Q3 2020 Ultra Clean Holdings Inc Earnings Call
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Conference call all participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would like now to turn the call over to Rhonda Bennetto Investor Relations. Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining US with me today are Jim Scholhamer, Chief Executive Officer, and Cherry Savage 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 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 GAAP to non-GAAP can be found in today's press release posted on our website.
With that I'd like to turn the call over to Jim Jim.
Thank you Rhonda and good afternoon, everyone.
We appreciate your time today.
I'm going to start with a review of our third quarter performance and then highlight a few of our recent accomplishments.
I'll wrap up with our thoughts on the industry and then turn the call over to Sherri for a financial review and we'll open up the call for questions.
You see t. delivered another solid quarter of revenue and profitability. Thanks in large part to the exceptional commitment and innovation of our team members around the world and ongoing strength in the semiconductor market.
All our facilities are running smoothly, which enabled us to again exceed customer expectations for quality and on time delivery.
Our products Division saw an increase in visits from nearly all customers and we secured a sizable new award from one of our main customers as they continue to work with us to meet their outsourcing needs.
In addition, we were designated as an approved design and production partner for a major lithography company and continue to win manufacturing awards on their next generation tools.
This new designation enables you seek to add value early in the design and development process at the new systems.
And a final highlight for our products business this quarter, our Singapore facility hit a new milestone reaching record revenue of $100 million.
Our service business expanded at our Oems across all device areas, we saw elevated engagement at each of our OEM.
Using the midpoint of our fourth quarter guidance.
We will have increased our annual revenue by 30% this year compared to last year.
Typically only outperforming the overall WFP market for 2020.
Our performance these past few quarter underscores the strength flexibility and resilience of our business model to consistently gained share and deliver growth okay.
Having improved profitability and shareholder value.
In early 2016, we embarked on a plan to double our revenue and vastly improved profitability.
Focusing on the semiconductor market, we pursued additional capabilities deeper within the value chain that went beyond our primary guest ammo business.
Leveraging infrastructure and vertical capabilities already in place.
Together with a handful of strategic acquisitions.
We diversified our offering by adding multiple new equipment products into our portfolio.
And we added a higher margin service component to our business readily surpassing our goal.
This year, we are on track to achieve annual revenue of approximately $1.4 billion almost three times our revenue in 2015.
While maintaining our share of the gas panel business revenue from all other areas of our business account for almost 65% of our total revenue compared to 10% five years ago.
We continue to execute on our multi year growth by building upon our technology leadership in key areas further.
Further strengthening our competitive advantage.
The markets, we serve are being inspired by a best set of demand drivers and you see tees diverse suite of capabilities enable us to play a larger more valuable role with our customers.
Hi, optimizing our operations implementing new processes and procedures Max.
Maximizing utilization of our facilities.
And strategically expanding our global footprint, we have broadened our presence and increase our sizable lead within our served markets.
Our aspiration of goal for the next three years to become a 2 billion dollar company.
Since 2015, while the WFP market has grown less than to act.
We have more than doubled revenue from our largest customer virtually tripled revenue from our second largest customer and gain valuable traction within our broader customer base.
Another pivotal element of our growth plan is to add a third reportable customer to our products Division.
This year, we have accelerated our efforts and deepened our engagement with one customer in particular and expect their revenue contribution to yield reportable results within the next few years.
Dynamic multi year industry inflections are driving our business today, and creating exciting new opportunities for U see TV.
We are confident we can maintain our sustainable growth path and outperform the industry.
While we expect the fourth quarter to be somewhat flat compared to the third quarter. We are very encouraged by the alignment of the growth drivers for the industry for 2021.
Accelerating technology inflections due to the pandemic robust mobile demand driven by Fiveg, New CP, you architectures, which are enabling higher performance server.
And cloud AI and machine learning are all driving semiconductor content enrichment.
These trends will support continued demand for advanced memory and logic.
Our business is well balanced and both our product and service businesses have broad exposure across all device types.
In addition, we anticipate a disciplined capex schedule as customers build out their fabs at the leading edge that should strengthen market conditions and industry profitability next year and beyond.
Before handing the call over to Sherri I want to again, thank our employees and our suppliers for their incredibly hard work, ensuring Arctic cat and the success of our customers.
We remain mindful of the macro headwinds that may arise as a result of the pandemic situation, but have proven we can execute at speed innovate at scale and successfully navigate under difficult circumstances.
And with that I will turn the call over to Sherri Teresa to review our financial performance Jerry.
Thanks, Jim and good afternoon, everyone. Thanks for joining us.
In today's discussion I will be referring to non-GAAP numbers only.
Total revenue for the quarter was $363.3 million up 5.4% from the prior quarter.
