Q4 2022 Ultra Clean Holdings Inc Earnings Call
Good day, and welcome to the ultra clean fourth quarter and full year 2022 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 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 now like to turn the conference over to Rhonda Banesto Investor Relations. Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining US with me today are Kim 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.
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. Thank you Rhonda and good afternoon, everyone.
Thank you for joining us for our fourth quarter and full year 2022 conference call and webcast.
First I'm going to highlight a few financial results that Sheri will expand on in her commentary.
I'll follow this with an overview of what we are seeing in the semiconductor market and in the near term and summarize our plans as we play a more critical mean meaningful role in the value chain.
Solid execution from our global teams in 2022 resulted in a record year for UCT with revenue growing 13% year over year and operating income, reaching a new high of $260 million.
Looking back on this extraordinary three year industry ramp Uct's annual revenue grew almost 123% and earnings per share for 243%.
That's a compound annual growth rate of 31% for revenue and 51% for earnings per share compared to the industry CAGR of 22% in the same period.
Late in the fourth quarter. It became apparent that the industry was headed into a downturn as our customers quickly pushed out and canceled orders and rapid response to their customers doing the same.
Reductions in end market demand have been felt throughout the value chain and has prompted suppliers and service providers like UCT to make immediate adjustments to the near term production operation and financial forecast.
Because our customers and their customers are taking actions to bring surplus inventory into balance as quickly as possible. We believe the major step down of orders are reflected in our Q4 results and Q1 forecast.
We expect the order stream to stabilize around these new levels.
We have not changed our optimistic view that the fundamental drivers of our industry will propelled significant growth over the long term.
Not surprisingly after three consecutive years of record WSB growth accelerated by pandemic related demand for technology, we have entered a correction period.
Every semiconductor cycle has its own unique characteristics.
This one in addition to supply demand and inventory imbalances today. The industry is also grappling with lingering effects from the pandemic inflationary pressures on battling geopolitical event.
Notable macroeconomic influences such as trade wars and export restrictions.
All of these factors combined supported by what we've recently heard from Ibm's and Oems and our internal marketing intelligence. We believe weakness may continue through 2023.
Okay.
While the lower equipment investment will primarily impact our products business. There are pockets of opportunities we will be capitalizing on.
We will be ramping products in markets like lithography, which are anticipated to grow in 2023.
And while not yet at the level to offset declines in other segments of WSB in 2023 over time, our position in this space will continue to expand as a percentage of our revenue.
And our services group, where revenue is more closely tied to wafer start we see a decline in business, but at this point it is less than what we expect for WMC.
While we hope better recovery begins to materialize sooner, we are restructuring our business to maintain flexibility and optimize profitability just like we did during the 2018 2019 downturn that lasted five quarters.
We are taking immediate action within our variable cost model, including sharp reductions in overtime.
Difficult decrease of temporary workers and utilization of normal attrition.
To prepare for the next ramp to support our growth strategy, we are consolidating our footprint and making improvements within our supply chain through enhanced cost and delivery performance among many other actions.
We are balancing our cost reduction activities with key strategic investment program, such as proliferating, our single ERP solution ramping Malaysia.
Adding fluid solutions machining capabilities and expanding capacity at some of our service site to support new chip Fabs in the U S in 2024 and beyond.
UCT is a proven playbook to successfully manage through industry cycles and emerge a much stronger more profitable company each time.
While our focus over the past few years was primarily on meeting demand today, we are taking the opportunity to transform our business processes and global operational footprint. So we have the services products and capacity to scale quickly and efficiently to meet customer demand when the industry rebounds.
The industry always rebounds.
In summary, while the chip industry is notoriously cyclical and experiences fluctuations, we view current business conditions as an opportunity to improve our bottom line in the next up cycle, while ensuring that we protect our revenues and optimize our capabilities to secure long term growth.
By working closely with our customers today, we are increasing our strategic relevance within the value chain and expect to continue to outperform the market on an average over the long term.
I would like to thank our employees and our shareholders for their continued support and I look forward to updating you on our next call with that I'll turn the call over to Sherri.
