Q3 2024 Ultra Clean Holdings Inc Earnings Call
Speaker Change: Good afternoon ladies and gentlemen and welcome to the UCTQ3 2024 earnings and webcast conference call.
Speaker Change: At this time, all lines are a lesson on the mode. Following the presentation, we will conduct a question and answer session. If at any time during this call, be required immediate assistance, these press star zero for the operator.
Speaker Change: This caused me recorded on Monday of 28, 2024. I would like to turn the conference over to Rhonda Bennetto and Vester Lations. Please go ahead.
Rhonda Bennetto: Thank you, operator. Good afternoon, everyone. And thank you for joining us with me today, our Jim Schohammer, Chief Executive Officer and Sheri Savage Chief Financial Officer.
Rhonda Bennetto: Jim will begin with some prepare remarks about the business and Sheri will follow with the financial review that will open up the call for questions.
Speaker Change: Today's call contains forward-looking statements that are subject to risks and uncertainties. For more information, please refer to the risk factor 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.
Speaker Change: Discussion of our financial results will be presented on a non-gap basis. A reconciliation of Gap to non-gap 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?
Jim Schohammer: Thank you Rhonda. Hello everyone and thank you for joining our call this afternoon.
Jim Schohammer: I will start with a high level summary of our financial and operating results for the third quarter and share our thoughts on the broader industry trends we are seeing.
Jim Schohammer: After that, I'll turn the call over to Sheri for more detailed financial review before opening up the call for questions.
Jim Schohammer: During the third quarter, an increase in equipment spend by our customers supporting the expansion of AI infrastructure bill-ups and demand from the domestic China market results in a revenue coming in at the high end of our dieted range.
Jim Schohammer: Using the midpoint of our Q4 guidance and animals consensus for our peer group, UCT revenue is on track to be up over 20% this year over last year, surpassing that of our largest customers.
Jim Schohammer: In addition to the uptick and equipment sales for advanced packaging applications that we saw over the past several quarters, third quarter remains broadened to include other AI related processes such as chemical mechanical planarization or CMP, specifically for the large AI chips.
Jim Schohammer: Because UCT has such a diverse, inflectable, manual solutions, customers are apartment with us to accelerate their leading edge technology road maps.
Jim Schohammer: Turning to China, revenue from our Shanghai Manufacturing Facility supporting local Chinese OEMs remained elevated.
Jim Schohammer: Recent conversations with local customers and our expectations that regional fans will continue to expand and new ones will come online. Supportive by local government investment, leads us to believe that this will hire level of spend will continue into 2025.
Jim Schohammer: We will continue to meet regularly with our local Chinese customers and watch for any change in sentiment or spending pandas that could alter our opinion.
Jim Schohammer: Last quarter I mentioned some of the metrics we are tracking that the point towards a broader industry recovery and they continue to improve.
Jim Schohammer: Inventories at mostly real-ying, shipments of high-performance computing ships have increased.
Jim Schohammer: Data Center spending is very robust. Memory is being actively managed to keep supply and demand balanced. And faster reporting improved utilization rates.
Jim Schohammer: In fact, the world's largest ship maker recently announced it thanks.
Jim Schohammer: Well, continue to observe extremely healthy AI-related demand through the second half of 2024 leading to increase capacity utilization rates for leading-inch process technologies with signs of acceleration and to next year and beyond, of course.
Jim Schohammer: You see keep those diversified line of products for the industry that extends our reach far beyond gas and fluid deliveries and solutions.
Jim Schohammer: If you can walk through a fan, you will see thousands of our parts components in modules.
Jim Schohammer: Usually, the indirectly touches nearly every stomach and dr. Chipped that goes into every smart phone, smart card, data center and device that uses artificial intelligence today.
Jim Schohammer: We have a roadmap both to last and leverage our competitive advantage by offering a high-value differentiated solutions across all-MR gates.
Jim Schohammer: Our state of the Art of Manufacturing Technology, a special emollation, where revenues has increased nearly 150% of this time last year. It's helping our customers reach greater economics and scale, especially at the leading edge.
Jim Schohammer: Now my connector cycle that too prompt, their technology driven can capacity driven.
Jim Schohammer: Strong investment in the technology phase of the cycle has been healthy this year and one of the reasons UCT is being able to meet a global revenue.
