Q1 2023 Ultra Clean Holdings Inc. Earnings Call
Good day and welcome to the Ultra clean first quarter 2023 earnings call and webcast.
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 will be an opportunity to ask questions to ask a question. You May Press Star then one on a 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 Donato Investor Relations. Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining US with me today are Jim Shaw Hammer, 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 details 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 like I said no obligation to update them. After this call discussion.
Discussion of our financial results will be presented on a non-GAAP basis.
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.
Thank you Rhonda and good afternoon, everyone.
You for joining us for our first quarter 2023 conference call and webcast.
I'll start with a high level overview of the first quarter that Sheri will expand on in her comments.
And followed that with the steps we are taking to manage through this downturn and conclude with our view on the longer term prospects of our industry.
As expected industry demand remained under pressure in the first quarter as OEM customers continue to cancel or push out orders against a backdrop of inventory surplus and ongoing geopolitical and macroeconomic uncertainty.
End market demand remains weak therefore, uct's revenue is likely to remain constrained in this environment.
Pulling from our playbook from the last downturn, we are focused on aligning our operational efficiencies and cost structure with the prevailing business environment.
Our objective is two fold to mitigate the impact of the downturn as much as possible.
Prepare to outperform the market again during the next expansion phase.
While we are slowing down some of our global capacity expansions in both products and services to align with our customers' roadmap.
We are moving some projects forward to be ready for the inevitable ramp in volume that follows every semiconductor downturn.
We saw growth in our fluid solutions business in the first quarter and continued to expand production in our Malaysia plant, which will improve our profitability and deliver performance down the road.
In the services business, we are developing higher value solutions, such as special yield enhancing part coding and cleaning methods to support ongoing node transitions.
We are one of the few large purely semiconductor focused manufacturers with a proven ability to support the dynamic product demand and stringent quality levels required for advanced chip manufacturing.
We are extremely confident about the industry's upward trajectory over the long term driven by emerging key sectors, such as automotive and industrial automation high performance computing, and especially for artificial intelligence and machine learning.
To add some perspective today's average electric car has doubled the chips of Arnold.
Actress vehicle.
Even more impressive is the phenomenal growth of Microsoft's AI chat G. P T.
Which requires massive amount of memory in data processing chip technology.
When launched last November and attracted 1 million registered users in just five days and only two months later it had registered more than 100 million users.
It is by far the fastest growing chip dependent consumer application in history.
Leading edge technologies like this are in the very early stages of widespread deployment and have only touched on the exponential growth in commercial use cases, which should drive the semi industry towards the trillion dollar Mark this decade.
While it feels like we are in the doldrums at the moment, we believe it is temporary and we couldnt be more excited about the future.
UCT has been enabling technology and supporting the lifecycle of chip manufacturing for over 30 years, we indirectly touched nearly every chip on the planet and are ideally positioned with the expertise and capacity to fully capitalize on opportunities during the next upturn.
I would like to thank our employees and our shareholders for their continued support through all of our phases and I look forward to updating you on our next call.
With that I'll turn the call over to Sherri.
Thanks, Jim and good afternoon, everyone. Thanks for joining us in today's discussion I will be referring to non-GAAP numbers only.
Jim noted the abrupt industry downturn that started late in Q4 carried over to Q1 as customers continue to push out you cancel orders.
We have implemented cost saving initiatives and our top priorities are to protect profitability and generate cash and reduce revenue while keeping in mind the industry will recover.
Total revenue for the first partner came in at $433 $3 million compared to $566 4 million in the prior quarter.
<unk> products Division revenue was $368 6 million compared to $499 5 million last quarter.
And revenue from our services division was $64 $7 million compared to $66 $9 million in Q4.
Total gross margin for the quarter was 17, 3% compared to 19, 5% last quarter.
Product gross margin was 14, 7% compared to 17, 7% in the prior quarter.
Services was 31, 7% compared to 33, 5% in Q4.
The decline in Q1 can be attributed to lower volumes and product mix. We are continuing to focus on cost improvements to strengthen profitability.
Operating expense for the quarter was $52 7 million compared with 53 point.
8 million in Q4 as a percentage of revenue operating expense was 12, 2% compared to nine 5% in the prior quarter.
Total operating margin for the quarter was five 1% compared to 10% in the fourth quarter.
Pardon me for my products Division was four 1% compared to nine 9% in the prior quarter.
And services margin was 10, 8% compared to 11, 3% in the prior quarter.
The reduction in margins was due mainly to decreased efficiencies on lower volume and product mix and some higher year end related expenses.
Many of the cost reduction initiatives, we have implemented some of which were initiated late in the quarter can take time to be reflected in our financial results.
Based on $44 8 million shares outstanding earnings per share for the quarter were <unk> 17 cents.
On net income of $7 $6 million compared to 93 cents on net income of $42 6 million in the prior quarter.
Our tax rate for the quarter was 16% compared to 13, 7% last quarter.
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 $322 $1 million at the end of the first quarter compared to $358 8 million last quarter.
Cash from operations was 28 million compared to an outflow of $38 8 million in the prior quarter.
Driven primarily by improvements in working capital.
The effective management of our working capital continues to be an important focus, especially in the current phase of the cycle during.
During the quarter, we made an additional debt payment of $20 million and repurchased 433000 shares at a cost of $14 $2 million.
Given the current dynamic state of the industry, we are keeping our guidance range why we project total revenue for the second quarter of 2023 between $410 million and $460 million, we expect EPS in the range of 15 to 35 cents.
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 Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily.
Or at least to assemble our roster.
Our first question comes from Quinn Bolton with Needham. Please go ahead.