Thanks, Dan and good afternoon, everyone. Thanks for joining us in today's discussion I will be referring to non-GAAP numbers only.
As Jim noted 2022 was a record year.
For revenue and operating income.
During the year, we pay down our debt by $40 million and.
$12 $1 million repurchasing shares and prudently invested in projects to support our long term growth strategy.
Total revenue for the fourth quarter came in at $526 $4 million compared to 635 million in the prior quarter.
Products Division revenue was $499 $5 million compared to $556 3 million last quarter.
Revenue from our services division was $66 $9 million compared to $78 7 million in Q3.
The strong demand we saw in the first three quarters of 2022 led to a record revenue of $2 4 billion for the year.
13% from the prior year.
Products generated revenue of $2 1 billion up 15% year over year and services contributed $299 6 million flat with the previous year.
Total gross margin for the fourth quarter was 19, 5%.
Compared to 26%.
Last quarter.
Product gross margin was 17, 7% compared to 18, 3% in the prior quarter.
In services was 33, 5% compared to 36, 9% in Q3.
Margins can be influenced by fluctuations in volume mix and manufacturing region, as well as material and transportation costs.
So there'll be variances quarter to quarter.
Total gross margin for the year was 22% compared to 21, 4% last year.
Operating expense for the quarter was $53 8 million compared with $56 5 million in Q3.
As a percentage of revenue operating expense was 19, 5% compared to eight 9% in the prior quarter.
For the year operating expense as a percentage of revenue was nine 3% compared to 92% in the prior year.
Total operating margin for the quarter was 10% compared to 11, 7% in the third quarter.
Margin from our product Division was nine 9% compared to 10, 8% in the prior quarter.
And services margin was 11, 3% compared to 18, 2% in the prior quarter.
The reduction in margin was mainly due to decreased efficiencies for both the vision on lower volume.
For the full year operating margin came in at 11% compared to 12, 2% in the prior year.
Based on 45 7 million shares outstanding earnings per share for the quarter with 93 cents on net income of $42.6 million.
Compared to a $1 six on net income of $48 $6 million in the prior quarter.
For the full year earnings per share were $3 98 on net income of $181 $9 million.
Compared to $4 20.
On net income of $186 $1 million in 2021.
Our tax rate for the quarter was 13, 7% compared to 17, 9% last quarter.
For the full year, our tax rate was 15, 9%.
We expect our tax rate for 2023 to stay in the mid to high teens.
Turning to the balance sheet, our cash and cash equivalents were $358 $8 million at the end of the fourth quarter.
Compared with 453 5 million last quarter.
Cash from operations was an outflow of $38 $8 million compared with an inflow of $71 7 million in the prior quarter.
Shipment volume and timing of cash collection and payment.
For the full year cash flow from operations was $47 $2 million compared to $211 6 million in the prior year.
In the fourth quarter, we made an additional debt payments of $13 $4 million, bringing our total debt payments for the year to $40 million.
In the third quarter, the board initiated a three year $150 million share repurchase program.
In the fourth quarter, we have purchased 343000 shares at a total cost of $12 $1 million.
Subsequent to year end, we repurchased an additional 389000 shares at an aggregate cost of $12 $9 million, leaving $125 million remaining on our three year program.
Given the current global macroeconomic and geopolitical uncertainty, we are keeping our guidance range wide, including a negative adjustment of $30 million related to our cyber cyber security event recently announced one of our suppliers.
This revenue to flow into the second quarter.
We project total revenue for the first quarter of 2023 between three $995 million and $445 million, we expect EPS in the range of 12 to 32.
And with that I'd like to turn the call over to the operator for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
And at this time, we will pause momentarily to assemble our roster.
And the first question will be from Quinn Bolton from Needham and company. Please go ahead.
Hey, guys. Congratulations on a record 2022, I know the environment has changed but great to see those results I guess, Jim wanted to ask your thoughts.
Thoughts in your script you talked about the.
