Q2 2021 Ultra Clean Holdings Inc Earnings Call
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Good day and welcome to the Ultra Cool technology second quarter 2021 conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star followed by zero.
After today's presentation there'll be an opportunity to ask questions.
I'll ask a question you May press Star then 1 on your Touchtone phone to withdraw your question. Please press Star then 2 please note. This event is being recorded I would now like to turn the conference over to Rob that Bernardo. Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining US with me today are Jim 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 a financial review and will 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 and our SEC filings. All forward looking statements are based on estimates projections and assumptions after day 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 and with that I'd like to turn the call over to Jim Jim.
Thank you Rhonda and good afternoon, everyone. Thank you for joining us today.
I'm going to start with a brief review of our second quarter performance, while sharing my thoughts from the industry and how you see T continues to increase its value with it and semiconductor ecosystem.
After that I'll turn the call over to Sherry for a financial review and then we will open up the call for questions.
And maximizing our current market position and capabilities and consistently working to meet customer demand you see T again reached new revenue and EPS milestones.
Total revenue for the second quarter was just over 515 million, a 50% increase year over year, and EPS grew 32% to nearly $1.
Over the past 5 years, we have consistently outperformed the markets we serve.
This track record combined with our commitment to investing and our future paves the way for a very exciting road map for growth in 2020, 1 and beyond.
And the semiconductor industry continues to be stressed by record high demand, we are leveraging our leading position as the partner of choice to help our customers and their customers accelerate the rapid migration towards next generation devices.
The global semiconductor industry has historically been driven by demand from electronics, such as smartphones and computers.
More recently continued enhancements of existing products and the inclusion of emerging technologies, such as AI and <unk>.
G networks and high performance computing applications are creating sustained demand increases across a much broader end market.
This megatrend is enabling greater visibility with multiyear record breaking industry Capex plans for leading and trailing edge capacity to support the extended ramp.
Uct's broad spectrum of products and services are increasingly relevant to the success of our customers and.
And this gives us a significant competitive advantage.
We are 1 of the few semiconductor focused manufacturers with a proven ability to.
And I believe support the dynamic product roadmaps and stringent quality levels required for advanced chip manufacturing.
To ensure we are ideally positioned to deliver value quickly and efficiently to our customers worldwide, we are making strategic investments to expand our capacity to provide additional leading edge and specialty capabilities to support our growth strategy over the long term.
Our new state of the art facility and Malaysia is on schedule and customer qualifications are beginning this month.
Fortunately, we are located in northern and Malaysia, where Covid cases remained low compared to the rest of the country. So we have seen no interruption to speak of.
We remain on track to start initial production in early September and unexpected progressively ramp this year and into 2020.2 to meet our customers' increasing needs.
The timing of this additional capacity is a deal is it strategically expands our capabilities and existing and new customer platform and an optimal time.
Our broader capacity expansion program stretches beyond Malaysia and include strategic investments designed to capture the many significant profitable growth opportunities, we see not only and wafer fab production equipment, but also and service.
Fab support equipment and infrastructure as well.
And the industry continues to transform at a very rapid pace.
We will continue to engage with our customers to design manufacture and service the best products and the best way possible to address their needs and a sustainable manner.
The global Pet and it continues to be a risk factor as adult theyre very good spread and quickly across many regions.
Like we have done since the pandemic began UCT will continue prioritizing the health and wellbeing of all of its employees, while ensuring business continuity.
All safety protocols and a P. C. P playbook remain in place at each site and all UCT facilities remain fully operational.
We are extremely grateful that we have had zero employee to employee transfer and some of the virus within our 6000 plus global work force since the pandemic began.
We continue to work closely with our supply chain to increase resilience and for them.
Business continuity across all our products and service lines.
121 is shaping up to be another year of outperformance for U C. G.
Our growing suite of capabilities additional capacity.
Strong balance sheet ideally positions us to capitalize on the robust demand trends returning considerable value to our shareholders over the long term.
Before handing the call over to Sherry I want to again, thank our employees and our suppliers and partners for their commitment and incredibly hard work and we look forward to speaking with you again in a few months and with that I'll turn the call over to Sharon to review, our financial activities and performance Jerry.
Thanks, Jen and good afternoon, everyone. Thanks for joining us and.
Today's discussion I will be referring to non-GAAP numbers only.
Total revenue for the quarter was $515.2 million up $23.4 per cent from the prior quarter.
This division was up 28% to for.
$442.5 million, which includes nearly a full quarter of revenue from harmless amounting to $58.2 million.
Our services division was up slightly to $72.7 million.
Total gross margin for the second quarter remains at the high end of our model at 21.2 per cent compared to 21.3 per cent last quarter.
