Q3 2023 Ultra Clean Holdings Inc Earnings Call

Good day and welcome to the Ultra clean Q3, 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 todays 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.

Netto Investor Relations. Please go ahead.

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 Lasalle or with a financial review 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.

<unk> 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.

You Rhonda.

Total revenue for the third quarter came in as expected.

<unk>, 3% over the second quarter.

Our product business grew just over 5% at some WSB fundamental dynamics began to show a small signs of improvement.

We believe that some progress has been made for equipment inventory reductions broker system.

We expect several more quarters until normal levels are achieved.

We are aligned with our customers and their customers that while we don't know the pace or the timing of the recovery. We believe the fundamentals, while we're setting the stage for the industry to return to growth.

Our typically high margin service business saw an abrupt decline in revenue due to a sudden and unexpected large reduction in wafer starts at a primary customer.

While this pullback had a detrimental effect on our overall profitability and earnings we believe their production cut should help rebalance of supply and demand and a recovery of chip prices.

For the foreseeable future, we will continue to focus on optimizing our global footprint driving operational efficiencies and other strategic initiatives to further increase our value for our customers.

These efforts will lay the foundation required to capitalize on share gain opportunities heading into the next brand.

We are in a strong position to increase our semi manufacturing leadership position with the available capacity and geographic flexibility to meet accelerated demand when it returns.

Along those lines. We are very pleased to report that we have acquired H I S innovations group.

They provide design manufacturing integration of component process solutions and fully integrated sub systems to the semiconductor segment.

This acquisition adds a higher gross margin and value product offering increases our vertical capabilities and synergies.

Our reach into the sub fab area and expands our addressable market by approximately $1 5 billion.

With over 60 Fabs under construction globally. This acquisition aligns with our long term strategy to pursue sustained and profitable growth and will be rolled into our product division.

Lastly, we are deeply saddened and concerned by the current events in the middle East.

We are taking the situation very seriously and I'm relieved to say that all our employees are accounted for and we're doing all we can to assist with their safety and wellbeing.

Both of our facilities in Israel are running at the capacity required to meet production targets.

Our commitment to support our customers worldwide remains a priority.

Israel policy insurers business continuity across the industrial segment, so imports and airports are currently functioning and we can ship and receive the product and raw materials required to meet customer demand.

We're also working together with other multinational companies that have substantial operations in Israel to ensure we are aligned in supporting each other.

Overall, we are navigating through the demand variability in the current environment longer term, our increased scale operational efficiencies expanded capacity and new capabilities position us well to maintain our leadership position and outperformed the industry.

And with that I will turn the call over to Sherri.

Thanks, Jim and good afternoon, everyone. Thanks for joining us in today's discussion I'll be referring to non-GAAP numbers only.

As Jim noted our products business performed well from a revenue standpoint in the third quarter our.

Our services business, however was impacted by a larger and larger than expected reduction in wafer starts in Q3 that impacted our overall profitability and earnings.

Total revenue for the third quarter was $435 million compared to $421 5 million in the prior quarter revenue from products increased five 1% to $380 9 million compared to $362 5 million last quarter.

Services revenue was $54 1 million compared to $59 million in Q2 due to the scale back in wafer starts as I just mentioned.

Total gross margin for the third quarter was 15, 5% compared to 16, 7% last quarter.

Although product revenue grew sequentially gross margin came in at 13, 8% compared to 14, 5% in the prior quarter.

And services was 27, 4% compared to 33% in Q2.

The reduction in margin due to lower volumes for service and overall mix within each business unit.

We continue to focus on cost improvements and operational efficiencies to strengthen profitability.

Operating expenses for the quarter was $48 6 million compared with $49 4 million in Q2 and decreased as a percentage of revenue to 11, 2% from 11, 7%.

Total operating margin for the quarter was four 4% compared to 5% second quarter.

Margin from our products Division was four 5% compared to four 3% in the prior quarter and services margin was three 7% compared to nine 3% in the prior quarter.

The drop in services margin was due to lower volumes and mix.

Based on 45 million shares outstanding earnings per share for the quarter with four on net income of $2 million compared to 16 on net income of $7 1 million in the prior quarter.

Our tax rate for the quarter was 37, 3%.

Due to a shift in profits by geography.

Our tax rate was chewed up in Q3 for year to year to date expense and we expect our tax rate for Q4, and 2023 to be approximately 20%.

Turning to the balance sheet, our cash and cash equivalents were $342 million, an increase of $21 2 million over Q2.

Cash from operations was $36 2 million similar to last quarter at $36 $4 million.

As we navigate through the current cycle, we will continue to manage our working capital.

Given macroeconomic and geopolitical uncertainty and current industry dynamics, we are keeping our guidance range wide with the addition of H I S. Innovations. We project total revenue for the fourth quarter of 2023 between $420 million and $450 million, we expect EPS in the range of <unk> to <unk>.

Got it.

This includes approximately $10 million of revenue and why incentive EPS for two months of operations from the acquisition.

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 Touchtone phone, if you're 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 to assemble our roster.