You already have the step down in orders you think is taking place in Q4 of 'twenty two and in this quarter here in 'twenty three and then you talked about seeing or expecting orders to sort of stabilize and so as you look out to 2023, how do you how do you see the revenue profile for the year I know you've got that 30 million.
And that comes out of Q1 and likely gets captured in Q2, but.
Should we be thinking about it.
Feels like.
The first quarter level without that $30 million impact would be close to $450 million at the midpoint is that kind of the revenue level, you see where things are stabilizing or.
Do you see a different level.
Yeah, Hi, Quinn no I think you have it exactly right.
Yeah, but that's it.
That's true it wouldn't have been around 450 would have been what we would have been projecting.
Projecting and yeah, I think we see it stabilizing.
At that level, or maybe slightly higher and being bouncing around roughly those numbers throughout the year. We're obviously hopeful that you know through the second half you know could be more positive than some of our.
Customers and peers have commented that they're looking to see if theres something improves in the second half, but our assumption at this time is bouncing.
Bouncing around the number that you that you are you you put out there and some recovery in the second quarter.
I'm, assuming that the supply or.
Packaging, often many people right now I was able to recover as well so yeah, that's exactly right way to think about it.
Perfect.
Mentioned, Jim the number of actions.
Taking too.
To streamline operations now, including reduced overtime getting rid of some of the variable employee.
Costs, but where do you see opex sort of shaking out in in the near term.
Yeah as you take those actions and then you also mentioned facility consolidation is this downturn, giving you the opportunity to bring more business into Malaysia for some of the other sites around the world.
Yeah, I think there are several parts of that Quinn.
Yeah, we've been through multiple of these these cycles and so you know taking down the variable costs, especially in the Cogs area, we're pretty experienced at that.
And I think you'll see a sustained higher gross margin through the cycle than we have in the past also with our broader company portfolio that we've assembled since the last downturn. So on the Opex side are there there are a few headwinds.
Sheri you talk about that in a second.
You know those take a while to really move down and some of the consolidation actions of course, you know those are okay.
Consolidating where you have two sites you know relatively close proximity.
Or business has moved from one region to another site and kind of unbalance as a result of the last you know a surge of of the industry.
We rebalance that and consolidate those side those actions take you know roughly a year to put in place before you start seeing the benefits of those so that we won't see a lot of that impact.
Those longer term cost reductions, but until next year, but those those will obviously help us become.
Leaner and better better numbers in the next upturn just like we did in the last one that Jerry maybe you could talk about.
Some of the other specifics yeah. So.
We came in at 95% for Q4, we will see that go up in Q1 and partially in next year as we move through it but we do have quite a few protection initiatives in place, especially surrounding controllable spending within opex, whether that'd be travel or other discretionary spending.
That's what I was looking at our head count and obviously looking at footprint does play into that as well. So we are continuing to look at that quite heavily and you don't see that that cost hopefully come down as we move through the year as well.
Sure sure if you're thinking maybe opex somewhere between say 10, and 11% of sales or do you think it could go even higher just given the magnitude of that.
Quarterly change in revenue and in March.
Yeah, we've seen it I think in the pathway constant downturn anywhere between 10, and 12%. So I would assume that would it be around that within that range, depending upon the revenue level. So obviously Q1 has come down.
As a result of the cyber attack along with them you know just the industry coming down so I anticipate there's going to be probably a little higher as a percentage of revenue for Q1, but.
As we move through the year I think it'll come up to a more normalized range.
Perfect. Thank you.
The next question is from Krish Shankar from Cowen. Please go ahead.
Hi, guys. Thanks for taking my questions. This is Steven calling in behalf of Krish.
I guess, Jim or Sheri just quick question first on our Q4 and some of the impact from I guess production.
Limitations in China that you guys previously highlighted.
I guess relative to that 60 million Delta between what you reported for Q4 and in your original guidance midpoint, how much of an impact it.
Production restrictions habits, and how is that situation here in Q1, so far.
Yeah in Q4.
The major impact was actually the you know the industry downturn and a lot of canceled and delayed orders the COVID-19 impact.
Turned out to be much smaller than we first feared I think it was roughly $8 million or $5 million and that factory is.