Product gross margin was $18.8 per cent compared to 18, 2% last quarter.
And services was $36.2 per cent compared to 36% last quarter.
Margins can be and fluid influenced by customer concentration geography product mix and volume share there will be variances quarter to quarter.
Operating expense for the quarter was 48 point for $48.9 million compared to $38.1 million and Q1 due to the acquisition of bottom line.
As a percentage of revenue operating expense was $9.5 per cent compared to $9.1 per cent and the prior quarter.
Total operating margin for the quarter was 11, 7% compared to $12.2 per cent and the first quarter.
Margin from our products Division with 10, 9% compared to 11, 7% and the prior quarter.
And services Division was $16.7 per cent compared to 14, 3% and the per quarter.
As we mentioned when we purchased omelet their operating margins are below our typical product margin range with synergies and we will continue and improve the products operating margin over the coming quarters.
Based on $44.3 million shares outstanding earnings per share for the quarter were 99 cents on net income of $43.7 million.
Third and 92 cents on net income of $38.2 million and the prior quarter.
Our tax rate for the quarter was $17.6 per cent compared to 18 per cent last quarter.
We expect our tax rate for 2021 to state and a high teens.
Turning to the balance sheet, our cash and cash equivalents were $451.4 million at the end of the second quarter.
Compared with $264.3 million last quarter.
A significant portion of the increase was a result, and the equity offering and April 2021.
Cash from operations was $51.1 million compared to $65.6 million and the prior quarter.
During the second quarter, we made and additional voluntary payment on our term b loan and the amount of $25 million.
Before we review our guidance for the third quarter I wanted to share a change to our services joint venture and Korea.
We have recast our arrangement to purchase additional shares of the JV to remain much more flexible.
This change will not impact revenue or operating margin.
Reduced our reported EPS and future quarters.
And the third quarter, we anticipate revenue between 520 million and $560 million and.
And increase of 5% using the midpoint, we expect EPS and the range of 94 cents to $1.10.
Our EPS guidance includes a 3 to 4 cents impact from the joint venture change I just noted.
And with that I'd like to turn the call over to the operator for questions operator.
Thank you we will now begin the question and answer session.
And the question you May Press Star then 1 on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing for Ts.
To withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
Yeah.
For first question comes from.
Cursing and car with Cowen and company. Please go ahead.
Yeah, Hi, Thanks for taking my question I actually have 3 of them first 1 for Jim or Sheri just a quick housekeeping question, you said homelink growth of 58 million in June.
How much is harmless and your September guidance, and then ask you hold them for it.
Yeah.
And we have not we didn't break that out, but I would anticipate it would be similar to up shield and the amount that they did and the Q2 timeframe.
Got it got it okay fair enough. Thanks for that and then a question for Jim.
What is the visibility today.
Is it into the December quarter, or even into 2020.2 and the reason I'm asking is does the posture. All this outgrown W. C and since the last 1 is called the debt with the outlook as he sees for over 30 book from the field.
And they do the math that basically means that the December revenue has to be.
Al if you wanted to Oh.
So I'm just kind of curious what Elizabeth and.
If you can give any color into December.
Yeah.
Yeah, Chris Thank you.
Yeah, we certainly are not forecasting out through December or through the March quarter.
But I think it's safe to say that all throughout the industry, we see a free salad forecast out out through the end of the year and into next year.
At this point, it's really a case for the whole industry more gated by the ability the ability to really produce the wip tools rather than orders are orders on hand, So I think we see and unusually long a trail of orders heading out several quarters, which normally normally we don't see.
Yeah.
Got it got it and then a final question for Sheri.
Just from the operating leverage you know clearly revenue excuse me June but margins were kind of flattish and then Kai.
And your guidance based on our September and looks like that and it's improving but EPS is kind of still not that much. So it's harmless.
And we need or do you think the incremental operating leverage.
Kind of waning now that the.
E V moved.
Yeah, no from and.
Hum and definitely accretive to the gross margin, but as I mentioned in previous calls, they're not accretive yet from an operating margin perspective, we anticipate that we'll be able to get them and to our products range from 8 to 10 per cent and the next couple of quarters and they're adding a specific amount of.
Opex et cetera, and costs that will continue to work on along with revenue synergies over the next couple of quarters, but that's what will help us see that operating leverage as we continue to move forward with that.
So that's really the 1 of the key contributors.
Well as we have to continue to.
And then.
So that we can continue to grow so we will continue to work on that as we and even before that.
And I think essentially thank you.
You're welcome.
Our next question comes from Quinn, Bolton with Needham and co. Please go ahead.
