Q4 2020 Ultra Clean Holdings Inc Earnings Call
Good afternoon, and welcome to the ultra clean fourth quarter and full year 2020 conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask the question you May Press Star then one on your Touchtone phone two.
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I would now like to turn the conference over to Rhonda <unk> Investor Relations. Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining US with me today are James Shellhammer, Chief Executive Officer, and Sheri Savage Chief Financial Officer, Jim will begin with some prepared remarks about the business and Sheri will follow with the financial review and then well 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 the non-GAAP basis, a reconciliation of GAAP to non-GAAP can be found in today's press release posted on our website and with that I'd like 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 the short review of our full year results and briefly touch on our fourth quarter performance.
Then I'll share my thoughts on the industry and how technology advancements are benefiting you see T. As we execute on our growth strategy before turning the call over to Sherry for a financial review then.
Then we will open up the call for questions.
For many reasons Twenty-twenty was unlike any year, we've ever seen but by every measure it was an extraordinary one for UCT.
I must start by thanking our global employees for their commitment resiliency determination and drive to be the best.
The team rose to the challenge and continue to exemplify our culture of integrity and teamwork.
Some of the best financial results, we have seen in our 30 year history.
UCT added 2020, where the record total revenue of $1 4 billion record operating margin of 11, 3%.
And record EPS of $2.80.
While significantly outgrowing the overall Wi Fi market by 11%.
The reach these extraordinary milestones in the year of fraught with challenges, we continuously adjusted to the changing work environment, while staying focused on meeting customer demand and delivering strong returns of shareholders.
The fourth quarter benefited from ongoing strength in foundry and logic as well as increased demand in memory as customers plan for expansion and equipment investment in 'twenty and 'twenty one N b on.
Both of our product and service division saw increased engagement across all segments of the market, resulting in another quarter of growth and improved operating leverage.
You see T remains solidly on track to outpace the accelerated growth of our served markets again in 'twenty 'twenty one.
Technology advancements within our data driven economy continue to fundamentally change, how we live and work.
This digital transformation is accelerating the adoption of semiconductor growth drivers such as artificial intelligence high performance computing Iot and five G.
Capital intensity at the leading edge is increasing to support a more diverse set of end use markets, which provides confidence for strong multiyear WSB demand.
Our business is well balanced in both of our product and service businesses have broad exposure across all device types.
This bodes well for UCT as we continue to engage in the early stages of customers' technology Roadmaps.
A key components of UCT delivering on its long term growth strategy is the acquisition of hamlet.
The pre closing integration planning process is going very smoothly and we are excited to begin operating as one company after clothing likely early in the second quarter.
Adding hamlets of our broad and growing suite of vertical capabilities will support our customer partnerships with the significantly broader higher value higher margin portfolio of market leading product solutions.
Youll recall that have much components are used primarily within our current GAAP panel product line as well.
Well, it's for gas distribution throughout the semiconductor tools.
In addition, GAAP the Liberty is a significant element of the sub fab infrastructure within chip, making facilities, providing an additional platform for growth.
By leveraging uct's solid customer relationships on global operational footprint, we see a sizable opportunity to grow hamlets, 5% share of the 2 billion dollar market.
You'll see teased new facility in Malaysia remains on track to begin the initial production in the third quarter. This year.
This state of the art facility will enable us to better serve and bring value to our local and global customer base.
The facility enables us to provide additional capacity ensuring business continuity to meet ongoing demand.
There has never been a better more opportune time to be of manufacturing leader in the semiconductor industry.
Our customers and their customers are well positioned at the forefront of the technology around the time and we see our existing partnerships expanding with them as they Houston to advance their technology Road maps.
Our comprehensive portfolio of product and service offering together with our strong physical discipline on resilient business model will drive continuous long term performance and profitability with the goal of returning even more value to our shareholders.
Our guidance for the first quarter reflect an increase in business across our entire customer base.
Industry sentiment backed by our internal market analysis project momentum continuing through 2021.
Before handing the call over to Sherry I want to again, thank our employees and our suppliers for the incredibly hard work. This past year and we look forward to again outperforming the markets. We serve in 'twenty 'twenty, one and with that I'll turn the call over to Sherry to review our financial performance.
Thanks, Jim and good afternoon, everyone. Thanks for joining us on today's discussion I will be referring to non-GAAP numbers on.
Total revenue for the quarter was $359 $6 million.
One 7% from the prior quarter.
Our products Division grew one seven per cent to $299 5 million and our services business was up one eight per cent to $70 $1 million, both on increased demand across the customer base.
Total revenue for the year was a record $1.4 billion up 31.2% from the prior year.
<unk> generated revenue of $1 1 billion and services contributed $267 $4 million of $34 five per cent and 18, 7% over 2019, respectively.