Operating nor.
Normally right now like what was the second part of your question on that.
Yeah is there any I guess you already answered I guess, there's a there's no follow on impact here in Q1 is that correct.
No the only unexpected impact in Q1 was one of the key suppliers for the industry.
And the issue that they're having with the cyber attack.
Those components are used in a.
Multiple areas of the tools by many of us.
Hi, My first question is regarding certain I guess your memory exposure.
I think in your slide deck, even show up.
Closure on a revenue basis.
And your largest customer is holding steady around 40% in Q4 relative to Q3 I'm just kind of wondering you know just getting somebody to talk in the industry over the past couple of weeks about memory makers.
Suppliers potentially not cutting capex.
Certainly this year as originally expected I guess, how do you see that if any at this time falling through to to your outlook for the second half of the year.
Yeah.
It's hard to predict what impact I think obviously, we're seeing Samsung are looking to spend you know spend a little bit through the cycle more than some of the other memory or foundry makers as well.
So it's really hard to say.
If that's going to you know, what that's going to look like or or or any further cuts from the memory tanker trucks. So I think that's why we're taking the view.
Oh.
Not expecting a recovery in the second half of the year, but obviously.
But the positive surprise as possible.
Okay, great. Thank you.
And the next question is from Christian Schwab from Craig Hallum Capital Group. Please go ahead.
Great.
Jim After you take the variable cost of Cogs out you know I'm. Just wondering you know do do we you know what your utilization rate of Labor is and then you know more importantly, as we look to the eventual recovery at a $450 million.
Run rate business quarterly plus or minus what is your utilization rate then on tools and facilities.
Yeah, the utilization on labor with the with some time lag.
We tend to keep.
You know that at 100%, but pretty close though even through the down cycles. When we're not able to achieve it through normal means of overtime and we carry a large temporary workforce, sometimes up to 35, 40% during the upturn. So when we're not able to meet those utilization.
Then we utilize other things like E.
Shutdowns, which we're doing.
Quarter.
And and and other methods as well so we keep the labor utilization very high.
So we expect to be able to keep the gross margin.
Obviously the.
The footprint and the tools and the.
It's a sunk cost in Cogs.
It's harder to it's harder to cover I couldn't give you an exact number on the utilization, but I think it is.
You can assume we were 100% utilized at the 630 number.
Do the math on the on the call.
The number which is 65% of that I think you'd be somewhere roughly around around there we were not 100% utilized in the Malaysia footprint, but we were a 100% utilized.
Workforce, there so maybe put it at around 60% or so.
Okay, No that's great.
Could you just remind US you know on the product mix you know the end markets.
You know that you serve.
You know between memory mature advance logic, where you know the vast majority of your you know your shipments to your two leading customers you know end up being utilized by end customers Fabs, so that makes sense.
Yeah, it's it's actually hard for us to track.
On a running basis, when we ship a tool.
Who are our customers against that same tool can go or the same module can go to any application. So that's something I can I can really forecast, but I think you'd expect it to follow you know exactly where the capital is being spent right now so memory is clearly going to be down.
More and more of the more of the tools are going to you know boundary and Samsung.
As well, so I think youll see a shift that way, but I couldnt give you a I couldn't give you a new pie chart on on memory versus logic foundry at this point, but I'm definitely it's going to be moving towards less memory as you would expect.
Great.
Then.
Should we assume that gross margin you know improved sequentially in Q2, and then they kind of flatlined at those type of levels. Given you know labor will be fixed quickly.
You know is that the way, we should be thinking about that.
So I would assume that it would.
You know be able to level out at these levels and then hopefully depending upon what happens in the second half you know we would be at stake.
Around that range as we move through the rest of the year.
Great and then my last question is you know remind us if you could you know what what lead times were.
You know pre pandemic or you know pretty strong three years, how would you want to do it what they were you know during the strong three years in and what you expect them to be on the back side of this.
Are you talking about total lead times from <unk>.
The types of customers.
But from us to our customers' yep.
