Q2 2022 Ultra Clean Holdings Inc Earnings Call

Good day, everyone and welcome to the Ultra clean second quarter 2022 conference call.

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After todays presentation, there will be an opportunity to ask questions to ask a question May Press Star and then one on your Touchtone phone.

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You'll also note todays event is being recorded.

At this time I would like to turn the conference call over to Rhonda Donato Investor Relations Ma'am. Please go ahead. Thank.

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.

A 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.

Thanks, Rhonda and thank you all for joining us today.

I'm going to start with a brief review of our second quarter results and activities and provide some insight into how we feel the second half of this year will play out.

I'll also highlight how uct's diversification strategy has become a compelling advantage and then I'll turn the call over to Sherry for a financial review.

After that we will open up the call for questions.

The relaxation of China's Covid Lockdown protocols combined with strong execution at our other global sites.

Enabled us to reach revenue above the midpoint of our guided range.

After a comprehensive strategic review of our corporate structure and operation. We began the process of divesting some of our non semi businesses during the quarter that we acquired with the Hamlin acquisition.

We continue to analyze ways to improve capital efficiency, while remaining focused on our core semiconductor business.

For the second half of this year, we reiterate our belief that 2022 will be another year of growth for the Wi Fi market and you see T.

Broad based rational spending supporting leading or trailing edge devices.

Tenuous to keep demand elevated.

While some customer order flow the delivery schedules have been adjusted into the following quarters to align with ongoing supply chain constraints and capacity limitation.

We have not seen any significant cancellations.

Trusted partners like UCT, and anticipate and deliver beyond our customers' needs.

Are becoming even more valuable within the semi ecosystem.

We are focused on two priorities right now optimizing our supply chain and adding capacity to meet near and long term demand.

While UCT has mostly been able to deliver on time the industry remains challenged with shortages in the supply chain.

We are working quickly and constructively with our customers to alleviate bottlenecks by accelerating new supplier qualification.

Organizing shipment.

Collaborating to forecast trends that better support future demand.

Engagement with our customers has become much more in depth and cohesive and it's one of the many reasons why we continue to gain market share.

Alright investment and strategic capacity expansion ensures our assets are aligned to changing market and manufacturing conditions and will support sustainable near and long term demand.

In addition to our new facility in Malaysia. We are also expanding in realigning our product manufacturing footprint in the U S Europe and Israel.

To ramp production and increased flexibility to ensure business continuity.

Likewise, our services division is investing to support increased wafer starts and the need for consistent high utilization for some of the world's largest chipmakers.

Our ability to deliver quality products and services on time anywhere in the world. It's why our customers choose to engage with us on their most challenging projects.

Our outlook for 2023 remains favorable.

While there are signs of potential weakness in P. C low end smartphone and some consumer electronics those.

Those are being offset by strong demand in the high performance computing, Iot robotics and automotive sectors.

Today, the chip industry powers, most aspects of our economy. So it's far less vulnerable to a single retail end market and so as you see T.

Our strategy to diversify well beyond gas panels over the past several years.

His position today as you see tend to be more resilient to periodic weakness in any one specific sector.

Whether the emphasis is on memory foundry logic analogs, leading edge or trailing edge domestic or international you see T plays an integral role in all of these segments.

We indirectly touch every chip that goes into every phone gaming device laptop tablet server smart car and more which is why we expect to outperform the overall Wi Fi market.

I would like to thank our highly capable global team for their hard work and commitment ensuring UCT remains the partner of choice for our customers.

We are very optimistic about the future and continue to invest in our products and services. So that we can play a bigger and broader role in the industry alongside our customers.

And with that I'll 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'll be referring to non-GAAP numbers only.

The easing of Covid restrictions in China, and ongoing demand for our products and services resulted in total revenue for the second quarter of $608 $7 million compared to $564 1 million in the prior quarter.

Products Division revenue was 532 million compared to $486 8 million last quarter and revenue from our services Division was $76 7 million compared to $77 3 million in Q1.

Total gross margin for the second quarter was 23% compared to 25% last quarter.

Gross margin was 17, 8% compared to 18.2% in the prior quarter and services was 37, 2% compared to 35, 5% in Q1.

And supply chain constraints ease, we expect gross margin will incrementally improve.

Margins can be influenced by material and transportation costs manufacturing.

Manufacturing region.

Mix and volume, so there'll be variances quarter to quarter.

Operating expense for the quarter was $55 $9 million compared with $54 3 million in Q1.

As a percentage of revenue operating expense was nine 2% compared to nine 6% in the prior quarter.

Total operating margin for the quarter was 11, 1% compared to 10, 9% in the first quarter.

Margin from our products Division was 10.2% flat with the prior quarter and services margin was 16, 9% compared with 15, 7% in the prior quarter due to higher operating efficiency.

Based on $45 6 million shares outstanding earnings per share for the quarter was the dollar four on net income of $47 $4 million compared to 95 cents on net income of $43 3 million in the prior quarter.

Our tax rate for the quarter was 15, 2% compared to 16, 4% in the last quarter we.

We expect our tax rate for 2020 to just stay in the mid to high teens.

Turning to the balance sheet, our cash and cash equivalents were $421.4 million at the end of the second quarter.

Compared to 367 million last quarter.

Cash from operations was $85 $9 million compared with negative $67 4 million in the prior quarter due to favorable timing of cash collections and payments and reduced inventory.

