Q4 2021 Ultra Clean Holdings Inc Earnings Call
Good afternoon, and welcome to the ultra clean fourth quarter and full year 2021 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 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 now like to turn the conference over to Ron excuse me rather than that of Investor Relations. 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 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.
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.
Thank you all for joining us today.
I'm going to start with a brief review of our fourth quarter and full year results and then provide an update on current events.
And conclude with our thoughts on why you believe 2022 will be another year of growth for the Wi Fi market.
Following that I'll turn the call over to Sherry for a financial review and then we'll open up the call for questions.
With intense industry demand as a tailwind and UCT executing at peak levels, we are.
Accident, 2021 with record financial results.
Total revenue for the fourth quarter grew 66% compared to the same period last year.
It rose by more than 50% for the year compared to 2020.
Fourth quarter earnings per share grew 50%.
Compared to the same period, a year ago and 50% for the full year of 2020.
UCT consistently outperformed the markets, we serve and outpaces the majority of companies supporting the wip.
These results are extraordinary given the challenging business conditions around the world over the past two years.
I want to again, thank each of our 7000 plus employees for their contributions to our success.
We spun them together as a team.
Leveraging our global footprint and talent pool.
And optimizing our operations.
We were able to skillfully navigate many obstacles and adapt quickly to the operational complexity.
Theater with the pandemic, including global supply chain challenges.
Recently, the army Crown Serge placed additional pressure on already strained supply chain and Labor force.
We are actively collaborating with our customers and suppliers.
Clothing qualifying new suppliers.
To maximize our output capability and meet our customers' delivery schedules.
Uct's global footprint enables us to leverage economies of scale and our procurement teams have found innovative ways to limit risk by increasing resiliency and efficiency in our supply chain.
So a large extent UCT has not been the limiting factor in the supply chain for on time deliveries.
Our global sites have been experiencing elevated levels of skilled labor absenteeism.
However, we have been able to minimize the effect on our delivery schedule and the situation is already improving.
Despite the extremely high levels of demand.
Supply chain constraints may continue for some time and we have factored that into our first quarter guidance.
Our financial performance is not the only measure we use to validate our chipset.
We know we are doing the right things for our customers when we get recognized for our efforts.
Winning Intel's award last year for extraordinary performance innovation and resolve in the face of the pandemic related supply chain challenges.
And then being invited to partner with them on the recently announced Ohio Mega facility.
Amplify our position as a strategic partner of choice and deepen our engagement at the leading edge.
We are constantly challenging the status quo and increasing our position in the value chain.
By meeting our customers' most complex needs and partner early with them on their growth plans.
We entered 2022 from a position of strength in our sector and expect that momentum to continue.
As visibility and demand are greater than they've ever been.
Our capacity expansion plans are progressing not only in Malaysia, but in other strategic locations around the world for products and services.
This will enable us to meet regional capacity requirement.
Expand our global supply chain reach.
And then sure our output capability of lives with the industry.
Continued vertical integration with our current customers and capitalizing on many opportunities we see to attract new customers.
Supports our strategic roadmap for continued outperformance.
Increases in device complexity supporting rapid advances in artificial intelligence.
High performance computing automated electronics datacenter five G and virtual and augmented reality and gave me are the main drivers behind the increase in wip demand.
Supporting this growth will be 20, plus new Fabs currently being built.
IBM already increasing their capital investments to accelerate construction this year.
This is especially true in the U S where significant government support was recently announcing an important step to strengthen the country's leadership in the chip industry.
Based on current sentiment in peer reports and confirmed by our internal marketing expert T. We now expect Wi Fi to potentially reach the 100 billion range by the end of this year.
Uct's broad exposure to the entire pad construction equipment build out and production support ecosystems.
Together with our strategic capacity expansion plans.
The stage for another year of growth for UCT.
In closing we are executing at every level and will continue to drive innovation throughout our comprehensive portfolio of products and services.
To enhance our leadership position.
With demand skyrocketed, the trend towards outsourcing remains intact and UCT has never been more ideally position to expand our business with our current customers attract new customers and gain share over the long term.
And with that I'd like to turn the call over to Sherry for a review of our financial results Sherri.
Thanks, Jim and good afternoon, everyone. Thanks for joining us.