Okay, yeah, depending on depending on what part of our portfolio you're looking at.
The fluid solutions, you know the former harm with those lead times are relatively had been relatively short and a lot of that is vendor managed inventory if you're talking about.
Some of the other.
Like let's call it integrated module a piece of our business that was stretching out to two to three months in many cases.
And sometimes even even longer during the upturn.
Obviously, there are a lot faster now or in some cases immediately ready for shipment to customers require them.
[laughter] there.
Okay.
Okay.
It it's it so.
As far as.
You know.
This is the lead times are relatively short you know kind of what you implied you know your visibility of when you know how many ever quarters of digestion that these type of levels last cycle. I think you suggested it was you know five.
You know really will be determined by the dialogue and the direction that we hear from you know aim at Lam is that fair.
You know for three years, leading up to the last up.
Upcycle, where.
What the demand was outstripping supply or for everyone. In the industry. We were that's going to be we're seeing a very unusual four quarter.
Bookings that was pretty easy to forecast where more back of the normal state, where we can see one quarter out relatively clearly makes up for it.
Certain force majeure events like that.
Experiencing like Covid and cyber Oh, So I think we're back to where back to kind of think one quarter out it was a little bit even more blurriness because right. You know where you have to keep track of typically theres not much inventory between Hudson, our customers, but as the orders fell off pretty sharply at the end of 'twenty to 'twenty two.
And further into the first quarter, some inventory buildup between us and our and our customers, which is not a typical state. So we also have to try to figure out what it all.
Even when you look at end demand and what's going on there we have got to try to piece together what will actually reach an order book for us.
Yeah, and then just to follow up on that it'll be my last question. You know do you have an idea of how much you know aggregate dollar amount of inventory is sitting between you and the customer that historically is not there.
No.
We don't we don't.
Again, many of the things that we make.
We don't own 100% share of that module, sometimes where 50 or 60 or 70% share. So we're you know we don't know what they're holding up the same type of thing that we make but maybe a competitor made as well. So all we know is that the warehouses that many of our customers are are very full to the point, where we're even you know in a case here or there we may have to eat.
Hold onto something for them. So there its pretty big right now.
And that's why that's why you might see when they report.
You know what.
Drops in revenue there's a couple of factors there one is there they're working through their deferred revenue for things that they've already shipped.
And two is it because of because they do have a lot in their inventory right now, but I think that will burn off that will burn off you know at some point, but I think we're pretty confident when we put all those different pieces together the headwind the tailwind.
The numbers that are I think Glen was talking about makes a lot of sense.
Yeah, that's perfect great no other questions. Thank you.
Thank you Christian.
And the next question is a follow up question from Quinn Bolton from Needham and company. Please go ahead.
Sure just a quick follow up for you if we're thinking about.
Down roughly 25% or about 600 million year on year.
And I'm getting to that $20 billion, just by annualized herb yeah annualized in the $450 million quarterly run rate. We've been speaking about could you give us some sense of what do you see the incremental margin fall through on that lower revenue is I mean should we be modeling like 25% incremental margins or is there a better figure to be thinking about you just said.
We think through the gross margin trend for the year.
Yeah, I think I mean, the gross margin I don't see major decline in gross margin I mean, there there's going to be a point or two but it's not as much as what we've seen in previous downturns. What do they think first off I think the mix might be a little bit different but also we've done a very good job of making sure that we could we.
We can ship certain assemblies to lower cost regions as well as bringing our direct labor down very quickly.
So that one not as much of an impact I think I'm, obviously, making making adjustments to opex.
Is harder because theres more fixed costs, there, but we see that is like I mentioned before leveling out.
Degree and I think we want to make sure that we're ready for the next upturn is the key thing for for all of those categories.
Got it so a trough gross margin into 17, and a half per cent range feels it feels like that.
A decent place to be.
Yeah, I think that's probably a low point probably.
Okay perfect. Thank you.
Thank you.
Ladies and gentlemen, 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 everyone for joining us today, and we look forward to speaking with you at our next earnings happens next quarter. Thank you.
And thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Yeah.
[music].