Our first question comes from Krish Shankar with TD Cowen. Please go ahead.

Hi, This is Robert Mertens on behalf of Krish.

But let's see first just in terms of the service sales. This quarter I know there are a bit weaker on utilization rates last quarter and you mentioned the sudden reduction in wafer starts impacting in September was there was that the main a qualifier for this quarter or was there anything else in.

Maybe just in terms of the mix that goes into the service Division, if you have ever broken that down.

Yes, Hi, Robert.

The first part we had seen a reductions in wafer starts across the broad.

Spectrum Fabs prior to this last quarter, while we saw early in the.

Third quarter was one particular.

It may occur.

Is it down.

Mostly their memory fab pretty dramatically they've been holding that up for.

Past the time when others that already brought their utilizations down so that was.

That was I guess you'd say the lapped last wanted to really fall. So that was the main impact there.

As far as your second.

Question around the mix I think maybe my answer on the first answer to that but.

But services typically.

More dependent on logic and memory, but.

It is a rather large memory fab.

And it had an outsized.

Sized impact.

Great. Thank you and then maybe just real quick in terms of but the timing of.

The ramp down at that one customer is there any indication of maybe when that the sales will pick back up.

Is that something you think services would be growing.

Next corner or something more into into calendar year 'twenty four.

Yeah, it really difficult to predict we're starting to see some of the fundamentals of supply and demand of these chips start to move.

Move towards a better balance and starting to see some A&P.

Chip starts to recover a bit.

So things are moving in the right direction, but as far as when the customers will start ramping up the supply side of the chips.

And usually move their utilizations up it's still it's still unclear.

I would say is that we'll see anything mean meaningful within this year.

Okay.

Great. Thank you that's helpful.

Again, if you have a question. Please press Star then one.

Okay.

At this time, we are showing no more questions.

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

Okay.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Operator: Good day, and welcome to the Ultra Clean Q3 2023 Earnings Call and Webcast. All participants will be in list and only mode. Should you need assistance, please signally conference specialist by pressing the star key followed by zero.

Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star than one on a touch tone phone. To withdraw your question, please press star than two.

Operator: Please note this event is being recorded.

Rhonda Bennetto: I would now like to turn the conference over to Rhonda Bennetto, Investor Relations. Please go ahead. Thank you operator. Good afternoon everyone and thank you for joining us.

Rhonda Bennetto: With me today, our Jim Scholhamer 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.

Rhonda Bennetto: Then we'll open up the call for questions.

Rhonda Bennetto: 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 findings. 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 of our financial results will be presented on a non-gab basis. A reconciliation of gap to non-gab can be found in today's press release posted on our website.

James Scholhamer: And with that, I'd like to turn the call over to Jim Jim. Thank you Rhonda. Total revenue for the third quarter came in as expected, increasing 3% over the second quarter. Our product business grew just over 5% as some WFB fundamental dynamics began to show small signs of improvement. We believe that some progress has been made for equipment inventory reductions throughout the system and expect several more quarters until normal levels are achieved.

James Scholhamer: We are aligned with our customers and their customers that, while we don't know the pace or the timing of the recovery, we believe the fundamentals are slowly setting the stage for the industry to return to growth.

James Scholhamer: Artifically, high-margin service business saw an abrupt decline in revenue due to a sudden and unexpected large reduction in wafer starts at a primary customer. While this pullback had a detrimental effect on our overall profitability and earnings, we believe their production cuts should help rebound of supply and demand and a recovery of chip prices. For the foreseeable future, we will continue to focus on optimizing our global footprint, driving operational efficiencies, and other strategic initiatives to further increase our value for our customers.

James Scholhamer: These efforts will lay the foundation required to capitalize on sharing opportunities heading into the next ramp. We are in a strong position to increase our semi-manufacturing leadership position with the available capacity and geographic flexibility to meet accelerated demand when it returns.

James Scholhamer: Along those lines, we are very pleased to report that we have acquired HIS Innovations Group. They provide design, manufacturing, integration of components, process solutions, and fully integrated subsystems to the semi-conductor sub-bad segment. This acquisition has a higher gross margin and value product offering, increases our vertical capabilities and synergies, extends our reach into the sub-bad area, and expands our addressable market by approximately $1.5 With over 60 fabs under construction globally, this acquisition aligns with our long-term strategy to produce esteemed and profitable growth and will be rolled into our product division.

James Scholhamer: Lastly, we are deeply saddened and concerned by the current events in the Middle East. We are taking the situation very seriously and I'm relieved to say that all our employees are accounted for and we're doing all we can to assist with their safety and well-being. Both of our facilities in Israel are running at the capacity required to meet production targets. Our commitment to support our customers worldwide remains a priority. Israel's policy ensures business continuity across the industrial segments supports and airports are currently functioning and we can ship and receive the products and raw materials required to meet customer demand.