Jim Schohammer: The debut of AI-adabled smartphone in the laptop is here, and a broader place in cycle shouldn't be far behind.
Jim Schohammer: We remain very optimistic that we are in the early innings of an industry-wide recovery, and as capacity and lessons begin to increase, we expect momentum to accelerate.
Jim Schohammer: UCT has listed many cycles of very length and has helped perform during every upturn.
Jim Schohammer: In summary, our long-term outlook for the semi-industry remains very positive. We maintain our view that the global semi-connector market will exceed one trillion dollars by 2030. Driven by ballooning demands for any great circuits today, I, digital economies and electrical vehicles.
Jim Schohammer: To achieve this investment in WFD will need to be at $150 billion range. And we are ready with the products, services, capacity and efficiency in meat that major increases the demand we see coming.
Speaker Change: and the VAT, I'll turn the call over to Sheri for our financial review, Sheri.
Sheri Savage: Thanks, Jim and good afternoon everyone. Thanks for joining us. In today's discussion, I will be referring to non-gap numbers only.
Sheri Savage: As Jim mentioned, total revenue was up quarter of a quarter due to increasing man from our customers relating to AI infrastructure buildouts and continues strengths from our domestic China market.
Sheri Savage: Total revenue for the third quarter came in at 540.4 million dollars compared to 516.1 million in the prior quarter. Revenue from products increased to 479 million dollars from 452.7 million last quarter.
Sheri Savage: Services revenue was $61.4 million, compared to $63.4 million in Q2.
Sheri Savage: Total gross margin for the third quarter was 17.8% compared to 17.7% last quarter. Products gross margin was 16.1% compared to 15.6%. And services with 30.5% compared to 32.7% with Q2.
Sheri Savage: Margins can be influenced by fluctuation of volume, mixed in manufacture and region, as well as the Kid-On Transportation Costs. So there will be variances quarter to quarter.
Sheri Savage: Operating spends for the quarter with 56.5 million dollars compared to 55.8 million in Q2. As a percentage of revenue, operating spend decreased to 10.5% from 10.8% in Q2.
Sheri Savage: Total operating margin for the quarter increased to 7.3% and 6.9% in second quarter.
Sheri Savage: Margin from our Product Division was 7%, compared to 6.2%, and services margin was 10.1%, compared to 11.8 in the prior quarter.
Sheri Savage: The overall margin improvements were largely driven by improved product, operating efficiency, and effective management of operating expenses across both business units on a higher revenue.
Sheri Savage: Our tax rate increased from 24.7% last quarter to 27.1% this quarter. Representing a year-to-date, effective tax rate of 24.3%.
Sheri Savage: Our mix of earnings has been weighted to higher tax jurisdictions like China and the Czech Republic And as a result, we now expect the tax rate for 2024 to stay in the mid-20s.
Sheri Savage: Based on $45.5 million shares outstanding earnings per share for the quarter worth 35 cents on net income of $15.9 million. Compared to 32 cents on net income of $14.4 million in the prior quarter due to higher revenue.
Sheri Savage: During the quarter weeks, during some point exchange had wins, primarily related to the Malaysian ringet that negatively impacted EPS by six cents per share.
Sheri Savage: Turning to the balance sheet, our cash and cash equivalence worth $318.2 million, compared to $319.5 million in Q2.
Sheri Savage: Cashflow from operations was $14.9 million compared to 23.2 million last quarter. Primarily doing due to timing of cash collections and venue payments.
Sheri Savage: For the fourth quarter, we project total revenue between $535 million and $585 million. We expect the EPS in the range of 34 cents to 54 cents.
Sheri Savage: And with that, I'd like to turn the call over to the operator of the questions.
Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question? Please press star, follow the number one on your touchstone phone.
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Speaker Change: If you're using a speaker phone, please leave the handset before pressing any keys. One moment please for your first question.
Speaker Change: Your first question comes from the line of Taral C, from Needham. Your line is not open.
Taral C: Good afternoon, James Sheri. The first question is about the China, what's the percentage of the revenue coming from China in the third quarter?
Taral C: But maybe it's a related question I'll ask all together. When I look at the PowerPoint you posted on the website that you'll read me from Lam, this off, the Remnir from A-Matter is actually probably down a little bit.