Yeah, Hi, this is Trevor on for Quinn. Thanks for letting me hop on so last quarter, you noted that without the 30 million dollar impact revenue guidance for the first quarter would've been around 450 million and then stabilize around that figure through 'twenty, three and now with Lamin a S M.
By stating that memory is weaker than expected and that foundry logic outflow outlook at slightly weakened as well do you see that $435 million guidance midpoint as the new baseline and then also how much of that 30 million impact falls into Q2.
Probably a new baseline what we saw in the first quarter, we were able to make up a lot of that $30 million that.
But we thought it was going to move out of the quarter due to that supplier issue.
But we did see further dropped from two of our customers that have unexpectedly that did happen some push outs and cancellations within that quarter.
So that's why we ended up roughly where we expected in Q1, but that kind of little bit of a notch down that occurred in and.
Orders in Q1, we expect that well book Harry.
Forward. So yes. This is this is roughly the new baseline that's where we are right now.
Yeah.
Okay, I guess based off that with most of the 30 million falling into one Q could we possibly see a half over half increase in the second half with most of the demand coming in towards the end of the year.
Here I guess any positioning.
Thinking about 2023 would be helpful.
No as I said on the last call, we expect things to be relatively constant through the year. So that's our expectation.
And we're not forecasting the second half.
If there were any movements from that I think it's more likely that it could be up versus down, but our outlook right now is relatively flat through the year.
Okay, and if I can sneak one more in I'm somewhat mature spending continuing to be robust, particularly in China.
Wondering if you can quantify your exposure to both the leading edge and mature market any color there would be awesome as well.
Sure Yeah, you know a lot of the items that we make R. R.
R R.
No for Bolton at leading edge and legacy So I I don't have I don't we don't have it broken down by where you know when we make a module that could go on a leading edge tool are the very same module could go on a trailing edge tool. So that's something.
You know, we don't really have.
Broken down what we make and sell directly into China is around $20 million a quarter.
But where the customers.
Which which.
Application.
That's difficult to for us to really ascertain but obviously a little bit of that strength has helped stabilize.
Where we are at this current level.
Yeah.
Yeah. That's understandable. Thank you I'll hop back in queue.
Thanks Trevor.
Yeah.
The next question comes from Christian Schwab with Craig Hallum Capital Group. Please go ahead.
Yeah.
So it is as we look to the recovery I assume you kind of think it'll probably run like Lam highlighted where first we have utilization rates go up you should see that your quantum business and memory and then we will do some upgrades than capital equipment will kick in is that kind of the way you guys are thinking about it.
Yeah, Christian and and this go around is a bit of a finished goods inventory on our customer side as well so that will create an additional bit of lag.
Even after a wafer start starting to go up I think there needs to be a little bit more flush through of finished goods from our customers equip.
The equipment makers.
You you would still maybe have a quarter.
Leg.
Or so versus maybe say your two largest customers aimed at Lam. If if we saw a recovery is that the right way to think about it.
Yeah, I think a quarter at the most you know we're seeing you know obviously theres afterwards on their side to draw their inventory down through this year and that so we're seeing some of that impact in our year. This year.
So so hopefully the delay is that most of the quarter, but hopefully even worse.
Okay, great no other questions. Thank you.
Thank you Christian.
Our next question comes from Chris Sand car with Cowen. Please go ahead.
Hi, This is Robert Mertens on behalf of Chris Thanks for taking my question I.
I guess just.
In terms of last quarter. When you were talking about seeing the industry downturn, all earn sort of later in the quarter with customers either push out orders or canceling could you just provide a little bit more detail into the timing of these orders are canceled relations that you've seen and how those have progressed through the most recent quarter.
Is that something that's sort of a worsening or if you're expecting more of a steady state from.
Your guidance thanks.
<unk>.
Sure Yeah, we saw a bit of a notch down which we overcame by overcoming some of the supplier issues on the other side, we saw a bit of a notch down in roughly halfway through the quarter.
And that was most a lot of that was from one of the OEM manufacturers that hadn't really done a whole lot of push outs got so it felt more like a delay.
From the late November actions that took a little bit longer to work through into into end of January .
So having having said that you know we haven't we've seen things pretty stable. Since then so we don't expect a lot of movement.
On that side going forward.
Great. Thank you that's helpful. And then just in terms of inventory levels at your major customers. I know you mentioned, a little bit, but just sort of if you hadn't gotten into when you might expect to see more of a balance there would that be.
And that the back half of the year or potentially further out.
Yes, typically our customers do not inventory the majority of the things that we manufacturer.
Kind of an unusual situation given how sudden.
How sudden this downturn.
At the end of November so thats not typically we are not making things like power supplies are standard components that sit on the shelf. So it's a bit of an unusual situation. So theyre drawing some of those things down now which is impacting our revenue we expect they'll draw that down through the year and as I just said.
Christian hopefully by the end of the year, we would expect it to be back to more normal levels, where where there just isn't much finished goods between us and the OEM customers.
But but that's really hard to tell you. There's a really good report on tech insights showing the inventory levels in the systems.
Both at the at.
At the OEM level and also the sub.
The sub sill.
Some level the suppliers like us so you could see the inventory problem pretty clearly in those charts.
Yes.
Is that through the end of 'twenty two so I'm looking forward to seeing the data as it comes out but my anticipation would be that.
That we start to see those start to drop through 'twenty, three and hopefully clear out.
Somewhere in the second half.
Got it got it. Thank you that's helpful.
Yeah.
This concludes our question and answer session I would like to turn the conference over to Jim show Hammer for any closing remarks.
Thank you everyone for joining us today, and we look forward to speaking with you again next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.