James Scholhamer: We're also working together with other multinational companies that have substantial operations in Israel to ensure we are aligned in supporting each other. Overall, we are navigating through the demand variability in the current environment. Longer term, our increased scale, operational efficiencies, expanded capacity, and new capabilities positioned us well to maintain our leadership position and outperform the industry.

Sheri Savage: And with that, I will turn the call over to Sherry. Thanks Jim and good afternoon everyone. Thanks for joining us.

Sheri Savage: In today's discussion, I'll be referring to non-gap numbers only. As Jim noted, our products business performed well from a revenue standpoint in the third quarter. Our services business, however, was impacted by a sudden larger than expected reduction of wafer starts in Q3 that impacted our overall profitability and earnings. Total revenue for the third quarter was $435 million compared to $421.5 million in the prior quarter. Revenue from products increased 5.1% to $380.9 million compared to $362.5 million last quarter.

Sheri Savage: Services revenue was $54.1 million compared to $59 million in Q2 due to the scale back and wafer starts as I just mentioned. Total gross margin for the third quarter was 15.5% compared to 16.7% last quarter. Although products revenue grew sequentially, gross margin came in at 13.8% compared to 14.5% in the prior quarter. And services was 27.4% compared to 30.3% in Q2. The reduction of margin was due to lower volumes for service and overall mixed within each business unit.

Sheri Savage: We continue focus on cost improvements and operational efficiencies to strengthen profitability. Operating expenses for the quarter was $48.6 million compared with $49.4 million in Q2 and decreased as a percentage of revenue to 11.2% from 11.7%. Total operating margin for the quarter was 4.4% compared to 5% in the second quarter. Margin from our products division was 4.5% compared to 4.3% in the prior quarter. And services margin was 3.7% compared to 9.3% in the prior quarter.

Sheri Savage: The drop in services margin was due to lower volumes of mists. Based on 45 million shares outstanding, earnings per share for the quarter was 4 cents on that income of $2 million, compared to 16 cents on that income of $7.1 million in the prior quarter. Our tax rate for the quarter was 37.3% due to a shift in profits by geography. Our tax rate was trueed up in Q3 for a year-to-day expense and we expect our tax rate for Q4 and 2023 to be approximately 20%.

Sheri Savage: According to the balance sheet, our cash and cash equivalence were $342 million, an increase of $21.2 million over Q2. Cash from operations was $36.2 million, similar to last quarter at $36.4 million. As we navigate through the current cycle, we will continue to manage our working capital. Given macroeconomic and geopolitical uncertainty and current industry dynamics, we are keeping our guidance range wide. With the addition of HIS Innovation Group, we project total revenue for the fourth quarter of 2023 between $420 million and $470 million. We expect EPS in the range of 2 cents to 22 cents. This includes approximately $10 million of revenue and one cent of EPS for two months of operations from the acquisition.

Operator: And with that, I'd like to turn the call over to the operator for questions. We will now begin the question in the answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speaker phone, please pick up your hands up 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.

Operator: At this time, we will pause momentarily to assemble our roster.

Operator: The first question comes from Chris Sandcar with PD Cowan. Please go ahead.

Robert Murden: Hi, this is Robert Murden on behalf of Chris. But let's see, first just in terms of the service sales, this quarter, I know there are a bit weaker on utilization rates last quarter. And you mentioned the sudden reduction away for starts impacting in September. Was there the main qualifier for this quarter? Was there anything else? Maybe just in terms of the mix that goes into the service division, if you've ever broken that down.

James Scholhamer: Yeah, hi Robert. The first part, we had seen reductions in wait for start across the broad spectrum of fabs, prior to this last quarter, what we saw early in the third quarter was one particular chip maker, ratchet down. Mostly their memory fab pretty dramatically. They've been holding that up for, you know, past the time when others that already brought their utilization sound. So that was, that was I guess you'd say, you know, the last last one to really fall.

James Scholhamer: So that was the main impact there. As far as your second question around the mix, I think maybe my answer on the first might answer that. But services typically, you know, more dependent on logic and memory, but, you know, this is a rather large memory fab, and I had an outside impact.

James Scholhamer: Great, thank you. And then maybe just real quick in terms of the timing of seeing the ramp down at that one customer, is there any indication of maybe when the sales would take back up? Is that something you think services would be growing next corner or something more into calendar year 24?

James Scholhamer: Thanks. Yeah, really difficult to predict. We're starting to see some of the fundamentals of supply and demand of these chips start to move towards a better balance, especially these from ASP and some of these chips start to recover a bit. So things are moving in the right direction, but as far as when the customers will start ramping up the supply side of the chips and use the food, their utilization's up, it's still unclear. But I would say it's doubtful to see anything meaningful within this year.

Robert Murden: Great, thank you. That's helpful.

Operator: Again, if you have a question, please press star, then one. At this time, we are showing no more questions.

Operator: This concludes our question and answer session.

James Scholhamer: I would like to turn the conference over to Jim Schohammer for any closing remarks. Thank you all for joining us today if we look forward to speaking to you again next quarter.

Operator: The conference is now concluded. Thank you for attending today's presentation.

Operator: You may now disconnect.