should grow along with the overall market another customer projects and penetrations we've seen.

We've seen a kind of a mixed bag.

Some of the Oems are a more aggressive at them more steadily out continuing outsourcing through the downturn and others others. We're we're kind of more more.

Flat or even had pulled back a little bit.

So we're kind of being a mixed bag, but we definitely.

We'll see a I think all the OEM customers shift towards either outsourcing again or more outsourcing than they currently are doing when we see the DRAM business start to come in and push the capacities are the only items.

Great. Thank you very much.

Thanks, Patrick.

Once again, if he would like to ask a question. Please press Star then one.

Our next question today will come from Karl Ackerman of Cowen and company. Please go ahead.

Hi, Jim I Sherri. This is Sam rifle on for Karl I was wondering if you could stick to memory and discuss your thoughts about 120, a layer threed NAND ramping in 2020 as well as.

Indigenous Chinese memory production and what that means for you another module makers automakers.

Yeah, I'd say I'm yeah.

That's a good thing [laughter] <unk>, Yeah, we were seeing a yeah, we're starting to see some some of the recovery hit the Threed NAND first.

I think I think you're seeing several movements as you're aware of several the larger players moving the hundred 20, a I if you're referring to obviously that the if in fact that has on US is is kind of a double affecting the not only the.

The volume of of equipment going out, but also the fact that are you adding on.

Are you, adding 35% roughly a third more process chambers into to achieve that the achieved 128 nanometer. So so you know we expect the that's the NAND recovery is definitely a good thing for US I think there, but a lot of announcements im sure youve been following them.

But you know, especially.

Actually from a larger players in NAND, So I I think Uh huh.

I think outside of the some of the smaller players who are in Chinese players, who are still a lagging a little bit I think it's obviously being led led by the by the big the big three in that area.

Definitely helpful and then.

For the for Chinese investment do you see that being.

Anything other than linear and 2020 more and more capex frontloaded are back loaded or do you have an opinion on that yet.

On if you're speaking about NAND in general I mean, obviously, yeah sure NAND art, Yeah, why Mtc you know there there's still ramping there are 32 layers and and had treated and their transition to 64 at night team, they're looking to make the jump in 2020, but I think we.

We expect that down to really have much of an impact for us and in the year of 2020 as if we think that would be a later impact.

Understood Great and then a one more if I may a dog qg.

So one of the main benefits that we see in the quantum acquisition that it diversifies your customer base in the audience.

Moving into 2020, how are you in your team what can you expand your customer base further and how would you clarify your visibility in this market today versus your woman gas delivery systems businesses sold to front end suppliers.

Yeah I'll handle the answer the first part and then I'll ask you to repeat the second one because I missed that but the the first question on expanding obviously expanding into new idea I'm players you know, there's not a lot not a lot there.

It's pretty well consolidated but there are accounts that have a lower penetration a in Taiwan, we have a fab that has been put in not so long ago, and so into in southern Taiwan and timing on and so we see a lot of opportunity as we're penetrating into.

The TSMC account down there to improve our share, which we have a decent revenue from TSMC, but its not near the levels. So we have like a Intel and Samsung. So I think the biggest opportunity we see is expanding or share with TSMC hopefully that answered. The first part if you could repeat the second part again yeah.

No actually look humor my notes I I think you touched upon it so that that's it for me. Thank you very much Oh. Thank you.

Our next question will come from <expletive> Ryan of Dougherty. Please go ahead.

Thank you so sure you how should we view taxes going forward.

Yeah for Q4, I would assume would be similar to Q3 at this point, we have lots of tax initiatives that will come into play for 2020, but for the rest of the year I would assume it would be flat from from the Q3 level.

Okay.

And the cost savings 15 to 20 million a is that still are reasonable rate and how are you.

Looking at that so far in Q2 in Q3.

Yeah, we were starting to see the beginnings of that similar to last quarter. We're in the initial initial innings on that one I'd use our gross margin showed a little bit of an increase quarter over quarter and it and that's the result of both the product mix as well as are our initiatives going on I'm going forward.

I think you'll see more of that starting in Q4 in Q1, So that's kind of where we're out right now, but theres a lot a lot of factors in play.

Okay.

Hey, Jim on churn last couple of calls you talked about kind of late quarter pull in.

How did churn look for Q3.

Yeah, I would say it was less of a churn situation than more of a market building market demand building up less of a I mean, there was always a pull ins, but what we saw where a lot of.

You know, we call them and industry bluebirds or drop ins that are not a poland and so I think what we started to see as we are as are we went to the high end of our of our forecasted revenue as we started to see the strength of the of the order stream that not just shifting from one quarter the other.

Okay and your comments on investing for growth opportunities can you provide any specifics what a what you're doing there.

Oh, Yeah, I mean, obviously you know so some of the cost reductions that we've done our structural as we've reduced footprint and unconsolidated sites and so both those continue other those cost reductions you know we've made at the right spots and as we've seen a you know the ramp.

Does it never has evenly so a you know we see some of our sites you know taking off.

Earlier than others. So so we've added a we've added a added back from capability as we see the revenues are going to continue to.

Climb so we're continuing to add more capacity in the form of people mostly.

Alright, thank you.

Thank you.

And this will conclude our question and answer session.

It's time I'd like to turn the conference back over to Jim Scholhamer for any closing remarks.

Yeah. Thank you for attending our third quarter conference call and we look forward to speaking with you next quarter.

The conference has now concluded thank you for attending today's presentation.

And you May now disconnect your lines.