Our products Division grew 5.9% to 294.4 million on increased demand for nearly all our customers.
Our services business contributed to 68.9 million up 3% on increased activity across the board from our I'd M&A warm customer base.
Total gross margin remained at the higher end of our model at 21% compared to 22% last quarter.
The change was due primarily to increased spending on materials and maintenance for our services business to meet demand offset by favorable direct labor expenses in both businesses.
Product gross margin was 17.5% compared to 17.8% last quarter.
And services margin was 36% compared to 39.3% last quarter.
Margins can be influenced by customer concentration geography product mix and volume. So you can expect to see variances quarter to quarter.
Operating expenses were $34.3 million down from 35.4 million last quarter as.
As a percentage of revenue operating expenses decreased to 9.4% compared to 10.3% in the prior quarter.
Total operating margin for the quarter stayed flat at 11.6% compared to 11.7 in the second quarter.
Margins from our presentation improved to 10.8% versus 10.5% in the prior quarter.
Above our current model of 8% to 10% due to increased volumes and lower operating expenses.
Margins from our services Division was 14.9% versus 17.1 in the prior quarter.
And remains at the high end of our current model at 12% to 15%.
The change was primarily due to an increase in expenses for long lead time materials to meet demand.
Based on 41.1 million shares outstanding earnings per share for the quarter were 73 cents on net income of $29.9 million compared to 75 cents on net income of 30.5 million in the prior quarter.
Our tax rate for the quarter was 18.1% compared to 18.8 last quarter.
We expect our tax rate for 2020 to remain in the high teens.
Turning to the balance sheet, our cash and cash equivalents were 176.1 million this quarter compared to 214.4 million last quarter.
Cash from operations was 19.7 million.
From 17.5 million in the prior quarter.
In addition to our regular payment we made an additional voluntary term b loan payment of 7.8 million.
Our total term b payment to $10 million for the quarter.
In addition, we paid off the balance of our revolver and the amount 40 million.
We've made significant progress paying down our term b loans over the past couple of years and continue to look at ways to ensure that our overall capital structure supports our growth objectives.
While demand remained steady we continue to risk adjust our guidance to account for the numerous uncertainties surrounding COVID-19 pandemic, including unexpected changes in demand for possible supply chain interruption.
We anticipate revenue for the fourth quarter to be between $345 million and 375 million.
EPS in the range of 63 cents to 77 cents.
And with that I'd like to turn the call over to the operator for questions operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question. Our first question comes from Krish Sankar with Cowen. Please go ahead.
Hi, Thanks for taking my question. This is Steven calling in behalf Krish.
Especially headwinds have regarding the guidance range, so I understand that.
Providing a relatively wide range given.
And the uncertainty but I.
I guess.
The I guess you know looking beyond endemic situation.
Has visibility or commentary from customers and Oems has that changed at all over the last 90 days or is it still shows up well compared to the quarter, though.
Yeah, Hi, Steven This is Jim Yeah, I think things have definitely become a bit more predictable and I think.
Things were pretty clear in our supply chain, we had a pretty pretty.
Pretty good understanding of where we would end up but what was always unclear as where our customers. Other suppliers you know Mike reform, but I think we're starting to see that performance tightened as well I.
I think the range is now down to 30, where I will point I think we even had a $40 million range. So we're beginning to tighten up that range as well. So things are definitely smoothening out so knock on wood or would you know regarding any possible second wave or any other new interruptions you know, we definitely see things.
A little bit more clear than we did a few quarters ago.
Got it thanks for that and then as a follow up.
Related to China.
As you're a trend sales mix and.
I guess, how much of your sales mix those two like China domestic semiconductor companies.
Versus June.
True to your OEM customers.
Just trying to understand.
From a guidance perspective.
Sure if you're taking Chaim katzman risks related to this administration, taking any actions that officially against the Chinese domestic companies.
Yeah actually the the the risk around the actions around China trade of actually kind of played out as we predicted.
You know the risk is mostly around the phones. This mic foundry with its logic chips and so that's pretty much.
Pretty much played out I mean, they typically run $3 billion to $5 billion and WFP, they're running a little bit higher this.
This year. So we do have some exposure to that but it's relatively moderate.
Okay. Thanks, Jim.
Thank you Stephen.
Our next question comes from Charles She with need Ham and company. Please go ahead.
Thank you for taking my question, Jim It's Jerry on my first question is really.
Really about the third quarter is the revenue just you. Your you talked youre not the high end of the guidance and I can see that most of that is coming from the profit revenue I wonder compared to a quarter ago, where do you see the score so it's a significant upside.
On the product side of the business.
And is there any product revenue being pulled forward from the fourth quarter to the third quarter. Thank.
Thank you.
