Q2 2019 Earnings Call

Good afternoon, and welcome to the Ultra clean technologies second quarter 2019 earnings Conference call webcast, all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key.

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 Bennetto Investor Relations. Please go ahead.

Thank you operator, good afternoon, everyone and thank you for joining US with me today are Jim Scholhamer, Chief Executive Officer, and Cherry Savage, Chief Financial Officer, Jim I'll begin with some prepared remarks about the business and Sherry will follow that with 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 disclosure in our FCC public 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 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.

And finally, we will be participating in the D.A. Davidson Technology Conference in New York on September 4th and the Dirty in company Institutional Investor Conference in Minneapolis on September 5th.

Additional information on these conferences will be available on the investor events section of our website at Triple double you used the P. dot com.

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 second quarter 2019 conference call and webcast.

First I'm going to highlight a few financial results Sherry will expand on in her commentary.

I'll follow that with an update on our products and services businesses and provide our perspective on how we view the industry, both near and long term.

After that we will open up the call for questions.

I will start with our financial results for the second quarter.

You see peace solid performance is a direct result of our commitment to operational efficiency and our flexibility to consistently deliver solutions to our customers. During this dynamic period.

Strong execution by our team resulted in higher than anticipated revenue improved margins.

Robust cash generation and steady profitability.

Total revenue for the second quarter was 265.4 million with our products business contributing 210.4 million and our services business, adding another $55 million.

With respect to our products business semiconductor market conditions remained relatively unchanged from the first quarter.

Ongoing adjustments in capital expenditures access memory inventory and slowing activity levels in China continued to weigh on the equipment market.

Geopolitical tensions and IP concerns are adding to the overall uncertainty in the near term.

That aside our products business performed better than expected and we again executed on unexpected late quarter customer drop and then pull in orders.

Our team was able to flex to meet customer delivery schedules.

Further solidifying our strategic position as a partner and key supplier in the value chain.

While capital expenditures remain well balanced in support of rapidly advanced technology Roadmaps persistent elevated inventory levels levels led memory producers to take the additional unusual step of adjusting wafer output.

Something we have not seen in previous cycles.

Adjustments like this should be viewed as positive as they will help expedite the rebalancing of supply and demand in the near term and are expected to be temporary in nature.

The reduction in wafer output impacted our services business in the quarter.

As a brief reminder, a portion of our service revenue is derived from growth in the installed base, while the remainder is driven by wafer starts.

We expect a reduction in wafer starts to continue into the third quarter, but to a lesser degree and will likely be short lived.

We anticipate returning to a more normalized run rate heading into the fourth quarter as inventory supply and demand more closely align.

As demonstrated over the past several quarters, our services business has a very positive influence on use ctcs financial profile.

Our worldwide footprint gives us regional flexibility improves responsiveness.

Increases our competitive stance and reduces customer's total cost of ownership.

Partnering with our top tier idea I'm customers to unlock higher productivity with our technical cleaning and analytical solutions gives us great confidence that we will outperform our peers, who relied solely on WFP spend.

Our results confirmed by our peers and customers are showing strength in logic and foundry, which we anticipate will continue for the remainder of the year.

This spending driven by the initial rollout of five GE that is establishing the infrastructure for all things I O T. In a high is occurring at the leading edge.

Currently you see T. derives approximately half of its revenue from foundry and logic and the remainder from memory.

The memory market continues to digest the high level of capacity additions that were put in place over the past few years.

We are confident there will be a recovery, but remain uncertain about the timing and degree of the upturn.

In the meantime, our integration and cost reduction initiatives remain on track.

We are driving towards an improved financial model with the goal of combining growth with significant operating leverage.

Increasing cash generation and sustaining profitability through the cycles.

For the third quarter, we expect revenue to be down somewhat from the second quarter due to limited visibility from our customers on capital equipment demand and memory oversupply.

Until we have greater clarity on the timing of any sustainable improvements in overall end demand we are maintaining our view that our revenue will will remain around these levels for the rest of the year.

From our vantage point, we remain extremely confident about the long term durability of the semiconductor industry.

Smarter phone faster computing and higher content requirements will drive meaningful opportunity and result in significant growth overtime.

In summary, when the industry emerges from this downturn you see T will be a more efficient company with tremendous potential to support growth, creating long term value.

I want 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 will 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.