Taral C: is China the main contributor to the non-land, non-A-MAT, revenue grows in a third quarter. That's a first question, thank you.
Speaker Change: Hi, Charles. I think we did about 50, something, million 52.
Speaker Change: 55 million. This quarter from China direct, right? So, I'm talking about, like, what we felt directly to our Chinese OEM.
Speaker Change: and so as you look at percentages from our different, you know, flight and lamb.
Speaker Change: He can't reach too much into that. It's simply, you know, we're seeing some more strength from Chinese OEMs and we're seeing also some strength from.
Speaker Change: and ASM and ASM and other. So it's the look percentages are going to move around a little bit, but I think when you look at that way, I think you're seeing the fact that we're continuing to see.
Speaker Change: and the technique is straight from our direct sales to Chinese equipment makers.
Speaker Change: God, a 55 million-brown China Direct as just want to clarify.
Speaker Change: Yeah, and I'm just to give you like a wrap-roth turtle, so yeah, you know, in the past we did like you know 10, 10 million a quarter maybe 20 if you know had a great quarter so This has been continued strength and and I just actually met with
Speaker Change: The CEO's in China and they continue to think that that's going to stay strong through the year and through next year as well.
Speaker Change: and I'm obviously the access for you guys to the Chinese semi-cap is pretty unique in the industry. Maybe I want to ask you, maybe this is a technology question, maybe it's a product question. You talk about the AI infrastructure buildout. We all know that you have your revenue, I mean, part of your revenue is tied to...
Speaker Change: Lans Electroplating, which has done very well, they said it's more than double this year, since May continue next year. But looks like this quarter you're talking about some CMP related strength.
Speaker Change: Can you talk a little bit more about that first of...
Speaker Change: We tend to associate your part more with the Daven Edge, but what is the CMP exposure? That's number one.
Speaker Change: Number 2 is...
Speaker Change: Why there's a CMP ramp related to AI infrastructure build-out? Is it just going general with advanced nodes or there's something specific about CMP? As you said, the large AI chip for manufacturing, as a second question. Thank you.
Speaker Change: Sure, yeah, I mean, as you just mentioned, I'll reiterate.
Speaker Change: you know, the wet, the wet edge of electrochemistry strength that we've been seeing.
Speaker Change: For the Interconnect, this is continued or made really strong out of our Czech Republic of Factorics.
Speaker Change: But what we started seeing this quarter and one of the reasons for our alcohol performance as well is we started this CCMP business increased that we have a really good position and we have a significantly high footprint in CMP.
Speaker Change: and seeing a few very potty on and off, but what we're seeing is chemical mechanical mineral mineralization is kind of something that people do.
Speaker Change: to get their yields up in the chips that they're making. So this is becoming where we're starting to see more investments in that space. And since we also, like I said, we have a very diversified...
Speaker Change: The platform that we cover across many different types of equipment and technology. So we have a really solid...
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Edward Yang from Openheimer. Your line is not open.
Edward Yang: Hi Jim, congrats on a great quarter. I wanted to dig a bit deeper into your demand outlook and you mentioned growing faster than your customers. And I want to understand, is this a function of customers outsourcing more relying on partners like UCT, your win rates?
Edward Yang: or are you exposed to right technology platforms? That is, you know, your customers at such broad base and market exposure, are you overweight or underweight any particular areas that would help you meet a weak road faster?
Edward Yang: and the
Speaker Change: Yes, I had, we definitely...
Speaker Change: and you start to see the markets start to turn back and the industry start to bring up and we've seen this over the years, it we technically outgrow the industry in the up years.
Speaker Change: So what happens if you start to see, you know, our customers?
Speaker Change: Begin to outsource a bit more so we have some of that. We also have...
Speaker Change: and Lizagraphy that we've been exploiting and also you know our new platform in Malaysia where customers want to take advantage of that you know that low cost region that we've been growing. So we're yes we are starting with the our program.
Speaker Change: in these areas, from those basic, those basic strikes. So I think those are like this.
Speaker Change: The main thing, but if you were to look back to our history over the last 10 years, you will see that when the industry starts moving up a bit, we do, we do experience higher level of outsourcing and we do experience higher level of market churgan.
Speaker Change: and I just wanted to piggyback on Charles' question on China. You mentioned you're quarterly revenue there with 55 billion.