In today's discussion I will be referring to non-GAAP numbers only.
I'm very pleased to report total revenue for the fourth quarter was up 11% over the prior quarter to $615 $1 million.
Our products Division grew 10, 8% to $533 9 million, which includes revenue of $64 9 million.
Our services Division Rose 13, 4% to $81 3 million due to increased sales across the number of customers.
Increased demand throughout 2021 resulted in total record revenue of $2 $1 billion of 53% from the prior year.
Products generated revenue of $1 8 billion.
59, 5% year over year and includes $187 5 million from three quarters upon let revenue contribution.
Services contributed to $297.7 million growing 11, 3% over the prior year.
Going forward, we will be including revenue from public and our products Division financial reporting.
Total gross margin for the fourth quarter with 21, 5% in line with our newly updated model compared to 21, 6% last quarter.
Product gross margin was 19, 1% compared to 19, 3% last quarter.
And services was 37, 1% compared to 36, 9% last quarter.
Margins margins can be influenced by customer concentration geography product mix and volume so there will be variances quarter to quarter.
Total gross margin for the year was 21, 4% the same as the prior year.
Operating expense for the quarter was $54 $6 million compared with $50 9 million in Q3.
As a percentage of revenue operating expense declined slightly to eight 9% compared to nine 2% in the prior quarter.
For the year with revenue up 53% operating expenses as a percentage of revenue declined to nine 2% compared to 10, 1% in the prior year.
Total operating margin for the quarter improved to 12, 6%.
Compared to 12, 4% in the third quarter.
Also in line with our newly published model.
Margin from our products Division was 11, 8% compared to 11, 9% in the prior quarter.
Operating margin from services increased to 17, 9% from 15, 4% in the prior quarter due to higher volumes and operating efficiencies.
Demonstrating strong operating leverage on our revenue growth in 2021 total operating margin for the year was 12, 2% a sizable improvement from 11, 3% in the prior year.
We anticipate additional model accretion as our lower cost regions incrementally contribute to overall revenue overtime.
Based on $45 5 million shares outstanding earnings per share for the quarter.
<unk> to $1 22 on net income of $55 $5 million.
Compared to a $1 seven on net income of $48 $8 million in the prior quarter.
For the full year earnings per share was $4 20 on net income of $186 1 million compared to $2 80 on net income of $115 million in 2020.
An increase in earnings per share up 50% year over year.
Our tax rate.
For the quarter was 15, 8% compared to $15 five last quarter.
For the full year, our tax rate was 16, 6%.
We expect our tax rate for 2022 to stay in the mid to high teens.
Turning to our balance sheet, our cash and cash equivalents were $466 5 million at the end of the fourth quarter compared to 457 million last quarter.
Cash from operations was 43 million compared to $53 3 million in the prior quarter.
Due to increased inventory levels to meet demand.
From the full year.
Cash from operations more than doubled to $97 3 million in 2020 to $213 1 million.
During the fourth quarter, we made another additional term b loan payment, bringing our total payments for the year to $75 million.
With demand outpacing what the overall equipment industry can deliver uncertainty around global supply chain and higher cost typically associated with yearend. We are widening our guidance range and are projecting total revenue for the first quarter of 2022 between $580 million and $630 million.
We expect EPS in the range of $1 six $2 26, 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 a question you May press Star then one on your telephone keypad.
If you were 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.
Our first question is from Quinn Bolton with Needham and company. Please go ahead.
Hi, guys. Congratulations on the nice first quarter results and full year 'twenty, one results as well I wanted to ask obviously the entire industry has faced.
For supply chain condition.
Conditions in the near term some of that is component availability some of its omicron. It looks like you faced some of that as well wondering if you might be able to quantify for us how.
How much revenue might have been.
Affected in both the fourth quarter as well as potentially in the first quarter guidance.
From some of those supply chain effects.
Yeah, I I think Quinn I think.
If I recall in the fourth quarter, I think demand outstripped, our while we could ship and also what our customers could take.
Because of their issues as well.
By about roughly I think $30 million.
As we look forward in the first quarter, especially with the army crime spikes that we saw and continued supply chain issues. You know I think we're looking at more like a $40 million bogie in the first quarter. So.
I think things got a little worse for the first quarter, but part of that was because of the the big Spike in the Oh My crime cases.