We had a solid quarter generating total revenue of $265.4 million, a 2% increase over the prior quarter.

Our products Division accounted for 210.4 million and our services Division contributed 55 million.

Late quarter drop and pulling orders and our products business was offset somewhat by a decrease in our service business due to a reduction in wafer starts at some of our customers Fabs.

Non semiconductor revenue, which includes display generated 17.9 million or 6.7% of revenue up slightly from the first quarter.

Total gross margin improved notably to 18.8% compared to 17.8% due to improved mix reduced labor and material costs.

SSB gross margin was 35.6% and Sps was 14.5%.

As we've shared before margins can be influenced by customer concentration geography product mix and volumes and the timing of our restructuring initiatives. So you should expect to see variances quarter to quarter.

Operating expenses increased to 33.6 million compared to 30.3 million last quarter.

As a percentage of revenue Opex was 12.7% versus 11.7% last quarter. The majority of the increase was associated with the acquisition of Dms and we expect to streamline those expenses over the remainder of the year.

Operating margin for the first quarter improved slightly to 6.2% from 6.1% in the prior quarter.

Margin contributed from SSB was 11% and Sps was 4.9%.

Based on 39.7 million shares outstanding earnings per share for the second quarter was 21 cents.

Derived from net income of $8.2 million.

This compares to 8.1 million or 21 cents per share last quarter.

If we exclude share based compensation and our non-GAAP reconciliation our earnings per share would have been 26 cents for the quarter.

Our tax rate for the quarter was 18.9% compared to 19.2% last quarter.

Going forward, we expect our tax rate to be in the mid to high teens, but as always you can expect to see variances quarter to quarter.

Turning to the balance sheet, we ended the quarter with $168.1 million in cash and cash equivalents.

An increase of 13.4 million over the prior quarter.

Primarily due to the reduction in inventory and timing of customer payments.

Cash from operations was $49.9 million compared to 18.1 million last quarter.

Uses of cash included $30 million for the Dms acquisition and $14 million principal payment on our long term debt.

Our third quarter outlook assumes total revenue between 235, and 255 million and non-GAAP EPS in the range of 11 cents to 21 cents.

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 are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble the roster.

And our first question today comes from Karl Ackerman with Cowen and company. Please go ahead.

Hi, I'm human Sherri I hope all is well.

My first question I wanted to just.

You are talking about Wi Fi for a moment yeah.

I think the industry has revolved around the fee spending being.

In the low Fortys, a 40 billion for 2019.

I guess you know in the event that profit that the profitability of memory providers, you know work to further receded in the Capex where to get cut again.

How do we think about.

You know.

Youre installation to that and I guess.

You know as you as you think about fiscal 2020 or.

Fiscal 2022 of your fee.

You know I would think you get an incremental quarter of quantum this year and then incremental core of Dms in 2020, so that should help a bit but maybe just talk a little bit about the your core opportunities you see both from an outsourcing perspective, and and core growth perspective that would enable you to outgrow.

Duffy spending next year.

Yeah, Great girl, Yeah as far as.

I think your first question was around what if memory is worth.

So I think as you heard we're roughly 50% of our equipment shipments is actually in the larger logic foundry space.

And then if you look at the services side, obviously that has some dependence on member memory as well, but obviously that diversifies us quite a bit.

And on top of that I think regardless of the large memory spends I think thats better, but its been baked in as being more of a.

A lot of the capital going into the the shell of buildings and looking at more memory equipment going into 2020. So I think a lot of the memory downside is already kind of been baked in.

And you're seeing a lot of technology moves that are happening regardless of the capacity additions.

As far as 2020, I think looking at.

What we would expect to see a rebound obviously.

When the volumes go up the trends towards outsourcing become more important than ever. So I think we see a lot of opportunity.

A lot of opportunity in that space as well as both wafer starts going up for a service business as well as as.

Increase in outsourcing again as volumes rise.

That's.

That's helpful.

You know.

Earlier this year you you were.

Swift to take action to reduce your cost based as demand slowed down.

What are we doing now to drive continuous improvement.

Through your own supply chain, and I guess, particularly outside of.

The services business given not just the current soft environment, but also as you contemplate your business roadmap into 2020 and beyond.

Yes, yes, so Carl you know, we announced last time, a pretty extensive restructuring and cost cutting as well as integrating other businesses that we bought Dms and quantum and so we as we've been targeting $15 million to $20 million of annual cost reduction through a lot of restructuring of our of our footprint around the world.