Hey, guys congratulations on the results and outlook and Jim wanted to start with the overall industry capacity constraints and specific to U C. G. How are you feeling about your ability to manufacture to demand I know you've got Malaysia.
Ramping and September but you know how how tied are things now and do you feel that your business is constrained through your manufacturing footprint or do you think.
To be able to meet demand based on your manufacturing capacity today.
Yeah. Thanks, Glenn I think overall, we're doing a pretty good job of keeping up.
And with demand and making the deliveries debt that are that were expected and make them more case of the ability of our the whole industry to really absorb the other parts you know if we make a module on time or we make.
For a long time, you know there's other elements to that that have to also be ready. So I think you know it it's really a case, where the whole industry our customers and our peers are also.
And so kind of hand to mouth right now so even when we're able to make deliveries for a little bit constrained and win and win the whole you know the whole tools ready to go if you would.
So, but I think we're doing it we're doing a pretty good job and our.
Keeping up but it's I think 1 of the few times I've seen and the industry where are you now maybe 2030 years ago. It happened and the late nineties, where where the revenue is really gated by.
And not buy orders by by the ability of the whole industry to keep up with things.
Yeah.
Got it and second question for me and I know, you've only had a Hollywood under your belt for for about a quarter now, but wondering if you could give us any update on your ability to begin qualify and those home like components on your gas panels to try to capture additional no value and that and that sale.
Yeah. Thanks for that question demand demand is really strong across the board for Hamlin, we're definitely making progress with all the engineering and drawing changes needed to really set that up the.
And the book to Bill and that business is really high right now and so that work, where we're doing the qualifications and getting in place is really setting us up for next year and I think at this point, where we're doing everything we can to kind of increase the capacity of Oklahoma and so just to meet the orders on hand.
It is definitely I'd say around the time that we closed on the business we saw orders.
Really spiked up pretty dramatically and that space.
That's that's great and then Leslie for for Sherry I, maybe I missed it but can you just walk us through the JV change and why that's dilutive to EPS by.
And by 3 or 4 cents per quarter.
Yeah, absolutely. This was something that was put in place by quantum clean and before we purchased them and and basically there was an obligation to buy up to 86%.
Of the JV and as a result, we were able to consolidate profit up to 86%. So what we're doing is basically taking away the obligation and make it optional and we still own a majority of the of the JV greater than 50 per cent and really what it allows us to deal with and it gives us and you know as.
As we continue to look at M&A as corridor or strategy. It really allows us to maintain flexibility with our with our capital and so that it's more beneficial to shareholders and if we decided we wanted to buy up to that amount and we will but it just gives us more optionality versus obligation.
And so will you just effectively be recorded and a higher minority interest so that you.
Historically, you had 86 per cent of of that JV and flowing through your income statement and now that it's you don't have the obligation and you'll have a lower than 86 per cent of profit effectively flowing through the income statement.
Correct revenue and operating margin will stay the same will just have a bigger adjustment a profit below the line in other income so you'll see a little bit larger and back out a profit and the other.
Other income and interest line and that's what the effect is treated for sensors.
Got it thank you.
You're welcome.
Your next question comes from Patrick Ho with Stifel. Please go ahead.
Thank you very much and congrats on the nice quarter and outlook, Jim maybe to follow up on the capacity constraint question I'll look at it from a different angle of supply to the strength based on your results and outlook and it looked like you managed that very well why did you experience any I guess meaningful supply constraints.
And secondly, if not what have you been doing differently or how have you been able to procure the necessary supplies.
To keep up with your customers and demand.
Yeah. Thanks, Patrick.
We definitely.
And I had some level of constraint happening from some of the kind of the bill that they built in O P M to call them original part manufacturers.
So that definitely throttled back our ability and ability we could have delivered more revenue and now we met the customers' needs, but we could have delivered more if we had been able to procure more of.
Some of those old P M parts.
I think when qualify them for them got hit with a 210 day or 2 week shut down we were not affected and some of our competitors were so we were able to pick up from additional business within this quarter, and and probably this quarter and little bit as well and.
So there's some puts and takes them over and what I would say, we've been able to meet the customers' needs and but because of some of those constrictions. We when we we were we were.
And the constraint and delivering the amount of revenue we could have delivered more revenue this quarter without those issues.
Yeah.
Great that's helpful and maybe a question for share in terms of our.
Gross margin and you.
And there's a lot of moving parts to it but as you get the Malaysia facility ramped up.
We there are startup costs associated with it but given the I guess the high demand that we're seeing out there.
Right to assume that you could absorb that capacity faster and I guess, the normal time startup costs could be a little bit less and you could get gross margin is or I guess, you could keep gross margins at these elevated levels.
Because of the high demand.