Speaker Change: and that is up triple digits year over year but it is down about 4.5 billion from the pride core. Is there any seasonality there or did you see any moderation or is it just
Speaker Change: and you're seeing it right here. I mean, I can't go into details, but we have.
Speaker Change: You have two main customers there and one is dealing with internal issues and quality in the open. Not our issue and other one is growing faster. So we had, it is lumpiness but it's nothing to like be concerned about the long-term process.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Christian Schwab from Craig Helm Capital Group. Your line is not open.
Speaker Change: Thank you guys for taking my question.
Christian Schwab: And we last quarter you guys talked about seeing broader market improvement in the second half of 24 versus the first half of 25 which...
Christian Schwab: is obviously been correct. We also kind of talked about WFE being really strong on a year over year basis in 25, but I didn't really hear an update on that. We understand what your life is customer.
Christian Schwab: You know, talked about seeing growth, but I think we kind of talked about percentages on the call last time. Do you have any update for us there?
Speaker Change: Yeah, I think we've been looking at...
Speaker Change: and we continue to update that question. We continue to look at like 14, 10 to 14%.
Speaker Change: and it all depends, you know, obviously, how the year ends in 24, right? So the, you know, the base wearing changes a little bit, but we are still very positive that the WFV is going to increase weather ends up 10.
Speaker Change: 12 or 14 very difficult to say. We will do better than that in the next year, but I think I think we need to see how 24 ends.
Speaker Change: Before we get come out with a really good estimate for 25 but we definitely believe 25 will be up and we believe we will be more than that.
Speaker Change: Great, no other questions, thanks guys.
Speaker Change: Good morning.
Speaker Change: Your next question, some from the line of creation's son, Carl from PD Cowen, your line is not open
Speaker Change: Hi, this is Barbara Martin's on for Chris. Thanks for taking my questions. Maybe just real quick to jump back on the domestic China strength.
Speaker Change: that you're witnessing. Have you segmented out that before between if it's more foundry or memory-based or broad-based? And then also what sort of visibility do you have at customers within China? I know.
Speaker Change: and the December quarter. What sort of visibility and confidence you have heading into next year would be helpful.
Speaker Change: and so I arrived so he had not segmented it out to.
Speaker Change: The shift type. The mostly what we provide for them in the position and edge modules, especially in the gas panel area, which with our obviously 45% of our business.
Speaker Change: and as I mentioned before.
Speaker Change: I just made the trip there, I just, you know, had dinner with the CEOs of those companies and they continue, you know, they're going to continue to gain market share. That's a clear saying they are definitely over investing right now trying to get every piece of equipment they can. Not every piece of equipment is actually going out to the door.
Speaker Change: to their customers, but we basically, from everything I could see in every discussion I've had with these cost-in-mursives at 2025 is continued to be at the same level that we've been experiencing 2024.
Speaker Change: So that together with a broader market recovery at some point together with the...
Speaker Change: you know the AI strength that we're seeing in different parts of our diversified products. You know we're very comfortable and confident that we're going to continue. As we guide it up, you do for, we're going to continue to see things get better and better.
Speaker Change: and the other.
Speaker Change: Great, thank you, that's helpful, and then just...
Speaker Change: One more fun, in terms of the product margins, they've been doing well in the September quarter. Is that more to mix or does the sales volume have a bigger play into the puts and takes of margins on a quarterly basis?
Speaker Change: Say both do, it just depends. Sometimes we'll have them make for there's the higher margin shipments happening. Specifically, we've got ship more out of certain locations for certain product types. But volume definitely plays a huge factor for us in general, just because with the volume coming up, it's covering more of our fixed costs. It'll be bad at capacity over the last couple of years, so it definitely covers some of those expenses associated with that.
Speaker Change: That's probably the more major factor out of it.
Speaker Change: Got it. Okay, we'll congrats it and thank you for letting me take the time to ask questions.
Speaker Change: Thank you, Robert. There are no further questions at this time. I will not turn the call back to James Scholhamer for closing the marks. Please continue.
James Scholhamer: Thank you everyone. Thank you for joining our call today. I think you could pick up really excited about the go forward and hope you can join us next quarter and looking forward to it. Thank you.
Speaker Change: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.