Total gross margin for the fourth quarter remains at the high end of our model of 21.5 per cent compared to 21% last quarter.
Product gross margin was $17 eight per cent compared to 17, 5%.
And services gross margin was 37.5 per cent compared to 36% last quarter.
Margins margins can be influenced by customer concentration geography product mix and volume. So you can expect variances quarter to quarter.
Total gross margin for the year was 21, 4% up from $19 three in the prior year.
Once the Hamlin acquisition is closed we will take the opportunity to review and adjust our model.
Operating expenses for the quarter were $35 $7 million compared to $34 3 million in Q3 due to typical costs related to year end.
As a percentage of revenue operating expenses increased to nine seven per cent compared to $9 four per cent in the prior quarter.
As the result of our revenue increasing by 31, 2% year over year operating expenses as a percentage of revenue declined to $10 one per cent.
Compared to $11 five in the prior year period.
Till the total operating margin for the quarter increased to 11, 9% compared to 11, 6% in the third quarter.
The margin from our products Division remained flat at 10, 8% and margin from our services Division was $16 three compared to 14.9 of the prior quarter.
Total operating margin for the year was 11, 3% of Sig.
The improvement from the seven 8% in the prior year due to higher volumes and the ongoing management of expenses.
Based on 41 4 million shares outstanding earnings per share for the quarter were 81 cents on.
Net income of $33 $5 million compared to 73 cents on net income of $29 9 million in the prior quarter.
For the full year earnings per share were $2.80 on net income of $115 million.
Compared to $1 16 on net income of $46 5 million in 2019.
Our tax rate for the year was 18% compared to $18 one last quarter.
For the full year, our tax rate was $18 four per cent.
We expect our tax rate for 2021 to remain in the high teens.
Turning to the balance sheet, our cash and cash equivalents were $203 million at the end of the fourth quarter compared to $176 1 million last quarter.
Cash from operations was 44 point of $4 million an.
An increase of $24 seven.
From the prior quarter.
For the full year, our cash from operations totaled $97 3 million.
We have made significant progress paying down our term b loans over the last couple of years.
During 2020, we made additional voluntary term b loan payments totaling $818 $4 million.
Bringing our total debt repayment for the year to 25 million.
A key component of our overall growth strategy is to ensure we are ready to capitalize on expansion opportunities, while maintaining an ideal level of operating leverage as mentioned on your last call. We are currently reviewing our capital structure to support the strategy. So that we may consider of healthy balance sheet and maintain flexibility.
We anticipate revenue for the first quarter to be between $375 million and $405 million.
And EPS in the range of the 80 to 93 cents.
And with that I'd like to turn the call over to the operator for questions.
We will now begin the question and answer session to ask the 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 to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Okay.
Our first question is from Tom Diffley with D. A Davidson. Please go ahead.
Yeah. Good afternoon first of all wanted to check on the Hamlin acquisition. It sounds like the close was moved from the first quarter into the second quarter and I was wondering if there's any big hiccups at this point.
Yeah, Hi, Tom.
Yeah, we don't really don't consider it glues the move.
Moving on we talked about it being the ended the first quarter early second quarter and now we're still.
Projecting in the timeframe you'd get most likely early in the second quarter.
We're still with our one clearance from one of our government.
But we don't see that there'll be any issues of that.
Okay that sounds good and then when you look at the of the ramp of Malaysia. It sounds like it's on track for the third quarter. What do you do between then and now to ramp up capacity, if you needed to know.
So things are getting stronger in the first quarter, but then at the grille get on the second quarter, we have enough capacity on hand before the facilities done to handle.
Yeah, absolutely I mean, we always have a significant amount of the burst capacity.
Hum.
Different things that we can do with overtime and extended shifts and things like that so we definitely it's not of concern in the short term obviously as we see 'twenty one of 22 continuing to strengthen on the long term that additional capacity in Malaysia is going to really really pay off for us, but yeah. The there'll be no constraints and look forward in the in the near term.
Sure.
Okay and then final question when you look at you know the.
The kind of the consensus view of that for 15% growth of the industry.
The thing you seen correlate with that.
Yeah, Yeah, we see obviously part of the <unk>.
The 15% number that a lot of people are talking about definitely seems like a reasonable estimate there've been a lot of announcements you know, especially on the foundry side of things are true.
Support that.
You know as well as you know memory.
Memory.
Moving into more of capacity adds.
And this year, you know versus the you know the.
No the experiences that they were mostly focused on the last year. So we still think everything plenty of up really well for for strong growth in that range for 2021.
Great I appreciate your time today.
Yeah. Thank you Tom.
The next question is from Krish Shankar with Cowen and company. Please go ahead.