Yeah. Thanks, Charles No, we do not see any significant movement between the quarters and that definitely nothing fourth quarter.
The third quarter we.
We've seen strength you know across the board, obviously TSMC has been spending quite a bit with their their successes and you know moving forward with the with seven nanometer Samsung has been investing you know very heavily in their young tech fab. So.
So we've seen we've seen a pretty strong strong across the across the board I wouldn't I wouldn't say things have changed too much in that regard.
Okay. Thanks, so so maybe a little bit looking forward to the first quarter next year I know you don't provide guidance.
From your conversation with you with the OEM customers on the field plan, what's the general feel about the first quarter next year at this moment.
Yeah, you're right you know, we certainly don't get that kind of granularity on all of our customers are pretty strong.
In their forecast for the entire year of 2021, and I think that they're all looking at around a 10% growth rate and in any given quarter. You know there can be a.
You know movement around that number so it's too early from our bottoms up forecast to really.
Talk about the first quarter, but there's certainly nothing.
You know nothing to really show that we would do.
There would be any significant change from the industry ramp that we're in today.
Yes.
Got it got it. Thank you so maybe the next questions a little bit about the service side of the business definitely.
Definitely there is.
Very good nice sequential growth with a sales third quarter, I mean company driven by slightly higher Uh huh.
Utilization rate of your IDN customers and you also mentioned some certain OEM customers as well.
Wonder on the old IDN side looking into the fourth quarter. There's a lot of concerns about when did the especially the memory side, the fab utilization crude Stockton and what's your outlook, there and how that down.
I mean, the fact that your service business revenue for the fourth quarter.
Yeah, We don't guide bye bye.
By Division, but we don't see any weakening in the memory space on fab utilization at this point and nor do we expect that we do we are expecting kind of a one quarter.
We utilization drop in one of the major logic foundries that are switching over from 14 nanometer and they're upgrading to 10 nanometer. So there's going to be kind of a temporary one quarter.
You know drop in utilization that that rather large you know logics logic, a fab, where we have a very high probably so we see a <unk> a one quarter of small small drop there in the service business, which will which you know should resume again.
Back to full utilization in the first quarter as they as they finished their conversion and that's really the only change that we see in the fourth quarter for the for the service side or the wafer starts grow.
Great great. Thanks, so much for the color Jim and congratulations on the results. Thank you.
Thank you Charles.
Our next question comes from Patrick Ho with Stifel. Please go ahead.
Thank you very much and congrats on the nice quarter, just maybe first off on the product side of the business.
Given that you've been able to deliver to your customers above expectation is youve managed to capacity well update as business trends continued to be healthy and potentially grow as we go into 2021, one how do you look at your current capacity situation on the products and and secondly, do you.
You need to build any inventory on your rent given some of the comments by your customers that they are building inventory.
So yeah I think Patrick in the second part you know we don't <unk> most of the products. We make are not really like inventory type of products, they're they're kind of customize equipment for which are very customer specific. So so I don't see a lot of that we have the ability on the capacity part.
And your first question, we definitely can.
Can you know temporarily go up significantly and capacity you know above the current current levels is not a sustainable to go up 20, or 30%, but certainly burst capacity, we have that capability and we'll start to see our Malaysia.
Facility start adding capacity in the third quarter of next year. So we're very comfortable with our ability to meet any any demand increases that was the demand increase that we expect in next year.
Great that's helpful and maybe as my follow up question for you also Jim in terms of the services business and the parts cleaning side of things.
You know etch and deposition are very capital intensive in Threed NAND. They go through a lot of the parks I know you probably you know that that helps your business as utilization rates pick up is that something that you're monitoring closely as we go into 2021 with a potential recovery in the NAND flash sales.
Okay, and how that can incrementally benefit that side of the business for you.
Yeah, Patrick we definitely we definitely monitor all that carefully and that's really where our our large footprint, though that we have in that business really pays off. So you know where we add good we're adding capacity in some of those sites to support some of those some of those increases are diagnosed or.
As a whole our majority owned JV is we're adding capacity and she on right. There right now as well as you know were replaced or the new building that burned in Korea.
That.
Building is coming online and capacity is increasing there to support Samsung accounting tax and in North America, we have such a broad footprint that we've we work with our customers to move around capacity to the to the to our Fabs, which have.
You know available capacity.
For example, our you know as our factories in Arizona, and Oregon and get it closer to fall, we divert some of that to our Charleston factory, where we haven't seen the demand really hit there yet. So so we definitely look at all those factors as we as we plan for capacity to meet our customers' needs and we're in a great.
Shape there.
Great and final question from me maybe for Sherri in terms of the model you've actually you've done a great job on gross margins and manage Opex well did you did mentioned that you're.
You know you're adding some expenses.