Leaving leaving.

At the end of the year and into the first quarter, we expect annualized to two g. those kind of cost saving rates.

We've done a lot along with its going very well we've closed a few factories. We've we've moved a few in we've done some reductions in force.

So everything is going very well on the announced cost restructuring that we've been working on.

Very helpful.

Perhaps perhaps one last one if I may.

You know one of your competitors spoke about gaining some share and gas panels last quarter.

I'm curious if you would comment on how you see any changes in the competitive landscape.

If at all.

And how you think about just the the overall stability.

Of that business.

Perhaps in light of.

Some of the changes within the Japan, Japan and Korea.

Trade imbalance.

Thank you.

Yeah.

The gas panel business, it's relatively stable there are always puts and takes I think one of the areas that both us and some of our our main competitors are seeing opportunity.

Isn't the SMS space and we have a very strong position.

Where they have some off with our long serving serving the Cymer division for them for many years and we're also seeing increased activity also with us a mile.

As as directly as a whole and so we're very comfortable that position. So you know, it's always a competitive environment, but the gas panel space. There are some puts and takes but they're generally not not significantly material between the suppliers, but however, there are new opportunities, which which I think both us and other outsource providers are taking advantage of.

Great. Thank you.

Thanks Carl.

And our next question comes from Quinn Bolton with Needham. Please go ahead.

Hi, guys. Congratulations on a nice margin performance I wanted to start there and just see do you think that better margins this quarter.

Really just.

A reflection of higher.

Revenue and better absorption or.

Are you starting to see some of the benefits of the restructuring programs and then I've got a couple of follow ups.

Hi, Quinn, Yes, we started seeing the initial.

The benefit of some of the cost reductions that we're making we're in the early stages, but we are starting to see a little bit of that come through I think the other thing that helped in our favor. This quarter was the mix of products that we ship, sometimes we talk about that unfortunately, hurting us, but this quarter. It was a better situation with both geographic as well as the mix within the certain sites that we have.

And you know we continue to take down our temporary labor force. We did do a reduction in force earlier. This year. So it's just a it's an iterative process that we're starting to see a little bit of benefit surrounding that.

Great and then the second question was around the quantum business and sort of understand the relationship to wafer starts.

You talked about that further declining in the third quarter, but then getting back to more run rate levels. In Q4, just wondering you've you've only on that business now for just under a year or so we don't have a lot of history. When you say run rate should we be thinking about levels that you did in the fourth quarter in the first quarter is kind of what you would define as run rate or is that too aggressive in terms of the potential snap back.

No Thats quanta business.

Yes, no no that's correct typically memory fabs operate pretty much at full capacity on a typical and even through down cycles. So it is a pretty unusual step to actually dropped the capacity the utilization of the wafer starts like they did.

So even even though we've only owned the business for a year. We obviously have historically so that was a pretty unusual event.

But the typical operation, where we expect and what our customers also expect is that the memory Fabs will return back to fully full utilization, where they can get the better cost points per bit.

Get in that was my last question on the quantum business, you've got I think a major memory customer in a major logic customer I assume the wafer start commentary is really more focused on the memory side of the business or did you see wafer starts decline on the across a larger customer base too.

No. The logic actually has been doing very well and that actually offset a lot of the impact from from the memory side, which was though which was significant.

Sorry. This is specifically Jim for the quantum business quantum business, yes, yes, it's in the quantum because in the service business logic has been doing very well, we've got great great position, there and that's been growing nicely that offset some of some of the negative results that we saw from the memory.

Correct memory wafer start correction that I think everybody in the industry is aware of right now.

Got it great. Thank you.

Thanks.

And our next question comes from <expletive> Ryan with dollar tree.

Please go ahead.

Thank you.

Hey, Jim you mentioned drop and then pull ins again this quarter can you kind of give an order of magnitude of the degree in Q2 versus what you saw in Q1.

Yes, Hi, <expletive> .

Actually it was it was I would well we called churn as we talk about dropping in Poland, but what actually is happening as drop in pull and push out cancel like all both to Aero then into arrows out of that was Uh huh.

Churn was even greater than we saw in the first quarter.

But the net result is more coming in than going out and that was on the order over a little bit higher than even what we saw the last quarter. So there's a lot of very quick reaction needed.