Yeah, I do think that we are able to absorb the majority of those costs and you know it.
Malaysia is going to and really be something that sounds probably more impactful to 2022, but I think as we slowly started up I don't I don't see there being a huge drag on and on our margin as a result of that.
Great. Thank you very much.
Thank you Patrick Patrick.
Our next question comes from Christian Schwab with Craig Hallum Capital Group. Please.
Please go ahead.
Hey, guys congrats.
The other another good quarter and outlook can you help us understand what's the remind us probably.
How much revenue.
You you could get from the new Malaysian facility.
<unk> and 'twenty, 2 and it would it be running that are at full capacity by the end of 'twenty, 2 or do you think it would take longer.
Yeah, Hi, Christian Thank you and yet the full capacity when it's all built out and 2 to 3 years. The maximum is roughly around 600 million and revenue.
And there's always some wiggle room and there is I think through 2020.2.
I think our estimate is something around a third of that would be utilized.
And but the 600 billion and not.
And our requires some additional hiring and building out a different clean rooms and things. So so we're doing the capacity and different stages there'll be ultra capacity of 601 billion roughly a third of that and who is available and will be available right now and we expect to have that kind of filled out by the end of the next year.
Great and and given kind of the day that the tightness and and the strength of the wafer front and equipment market in general or you already securing the orders for your September production and into 'twenty 2 for that facility as we as we sit here today.
Yeah, 1 of the phenomenon, we're seeing and so a lot more.
And a lot more working together with our customers to secure long lead time deals from them, which therefore, we are able to and.
Cover that cover those P O us back through our supply chain. So we're getting.
A lot of great cooperation from our customers to do really.
You know put put the money down and put the orders in and work then we're able to to lay out our long term orders and with the supply chain. So that's definitely 1 of the things that you know as we're.
For entering our third year of this big ramp we're seeing a lot a lot of improve.
Improved cooperation between all parties. So I think we're in good shape.
And then lastly would you guys still expect as we go through Oh, the way for front end and equipment spending cycle for you guys to you know.
Grow.
W. B by you know at least 10 points on a go forward basis.
Everything you're seeing are still suggested that and point to that.
Yeah definitely absolutely I mean, obviously this year.
And if you look at the inorganic you know the acquisition of hamlet that kind of puts us already and that you know in that territory.
And then on top of that we're doing very well with the.
And the organic side of our growth equation, which is a share gain continued outsourcing that were seeing from from our customers.
And our continued a continued penetration of <unk>.
A little the litho space and where we're heavily engaged so I think I'm very confident that this year. We will do we will easily hit the 10 points and and hopefully much beyond that.
Yeah.
Great no other questions. Thanks, guys.
Thank you thanks.
Our next question comes from <expletive> Ryan with Colliers. Please go ahead.
Thank you so Jim can you give us your views on Wi Fi and wafer starts kind of a second half of.
This year and maybe some commentary on next year.
Yeah, I think you know WSB.
And a lot of the prognosis is.
I think we're in pretty pretty much the same boat as our customers I think there they're looking at roughly a <unk>.
80, 80 billion 80 billion plus you know perhaps.
Yeah, I think we're we kind of see that their wafer starts are a little bit or a little bit slower just because the fabs are running full out so theres no utilization to really you know to really soak up so the wafer starts are growing as the equipment goes game.
And so we're seeing wafer start growth, but you know it's really at this point a little bit tapped out D. G I.
I think every single bad debt.
And that we know is running you know running at at.
At full capacity, so I think.
I think we're in pretty much lockstep with what you know the big Oems like applied and Lam Youre, saying.
Which as you know roughly 80 to 85 billion and I think and they're also they're also predicting a pretty strong.
For 2022, as well and I think and also the consensus and the second half of this year will continue to grow.
Okay.
It was pushed out of the quarter with the constraints that you saw.
Yeah, I mean I think.
I wouldn't say pushed out, but I would I would definitely determined we probably could have done and another $20 million to $30 million or so but I think many companies have the same story.
Yeah.
And then share was there any margin hits.
And all material cause logistic issues from the supply constraints that hit the quarter.
And I think 1 of the things that we're still trying and it's still seen is and freight costs being quite high I think a lot of companies are seeing that as being kind of 1 of those are expenses that have come in higher than than we had pre COVID-19. So I would say that that's something that I would anticipate probably been ongoing but I think the margin still.
And did very well, despite having such expenses flow through.
Sure. Thank you.
Thanks, Nick.
Yeah.
This concludes our question and answer session and I'd like to turn the conference back over to Mr. Shellhammer for any closing remarks.
Thank you everybody for joining us today and we appreciate it and we really look forward to speaking with you again next quarter. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.