During the second quarter, we divested two of our noncore non semi subsidiaries that came with the Hamlin acquisition and a third sale is pending.

The impact of all three divestitures is reflected in our second quarter GAAP financial results the.

The majority of the write offs includes noncash items, such as intangible assets and goodwill.

With demand still outpacing what the overall equipment industry can deliver uncertainty around the global supply chain and Covid related interruptions, we are keeping our guidance range wide.

We project total revenue for the third quarter of 2022 between $585 million and $645 million.

We expect EPS in the range of <unk> 94 cents to $1 18.

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

Yeah.

Ladies and gentlemen at this time, we'll begin the question and answer session.

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Our first question today comes from Patrick Ho from Stifel. Please go ahead with your question.

Well, thank you very much and congrats on a really nice quarter, Jim maybe first off I wanted to make sure and get a clarification and just to make sure that you're emphasizing this correctly you got any movement, you're seeing with your products customer base is primarily due to the supply chain issues that they're having.

And now on any changes as man that Youre seeing on your approach.

Yeah.

Yeah, Hi, Hi, Patrick Yeah, that's that's correct.

We saw from our two main customers some movements actually we saw a little bit in the last quarter, but and they basically pushing out one quarter and then the following quarter will push into the following quarter. So we saw some of that on the CMP line and we saw some fat on the etch, but everything is the all the orders remain.

They are read shoveling those schedules.

<unk>.

Lineup better with when they can get the long lead time parts that our supply chain constrained from from other suppliers. So so they're trying to sit unless you know 99% build tools waiting for I'm waiting for that last few parts. So that's the reason, they're not lost or anything in there typically shifting one quarter out.

Great.

That's really helpful. There and this is my follow up question also for you Jim in terms of your services business a lot of it is obviously dependent on wafer starts you know good utilization rates and there's obviously a lot of mixed market.

Volatility out there right now at the same time do you believe the diversification on the services side is helping you kind of mitigate some of the volatility that you've seen in areas like the PC market and low end smartphone Victor mentioned before.

Diversity with your customer front as well as their markets, helping you keep.

Steady service business.

Trend going forward.

Yeah, absolutely Patrick I think you see that India, although the revenue was similar to last quarter the operating margin.

Was certainly a nice added in.

The services.

Growth in the longer term along with wafer start there are little dips when customers go through node transitions before they bring the utilization down.

Switch nodes.

Don't see every quarter it.

Arise along with wafer starts, but if you draw a line you know over eight quarters Youll see that trend. So I'm absolutely is.

It's a very stable revenue that slowly grows over time.

Okay.

Great. Thanks again.

Thank you Patrick.

Once again, if he would like to ask a question. Please press star and one.

Our next question comes from Christian Schwab from Craig Hallum Capital Group. Please go ahead with your question.

Hey, good afternoon guys.

Jim Jim remind me what is your guys' current lead times to your your two largest customers.

Yeah. Good afternoon Christian Yeah, obviously, it depends on what were shipping.

You know major modules.

Are typically in the range of three to four months. Our Weldment heaters are you now in the range of one to two months.

You know so so depending on what we're making.

Yeah.

It's typically somewhere between a month to you know some of them as long as four months.

Okay great.

And is your commentary regarding you know growth in Wi Fi and then you know optimism for WMC growth in 'twenty three.

Are any of your customers working with you and discussing.

Another next generation three nanometer node with you already or is that a little bit too early on your.

And.

Oh, Yeah. There is one customer that we're working with on the service side.

On the three nanometer.

Next next node, but we haven't seen it for them.

Any other customers yet.

Obviously, we're working with the.

The largest litho provider.

Their nextgen tools, right now, which are starting to rollout at the end of this year and.

And then into next year.

Those obviously will be used on on those three and five nanometer nodes. If I can go back one that is one area, where youre question on lead times on fluid solutions.

As such tightness in supply in that area capacity that that actually the lead time on the fluid solutions parts are more like nine months.

But that's pretty typical in that space that those components are very difficult to come by right now.

Okay.

That's that's very helpful. And then my last question. You know do you think you are still gaining market share in the marketplace. You know one of your large customers that you've kind of suggested talked about before and can you give us any update on you know how that is.

Going or or you know is that going to help you know over the next year and a half.

As far as outpacing growth of the WMC market.

Yeah, we've we've won market share in several different fronts out.

One is our outsourcing of gas panels from Oh, one of the Oems who had in source them Oh Jeez 99, 910 years ago. So so as they are beginning to try to make more of them in their factories, we've been winning.

Business from from their own factories, we've also been penetrating our customers in the area of Weldment and fluid solution products that we have not we.

We have not serviced and much you know anything at all really any real volume at all and so we're seeing some volume in those areas and then thirdly in Malaysia. We're also seeing a lot of the new products that the customers have been developing starting up.

Over in the Malaysia factory, so a lot of the Malaysia ramp has actually been.

New wins you know we're at.

I think we left the quarter at 20 about $20 million out of Malaysia, and the majority of that revenue is from new wins from the customers.

Great Great. Thank you no other questions.

Thank you Christian.

Once again, if you would like to ask a question. Please press star and then one.

Okay.

Yeah.

And in showing no additional questions I'd like to turn the floor back over to Mr. Shaw for closing remarks.

Yeah. Thank you everyone for joining us today, and we look forward to speaking to you again next quarter.

And ladies and gentlemen, with that we will conclude today's presentation. We do thank you for joining you may now disconnect your lines.