So we think it should start to see.
Dave Wise you.
You know, maybe flatten out or maybe even improve a little bit in the second quarter.
And that's the effect of supply versus demand that you are referring to rather than total revenue.
Yeah I think.
In other words.
If our customers could have taken it or if we had been able to get the parts.
Then yeah. Those are the kind of that was kind of the overhang of a $30 million and the 40 million number so.
And in fact that everybody is as you know so yeah. That's a that's it.
Quinn.
Second question I have just just sort of a longer term outlook. I know you are only giving formal guidance for the first quarter, but I think most companies in the industry.
Reflecting the current supply chain constraints sort of seed WMC and revenue is sort of being a little bit more back half weighted than front half weighted is there any reason to think that you see T C.
See a different pattern or should we think.
Guys are you expecting sort of a back half loaded year as well.
No I think we're expecting the exactly the same path.
Yeah. We you know if you recall a quarter or two ago, we were concerned about the second half we knew the first half was really strong.
And you know I think in the last two or three or four months. We've always seen is that that we expect.
The back half of this year to actually continue to move up.
Obviously, we'll have to keep growing our capacities and he you know, meaning you know meeting the need but yeah.
Yeah, we we expect UCT will perform.
Gradually moving up from here.
Great. Thank you Jim.
Thanks, Brian .
Your next question is from Tom Diffley with D. A Davidson. Please go ahead.
Oh, yes, good afternoon, and thanks for the question Yeah, I guess first on the guided range of the wider than normal range is that you because basically conservatism because of the violent we're in or are there specific issues that you're dealing with right now that caused you to be.
More heightened concern.
Concerned about things flowing through.
Or you know a couple of things we've seen is.
These dynamics changed a little bit where we weren't chasing 10% of the parts.
And now were chasing more like one or two or 3% of the parts, but you know unless you have a mall.
During the same boat.
And I think you know we've also seen.
Some reshuffling of when our customers are able to take the product because of the you know their supply chain issues as well.
So that caused more uncertainty so the demand the demand is there you know I feel very confident in our ability to execute.
And to close you know closed on that gap to some extent, but theres still a lot of unknowns that are kind of out of our hands.
Okay, No that makes sense and then Jim when you look at capacity expansion over the next several quarters.
You know for you is it more of a labor issue of tooling issue or the supply chain issues continuing.
Yeah.
Yeah.
Yeah, I think you know a big part of the capacity expansion in the next.
Pension in the next few quarters is.
Predicated on Malaysia, continuing to ramp up.
As we move beyond that to three or four quarters out, but you know into next year. We're also expanding some of our U S sites a bit some more capacity so but in the short term to your question I think we feel that we'll be able to keep you know ramping with the industry.
And a lot of that is going to fall on Malaysia ramp.
Okay, Great and then final question when you look at the variability of the margins in your guidance.
That product based at all or is it strictly just volume or overhead absorption.
I would say, it's at volume and mix based and so it's just it just depends obviously it changes quarter to quarter, depending upon what we're going to ship them from where and from what business unit. So the volatility is really surrounding that as well is what point, we are within the cycle and you know as we.
Tend to go up we tend to have higher margins and then things potentially come down it tends to be typically it takes a little longer to get costs out so it tends to be a little bit lower but generally there's there's many many factors that go into it.
Okay, well. Thank you both for the questions today.
Thank you Tom.
The next question is from Patrick Ho with Stifel. Please go ahead.
Thank you very much and congrats on a nice year in 2020 one Jim maybe first for you in terms of the services business.
How much capacity do you need to expand to shed but.
Not only intel or that announcement, but for some of your other customers that are growing there you've talked a lot about capacity expansion, particularly for your products business group can you just give a little bit of color.
Types of expansion plans for the services business.
Yeah, we've Bob Good question Patrick Thank you.
Definitely we have been proactively expanding our joint venture Sino synthetic expanding.
If you recall from the fire when they first bought the business when the one of the building came down we kind of built that out there to really grow Samsung.
So that's kind of in play.
With Intel you know there'll be a there'll be a new greenfield site in Ireland.
That we're working on that come up maybe next year.
And then we're making we're doing more kind of.
Incremental expansion of capability in some of our existing sites like in our Arizona.