By the supply chain as the end to end customers are making faster decisions in the lead times required.

As they're upgrading or adding capacity in niche areas or or basically relying on the supply chain being faster. We're seeing those lead times are really becoming critical and so our ability to really react to that quickly.

Allowed us to really outperform in that area.

Okay Dms has that been fully integrated yet.

No. We were the integration continues the majority of it will be done through the third quarter, but it's going very very well.

Okay and one last thing you mentioned, a you know one volumes pick up increases the trend towards outsourcing, but you know it.

Hi, guys or a trough situation that we're in what so what's the outsourcing.

Sentiment out your two major customers.

Yeah. It's you know the the two major customers Act a little bit differently.

One of them actually the outsourcing pretty much activity is pretty much ses or there is even sometimes a little bit of a back flow to their own factories, not not a major amount but.

They tend to flex in and out more of the other one is is kind of more of a slow plotting towards more outsourcing regardless of where we are in the cycle until they behave a little bit differently.

But you definitely see out outsourcing we saw tremendous.

Acceleration and outsourcing during the last ramp and you saw us outgrow WFP bye bye.

Hi double digits.

And I would expect in the next ramp we'll see we'll see similar outgrowth.

Great. Thank you.

And our next question comes from Patrick Ho with Stifel. Please go ahead.

Well. Thank you very much Jim just trying to I guess reconcile a few things I think it's a credit to what you guys have done in terms of reacting to the churn that you talked about.

At the same time as you're implementing some of these cost cuts that you've talked about over the past few quarters.

How ready will you be when the sustained recovery kits are you then able to ramp up to meet.

Potential.

Sizable demand that comes in during a select quarter.

Given that you are.

Cutting costs at the same time.

Yeah. The short answer is yes.

A lot of the reductions in force are temporary workforce, which is built to build for fast ramping Pascal like we did in 17 as far as the footprint changes that we're making a lot of is consolidating and getting scale of like products in the right spots around the globe. So actually we think.

At the end of the day, when we're done consolidating and putting the right scale to certain product lines that we do and where we do them. We actually think our capacity will be at least as as at least as good as when we started and perhaps even better.

Great that's helpful.

Hi, I was my follow up question on Dms, It's still in the early stages. You. Obviously acquired just a few months ago or how are you looking at expanding the customer base.

On the Weldments side of things given that they are predominantly.

Centered around one customer today, what are the efforts you are taking to look at expanding their customer base on that front.

Yeah, you know I think we don't even think of it as of today.

You know the capability of Dms the majority of the capability was pretty redundant with our overall weldment capability, where we do have a diverse customer base.

So we continue to have a pretty.

Pretty good diverse.

Supply or customer base with Weldments I think one of the opportunities as some of the unique areas in the larger outside diameter Weldments the bigger weldments.

Is.

[noise] capability that Dms add that we didnt have in the in the same way. They did so we see opportunities to bring that especially to Asia.

And to be able to expand that kind of that product offering across not just the current customer that dms and you'll see T was was using but was serving but also additional ones. So I think that it's more of a where could we expanded our product area. We have a diverse customer base for weldments.

Great and maybe final question for me and I in terms of capital intensity trends of your systems business or the gas panel delivery side of things or if there's a lot more talk about as the increasing layers for threed NAND you need more etch you need more deposition tools is just simply the volume of tools that will help you guys or are they more content because of some of the complexity in some of the applications such as.

One more layers high high aspect ratio applications, which are more intensive are you seeing not only volume increase in those tools that help you also potentially more content within the tools themselves.

Oh, Yeah, that's that's a great question.

Obviously, you don't tools themselves going out the door is a good thing the number of process chambers required per tool is a key indicator and is a key driver of how many gas panels are required.

So absolutely as as late as get more complicated and additional steps are capping layers are stressed layers of sacrificial layers are needed and more process chambers are populating each tool that is definitely a benefit for us.

Great. Thank you.

Thanks, Patrick.

And our next question comes from Christian Schwab with Craig Hallum Capital Group. Please go ahead.

Hey, great actually all my questions have been answered thank you.

Okay Christian.

This will conclude our question and answer session I like to turn the conference back over to Jim Scholhamer for any closing remarks.

Well, thank you for joining us here today, and we look forward to updating you after the third quarter conference call. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Your lines at this time and have a great day.