And I think of the question I had a couple of the Jim just to pull up on Tom's last question. You said that you expect the outperformance of continuous if you'd think WP is gonna be up 15 person dispute of is it fair to assume.
You'll revenues could be higher than debt.
Yeah, obviously, we're not guiding for for all of 2021, but.
Our are our target is the always outgrow WSB, we've outgrown that on an average of about 10 points over the last five or six years and obviously some years are higher and some of our lower than others, depending on many factors, but yeah. Our our aim is to continue to outgrow WSB.
Roughly on average of 10 points.
Got it got it and then Jim I think of the last call you kind of spoke about some.
Attention of crude designed into the ASML I'm kind of curious when do you think the transfers into tangible revenue.
Yeah, as I mentioned that the.
That's the the that's the kind of a long of long term goal on over a few years and there are several reasons. The you know a lot of the wins in a lot of the.
Work that we're doing our other next generation tools and the.
Litho space and so so those obviously you have to go and get adopted in the they have to ramp up you know on their own and also the wins the wins come in you know.
I mean, they come in in chunks, you know along the way they don't come in one big.
Yeah, the one big movement of Oh.
Operations from from you know into into ours. So you see you know on any given quarter, you'll see several several wins in certain.
Sub modules <unk> modules of components in those as those continue to.
Kind of stack up on each other over time as well as you know the new tools really started the rollout as they as they introduce them to the market. The that's the that's where we see kind of of a slow general growth over the next several years and our target to get that space up to our reportable segment.
Got it got it and then the final question for Sheri.
Looks like the Malaysia facility is on track for the second half of them I'm just curious how do how should we think about gross margin.
In the second half of the field of as debt facility them two of them.
Yeah, you know I.
I think we'll take a look at how that will affect our model over the course of the year right.
Right now we see ourselves itself is still at the high end of our model, especially now that we're starting to get into the one $5 billion to $2 billion bucket that we put out in our in our in our model. So you know, we'll see some increase in margin but.
We will see how that flows through with the volume of revenue that that flows than at the latter half of the year.
Got it and I think kind of Jim sanctuary.
Thank you.
The next question is from Quinn Bolton with Needham and company. Please go ahead.
Hey, guys. Congratulations just wanted to follow up on the last question just about the the gross margin effects of Malaysia, I assume that as that comes on line.
You were saying that you think that that's margin accretive and it could be a tailwind of the second half I just want to make sure I got your comment correctly.
Yes, it just really depends on the amount of volume going through so obviously it is the lower cost region for us and that will obviously help us from a labor force labor perspective on the volume is really the key thing there in terms of how much goes true, but yes. It could be helpful to get us continued to have us be at the higher Ed.
The bar, our gross margin model and the impossible possible expansion, we will be looking at a model is as mentioned before once the Hamlin acquisition comes into play and we'll be taking a look holistically across all of our product lines to provide a update the model based upon that.
The second question for me the the services business are actually growing in the fourth quarter surprised us I thought you were looking for potentially a step back in that business in the December quarter is one of your large customers went through a fab transition doesn't look like that had an impact on the business. So just wondering if you could give us a little bit more.
Color on the services business and do you expect that to grow sequentially in the March quarter.
Yeah, we we saw some yeah, you're right I mean, we definitely saw a temporary oh.
The slowdown in the.
And the from from the Israel logic.
Right as we had talked about before we saw a little bit more strength.
In the memory side of things in Korea.
We had anticipated.
And I think we do see that that will continuing and then with you know with the fab conversion kind of coming back in logic and the in Israel. There. We you know we would expect to see service continue to grow sequentially over the next quarters.
Yes.
Okay, Great and then the the last question for me I understand youre, not giving guidance for.
For the full year, but it sounds like you know 15 per cent W. P growth you guys target growing faster than that can you make any comments about linearity sort of first half versus second half is there've been you know there's been some debate in the industry as to whether it's the front half weighted year or more of a balance or even on a second half.
Did you or just any thoughts you have on kind of first half versus second half would be helpful.
Yeah, Yeah, we've been following those comments as well obviously.
The first half benefits from improved visibility.
And it looks it looks pretty strong as we look at the end market fundamentals, though you know I think of lot of the second half.
And in 2022, and an increasing you know the strength kind of it.
Pounding from that you know, it's kind of a little bit dependent on the more NAND NAND capacity adds versus the technology moves.
So memory, which is starting to add capacity you know continuing to accelerate so.
It's difficult, it's really difficult to call I mean, obviously people call. The first half because that's what we can see pretty clearly, but I I don't know of I would call a U.
Would make a call at this point the you know that the first half is going to be stronger than the second half of it is really I think it's really too early I havent looked at it as the first half is pretty strong very strong.