For example, so I think the incremental as we go so it's definitely definitely something that we can we can manage or we've already kind of a you know those things take all of those things are a longer a longer kind of runway. So we're working hand in hand with the chipmaker.
As a as they put in new Fabs are they expand their fabs you know we work hand in hand to expand our capacity either to put out new pad next to where they they are going to be you know or to add capacity, but its a longer runway. So we'd have those pretty well in hand.
Great and maybe as my follow up question on the on the product side of the business. You know one thing we're seeing a lot more at least with chipmakers and equipment companies is more collaboration.
More joint programs to work on next generation devices.
The OEM side of things can you discuss or maybe give a little bit of color of your increase collaborative approach with your customers and maybe how you can add even more value to them and then in the long run enhance your gross margin profile.
Yeah sure Yeah, obviously have to speak a little bit generically on this but we've definitely embedded a significant amount of engineers, who actually fit on the site.
Not only are our major customers, but some of the customers that we're really trying to grow.
For example, one litho customer and so we definitely have we've always had that pregnancy. We've always been there for DFM design for manufacturing, but I think we're seeing our scope expand like you mentioned.
And that's something that if you look at our our Opex line. If you look at R&D line, you've probably seen that creep up over time.
And part of that is due to that so and absolutely.
Absolutely I think it obviously can improve the margin because your you know you come out of the gates as the supplier.
There's not as much.
Pressure competition competitive pressure.
It also keeps you know also obviously helps us share gain when you come out of it a new product introduction that the you know the partnered suppliers you know so I think as multiple effects to really be involved from the very beginning through product launch and and then and then ramping up through two high volume and I think you know another.
As soon as we can do that in so many different places.
Globally.
You know expensive that we can we can bring it up wherever we need to close to where the engineers R&R customers and then we can transition that over to a high volume manufacturing in Singapore, China, Malaysia.
To really ramp it up and so it's something our customers really value.
Great. Thank you very much.
Yeah.
Thank you Patrick.
Again, if you have a question. Please press Star then one the next question is from Krish Shankar with Cowen. Please go ahead.
Hi, This is Robert Mertens on behalf of Krish. Thanks for taking my question I guess first.
First on the supply chain are there any areas that are particularly challenging whether it's acquiring components or your own ability to ship products logistics and.
And I guess just is there a way to further quantify this.
$40 million headwind in the March quarter.
And then I.
I guess, how should we think about the cost associated with it.
And the gross margin impact from the qualification of new suppliers.
Yeah.
So I'll answer the second one first because that's easy.
No theres no significant cost of bringing on a qualifying.
New supplier, but it's pretty negligible.
And it's often funded.
But the first part.
You know, it's really hard to say I mean, obviously you know cause.
Things that have computer chips in at the lower end chips have been really challenging.
Hum.
Specialty machined parts in specialty component.
You know, which are specced into the tool and sole sourced.
By our customer sometimes or by ourselves.
And those it could be the one odd year one out there it's really hard to say this is a big problem, but that's the big problem that every few weeks it kind of moves around like Oh.
Whack a mole game.
But I think anything that has a lower end computer chip is always challenging James circuit boards with that.
It's often very challenging, but and as well as I imagined some specialty machines components or or Oh actually theres a shortage of the of the.
The other components that are fluid solutions makes you know the valves connectors and things like that as an overall shortage in the market as well so at many many different areas hard hard to put a finger on it which is you know why.
We're being relatively you know broaden our range for the first quarter.
Great. Thank you that's helpful and then just a.
Quick one on the handle it just to make sure I heard correctly did you say that was about $65 million in the quarter and then was there any color given on that.
Business margins are or expectations in the March quarter.
Yeah. It was $64 9 million no, we're not providing margin guidance on that but they are definitely falling into our products and eight to 10 am 8% to 13% and operating margin that we have put out in our new model. So we have brought them up into that.
Range as part of them, obviously, the acquisition and working with them on their cost structure and their expanded revenue that they've had.
Okay, Alright, well. Thank you so much that's all I had.
Thanks, so much thanks Robert.
This concludes our question and answer session I would like to turn the conference back over to Mr. Chau Hammer for any closing remarks.
Thank you all for attending we remained very optimistic very proud of what we've done this last quarter this year and going forward and we look forward to talking to you again in April Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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