In the near term.
What this business growth that you're seeing how should we look at that full potential increase is it just you know incremental increases or is there a big step up potentially as your revenues get to higher levels.
Hi, Patrick Yes for now I would say its sound definitely incremental we still feel like we'll be at the top end of our our our.
Our operating margin model. So it's just going to be very careful obviously with opex to make sure that we only add incrementally and that we get the benefit of additional revenue coming through so a top end of our our model. So.
Great. Thank you very much.
Thank you.
Thank you Patrick.
Our next question comes from Dick Ryan from Colliers. Please go ahead.
Thank you say a share it with Jim's mentioning of Aspirationally goals of 2 billion over the next few years is it too early to ask where you think gross margin or operating margins could go under that sort of scenario [laughter].
Yes, too early to know I mean, I think obviously, we feel very comfortable with the model range, but it also depends on where that growth of revenue is and whether it's via via acquisition or organic growth and it really is dependent on many things. So it's hard to predict exactly what that margin would be.
Good point, but I think you know obviously, we feel very comfortable in the model range that we're in right now.
Okay, and what sort of debt payments should we expect in Q4.
We haven't made a final decision yet, but we are continuing to look at paying down some additional debt and so I would say, we would probably see a little bit of an additional payment like we did last quarter.
But I don't have a specific now at this point.
Okay.
And Jim earlier in the discussion you mentioned, a sizable new wins with an OEM and then some new designation went away. So customers are you able to give us a little more color on those two items.
Yeah, I'm I'm, one of the our existing high very high volume customers. They haven't built a lot actually they just haven't built any brick and mortar new capacity and as you could see the industry continues to push towards you know new highs in nwfp. So outsourcing is has always been part of their sales.
Energy is so it's even more important now as we continue to push to new highs in the industry. So so so as they look to move things out of their factory you know we've been bidding on some of those projects and one of the nice sizable ones have come through in the last quarter. So we were we were happy to report that.
Obviously, you know the live oak so live so a customer we've been in it you know.
On a long term engagement with them.
Really kicked in about a year ago I'm, even more direct.
Work with them and our engineers have been embedded with their engineers and we're working on a lot of the new new tools that those that are not yet released so far.
Fortunately revenue for those you know it takes a while to to go up for us because it yeah. They have to release the tools and start to see volume, but it's exactly it's exactly what we want to do which is get involved right into the front end of the design be be involved in the whole rollout, helping helping them get there.
Product you know to the market and then.
And then be coming the you know the high volume production house for those products as they roll out. So we're really pleased with our work there and we're starting to see that really pay off as as we you know we won.
The status of being a design in a production partner for them.
Okay, great. Thank you and congratulations on a strong quarter.
Thank you Dick.
Thank you.
Our next question comes from Tom Diffely with D.A. Davidson. Please go ahead.
Yes. Good afternoon, I guess first what was the timing on the list so engagement.
That's just a 2021 story.
Yeah, I think you know we see we have current revenue going out release products with better company now, especially through one of the acquisitions that they made about five or six years ago that that division to their companies than a longtime customer.
So we see we see incremental production here or there on some of the existing tools.
But definitely it's mid to late next year, where we started to see you know the revenue ramp on the new products that are rolling off that we are engaged with them on.
Okay, Great and then I was little surprised when you talked about your logic conversion and how it was going to just slow things down a little bit for a quarter or so I always thought that when a company went through a transition like that there was a lot of annual or preventive maintenance that they would do that would actually benefit your claims business.
Yeah, I think obviously there there is definitely some some element of that you know offsetting the fact that the the fab will be you know down.
For the majority of the quarter, so obviously that.
Reduces a lot of the hedging in the coatings that go on that require you know our business to come in and clean the tools. So yeah that definitely there is some offset.
From from parts coming out to be to be a p. managed but there's also obviously a lot.
Less cleaning cycles, when when the fab isn't isn't up and running.
Okay and final question on the new Malaysian facility, obviously increases capacity nicely, but you also talked about the cost reduction is most of that coming from just reducing output from higher cost regions or is it more of a shipping and logistics cost savings for being closer to your customers and suppliers.
Mostly it's you know is reducing the you know the cost of manufacturing there is a.
No it isn't a very great logistics places well, but most of the logistics cost for our product out the door are borne by our customers. So an inbound logistics is relatively straightforward. So it's the majority of that is products that being is being are being produced in hiring.
Cost regions will be transitioned over to Malaysia, where they have a lower lower labor costs.
Okay, Great and I appreciate your time today.
All right. Thank you Dan.
This concludes our question and answer session I would like to turn the conference back over to Jim Scholhamer for any closing remarks.
Yeah. Thank you everyone for joining us and we look forward to speaking with you again next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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