And then we see a lot of you know downstream indicators that there's no reason why the second half Shouldnt continue but you know.
Theres always with the caveat of the unusual events that occur.
So it's really too early to say I think our I think the the entire year of being pretty strong as kind of the is it's definitely of the consensus on that end and if there is any waiting I don't think it would be significant.
So kind of my view.
Great. Thank you Jim.
The next question is from Patrick Ho with Stifel. Please go ahead.
Thank you very much for taking the question and congrats on a really nice end to the year.
Maybe first off on staying on the surface of side for a second on the parts cleaning business typically utilization rates are a key driver for that business and obviously you saw that on the memory front, but can you talk about any potential incremental increases in that business due to the complexities of devices.
Maybe more specifically on memory, both NAND and DRAM.
They get more comps of complex do you see quote increasing I guess content on increasing services use because of the complexities of those devices on top of high utilization rates.
Yeah, I think that's the that's a fair assumption that definitely.
You could see the cleaning cycles accelerate like they are towards the you know the leading nodes of not logic, which would obviously caused the higher cleaning intensity if you would.
And in addition to that it also requires more of the leading edge kind of cleaning applications of more complex complex approaches to it which I believe the pits.
Well well into our Bailiwick and then <unk>.
Third then you still have you know why is it pushing some some pretty extreme dimensions of with seven and five and three nanometer, which is adding new requirements to two cleaning which is so the the coding of the texturing other parts.
For yield of particle control of starting to become a more significant.
Added process that you don't tend to see at those at those are those the.
The older nodes. So I think there's kind of three factors that really hum.
In the play that should should help you use it the the cleaning the cleaning in the analytics business to do.
You know to really maybe start to part ways with wafer starts and actually become a.
Grow a little faster, but I think it's kind of early days does the oh that on.
Of that happens, but I think that's definitely something kind of cooking is of those.
Those forces are of building up you're also seeing a lot of those.
Those devices started moving into more of a vacuum based on them.
But the even some of the litho applications that started to become more of vacuum based so you see you know.
Other you know another tailwind coming out of there so all of those things added together.
It's both.
Pretty well for for that segment of the industry to really really grow grow at an accelerated rate.
Yeah.
Great that's helpful. Jim and maybe as my follow up question you guys performed really well last year in 2020, despite the pandemic.
The issues.
Can you describe the supply chain debt.
The supply chain situation that you have right now and whether you feel you can meet the increasing demand that we're seeing.
In the current environment.
Yeah I think.
In the Asia the.
Factors of Covid on the supply chain. The last few quarters has been minimal to almost nothing.
The.
In the U S.
And in Europe to some extent to around the holiday season.
It was definitely something in the fourth quarter that we had the deal was with the suppliers of Uct's hasn't been directly impacted in any way the significant way Mike.
By any COVID-19 events, but but.
But we and we saw that at the beginning of the of the quarter that we're in but I think we're seeing less and less of them.
The Coke Covid related supplier issues you know.
It's now is the is the typical issues when you're ramping yet.
Ramping the <unk>.
Fire issues that come up but it's not so at this point at this point in time.
The knock on wood it hasn't been anything that has been really materially impacting our ability to get our output.
Great. Thank you very much.
Thank you Patrick.
The next question is from Christian Schwab with Craig Hallum Capital Group. Please go ahead.
Great.
I have one quick question follow up on memory have you seen any change in the last 90 days in your outlook.
Between DRAM and NAND.
Not much of a change I mean NAND is at the end is still kind of where we thought.
The people starting to.
Continuing the trend the you know the transition to.
So the 120 of later layers I think in the last quarter or two we start seeing the 176 layer of pilot production startup that was anticipated, though but we're starting to see some of that.
The kind of pick up but no real no real major capacity adds yet in NAND.
And then still a little bit kind of like the last cylinder the kind of the really really go forward with capacity.
DRAM is kind of moving along as we expected after the price has stabilized after the utilization of the fabs existing fans went up.
We started to see you know of DRAM capacity, especially in Korea and in the.
And then she on.
Some areas, we started the DRAM capacity adds start to roll in.
<unk>, which we also anticipated so I mean, those things are happening, but the I think that was kind of how we saw the year rolling out.
Okay. The only reason I ask is.
All of our checks have suggested that the utilization rates of.
Immediately of troops as of December.
So it appears that debt improvement has not yet led to.
Any day.
The euro here regarding the increased wafer starts there.
Sir.
That's correct yes.
The the first indicator of those utilization rates going up.
The next step is typically the discussions around the.
Their plans around the capacity adds and that's still.
That's still have we haven't seen that take place yet.
Great no other questions. Thanks, guys.
Thank you Christian.
Showing no further questions. This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Yeah. Thank you very much for joining us today, and we look forward to speaking to you again next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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